Newsbase: Turkmenistan’s Floundering Offshore Strategy

Published by FSUOGM – Former Soviet Union Oil & Gas

Edited by Joseph Murphy

Commentary by Mauro Fiorucci, Director 

A lack of market access and a restrictive investment climate have blighted development in the Turkmen sector of the Caspian Sea

The Turkmen section of the Caspian Sea contains around 1.1 billion barrels of liquid hydrocarbons and 255 bcm of natural gas in proven and probable reserves, according to a 2012 EIA estimate.

Ashgabat opened the area up to foreign investment in the mid-1990s, several years after Turkmenistan declared its independence from the Soviet Union. By and large though, the government has failed to secure the international expertise and funding necessary to exploit its offshore oil and gas wealth. It is worth examining the ways in which Turkmenistan’s offshore strategy has floundered, and whether the situation can be remedied.

oil and gas fields across the Caspian Sea

Limited progress

The Turkmen Caspian consists of 32 contract areas, although at present only four of these blocks are operated by foreign companies.

One of the oldest investors in Turkmenistan’s offshore zone is Malaysia’s Petronas, which signed a 25-year production-sharing contract (PSC) with the government for Block 1 in 1996. The area comprises five known oil and gas condensate fields which delivered 65,000 boepd of hydrocarbons last year. The only other offshore project in production is Block 2 (Cheleken), which contains two known oilfields and is operated by UAE-based Dragon Oil under a 25-year PSC struck in 2000. The block yielded 93,300 bpd of crude oil and condensate in the first half of 2016.

The other two occupied contract areas are Block 3, operated by Cyprus-based Buried Hill, and Block 21, controlled by Russia’s ARETI. Currently there is little activity at either site, however, and development plans are unclear.

Turkmenistan was able to recruit other IOCs to its offshore development drive in the past, including Denmark’s Maersk and Germany’s Wintershall and DEA, but these companies later withdrew from their contracts.

Broken system

Turkmenistan’s authoritarian political system, as well as aspects of its state-managed economy, has posed significant barriers to foreign investors in the country.

“Corruption and the lack of transparency have created a very challenging climate for foreign investment,” Mauro Fiorucci, a director at global energy consultancy firm Opportune, told NewsBase Intelligence (NBI). He noted that the approval of foreign investments was “politically driven” and dealt with on “a case-by-case basis” with the highest political leadership.

“The only way to penetrate the market is through high-ranking officials who arrange deals through their personal relationships with top leaders,” he said.

As such, Fiorucci explained that companies often needed to conduct years of due diligence before investing in Turkmenistan.

He also noted that international firms ran the risk of political interference and asset expropriation in the country. “Foreign investors who have fallen out of favour suffer from excessive tax examinations, non-payment of debts, non-delivery of good and services and renegotiations of contracts,” he said.

Early examples include Argentina’s Bridas and the Netherlands’ Larmag Energy Assets, which operated at sites off the Turkmen coast in the 1990s. Both companies had their oil export licences revoked, effectively bringing their projects to a standstill. Bridas later took Ashgabat to an international court in the hope of reclaiming the US$400 million it had invested in Turkmenistan since 1991.

Excessive red tape has also been an issue.

DEA, which had operated at Block 23, decided against renewing its contract in August 2015, reportedly because of problems with bureaucracy, corruption and government incompetence.

“For more than two years, the company has not managed to get the exploration drilling permits, even though all the four-year preparatory work envisioned in 2009 had been completed,” independent media outlet Alternative Turkmenistan News (ATN) reported in October of that year, citing a source in the Turkmen subsoil agency.

Stranded gas

A lack of access to gas export infrastructure has also sapped interest in Turkmenistan’s offshore zone, Fiorucci noted.

Under current regulation, IOCs must hand over their gas to state entities for processing and export. In practice though, much of the associated gas at offshore projects is flared, effectively making it a stranded resource.

One reason for the comparative success of Petronas is that the producer was able to strike a supply contract with state-owned Turkmengaz for gas extracted at Block 1. However, Turkmen authorities are generally reluctant to buy gas produced in the Caspian, as they already have more than enough production on land to satisfy domestic demand and overseas orders. This is linked to the fact that Turkmenistan, which boasts the world’s fourth largest proven gas reserves, lacks markets for these resources.

China has been reluctant to boost shipments from the Central Asian state amid a slowdown in demand growth and increased access to other import options. Russia, once the largest buyer of Turkmen gas, has halted shipments, and Iran is looking to do the same. Ashgabat’s plan to access markets in Europe and southern Asia by building pipelines across the Caspian and through Afghanistan, Pakistan and India remain speculative at this stage.

Territorial disputes

Development work off the coast has also been mired by the ongoing territorial dispute between the Caspian’s five littoral states.

Buried Hill’s Block 3 is situated in an area contested by Turkmenistan and Azerbaijan. Within the block is the Kapaz/Serdar oil and gas field, estimated to contain over 1 billion barrels of recoverable oil equivalent.

Over the past two decades, Russia, Kazakhstan, Iran, Azerbaijan and Turkmenistan have offered repeated assurances that they are nearing a resolution on the Caspian Sea’s status. However, there has been little tangible progress in settling the dispute. Until this happens, Ashgabat and Baku have promised to refrain from any exploration work at Kapaz/Serdar.

[Without the dispute] Kapaz/Serdar would be a relatively simple development; the resources are known to be there,” Fiorucci told NBI.

What next?

The oil price crash has prompted IOCs across the world to scale down investments. Under these market conditions, it seems unlikely that Ashgabat will be able to secure fresh interest in its offshore zone.

Even when oil benchmarks rebound, the Turkmen government will need to enact economic and political changes to improve its investment climate. This would need to include a clampdown on red tape and graft, greater transparency and freedom of information, market liberalisation and the establishment of an independent judiciary. However, there is little suggestion that Turkmen President Gurbanguly Berdymukhamedov, who was re-elected earlier this year in a vote dismissed by international observers as neither free nor fair, has the inclination to enact such far-reaching reforms.