Global Insight Perspective
Turkmenistan is stepping up its efforts to attract foreign investment in its oil sector, attempting to demonstrate that the formerly isolationist Central Asian state is serious about offering investment opportunities to Western energy companies.
Although much of the focus since the December 2006 death of long-time ruler Saparmurad Niyazov has been on securing access to Turkmenistan's vast gas reserves, the country's new leadership is keen to attract foreign investment in its oil sector as well, drawing significant interest in Turkmenistan's Caspian Sea shelf potential.
Turkmenistan has ambitious plans to boost its oil and gas production, but to attract the foreign investment and technological expertise that will be needed to help realise these goals, the Turkmen government will have to take proactive steps to improve the investment environment, not just talk about it.
Turkmenistan Puts Out the Welcome Mat
Since taking office last year following the death of long-time dictator Saparmurad Niyazov, President Gurbanguly Berdymukhammedov has increasingly sought to make it clear that he wants to drag Turkmenistan out of the isolation fostered by his predecessor. Berdymukhammedov has repeatedly said that he wants to open the Central Asian state to foreign investment, as well as diversify the country's oil and gas export options to reduce reliance on Russia as both market and transit state for Turkmenistan's exports. The start of construction of a Turkmenistan-China gas pipeline last year is one of the first tangible results of this new diversification strategy, and European Union (EU) officials returned from the Turkmen capital, Ashgabat, last week claiming that Turkmenistan has committed to begin supplying gas to Europe from next year as well (see "Related Articles" below).
Berdymukhammedov's "open door" policy with regard to foreign investment in Turkmenistan's energy sector has already witnessed a parade of Western energy company executives paying the Turkmen leader a visit in Ashgabat, but the country's approach largely has been to sit back and wait for foreign investors to come knocking—until now. Yesterday, a trio of senior Turkmen government officials took part in the opening day of the "Oil and Gas of Turkmenistan 2008" conference in London (United Kingdom), showcasing the Central Asian country's oil and gas potential and providing the opportunity for Turkmenistan to take a more proactive approach to courting Western energy companies. The road-show event took place one day after the Turkmen delegation met with representatives of BP and Shell in London, as well as U.K. Energy Minister Malcolm Wicks.
Bayrammurad Muradov, executive director of Turkmenistan's State Agency for Management and Use of Hydrocarbon Resources, told participants in the conference, which included a wealth of energy company executives, policymakers, and diplomats from a variety of countries, that, "In the future we hope our oil and gas sectors will determine our economy as a whole," adding that, "There is a place for foreign investors in this process." Turkmen Minister of Oil and Gas Industry Baimyrat Khodjamukhamedov said Turkmenistan is adopting an "open door" policy to attract private investment at the country seeks to boost its annual gas production to 250 bcm by 2030 and increase oil output to 2.2 million b/d. Considering that Turkmenistan produced only around 180,000 b/d of oil and approximately 70 bcm of gas in 2008, these targets look overly ambitious, but given high oil prices and projected European gas demand, U.S. Department of State Eurasian Energy Diplomacy Coordinator Steve Mann said that, "Those are targets that everyone in this room will cheer."
Getting from Here to There
While much of the international focus since Berdymukhammedov came to power has been on the country's gas reserves, Turkmen officials are eager to promote foreign investment in its oil production potential as well. Turkmenistan's estimated 100 tcf of gas reserves and the country's stated desire to supply new markets understandably have taken centre stage, but with some 600 million barrels of proven oil reserves—and additional potential reserves in the country's sector of the Caspian Sea—Turkmenistan is beginning to attract more interest for its oil investment opportunities as well. With the Baku-Tbilisi-Ceyhan (BTC) oil pipeline now up and running and slated to increase capacity, Turkmenistan has the ability to export its oil to world markets (provided it can reach an agreement with Azerbaijan to use the BTC), increasing the attractiveness of the Central Asian country to Western energy companies.
Only a handful of foreign companies, most notably United Arab Emirates' Dragon Oil, were invested in Turkmenistan during the Niyazov era, but with the doors now open, a number of oil companies have expressed their interest. Berdymukhammedov invited Chevron to invest in Turkmenistan's Caspian shelf, while Russia's LUKoil was said to receive the rights to three blocks in Turkmenistan's Caspian waters last year. Turkmenistan's Deputy Prime Minister with responsibility for oil and gas, Tachberdy Tagiyev, told conference participants yesterday that the country's state-run companies will continue to hold an exclusive right to extract oil and gas onshore in Turkmenistan, but he assured the audience that the government will allow foreign investors to develop deposits in the Turkmen shelf of the Caspian. According to him, foreign companies can also participate as service providers for onshore oil and gas projects.
Tagiyev said that Turkmenistan's hydrocarbon reserves remain largely untapped, noting that of the country's 150 known oil and gas fields, only 50 are currently in production. He also said that Turkmenistan has already issued 32 exploration licences for the Turkmen sector of the Caspian, although more will be available. Tagiyev said that Western companies will be invited to work under the basis of production-sharing agreements (PSAs), minimising the risk of legal, tax, and regulatory instability for foreign investors in Turkmenistan. Although there is likely to be considerably less foreign interest, Muradov also said Turkmenistan is seeking Western know-how in marketing and selling oil products from its two refineries, acknowledging that the country had little expertise in such matters.
Outlook and Implications
Western energy companies have homed in on Turkmenistan's Caspian shelf hydrocarbon potential, partly because it is relatively unexplored, but also because the offshore areas provide the best opportunity for actually monetising any oil extracted in Turkmenistan. The geographic proximity of Turkmenistan's sector of the Caspian to the 1-million-b/d-capacity BTC pipeline provides a ready-made export route for any new oil produced from the Turkmen shelf, assuming Turkmenistan and Azerbaijan can resolve their longstanding dispute over their maritime border. Even in the absence of a deal, oil extracted from the Turkmen shore could be sent by barge across the Caspian and reloaded into the BTC for export—just as oil from Kazakhstan is expected to be sent to the BTC—as the likelihood of a trans-Caspian oil pipeline being constructed in the near future is quite minimal.
Still, a border deal between Azerbaijan and Turkmenistan would be beneficial for both countries as it could lead to joint development of the disputed Kyapaz/Serdar oilfield in the central Caspian. While EU and U.S. policymakers are keen to see a border deal emerge in order to pave the way for the construction of a trans-Caspian gas pipeline, a Turkmen-Azeri Caspian agreement could open up new opportunities for oil development projects for Western companies in currently off-limits Caspian waters. With many other resource-rich countries putting restrictions on foreign investment in their oil and gas resources, Turkmenistan's drive to open up its formerly closed and mainly unexplored offshore regions to outside investment marks a welcome change for Western energy companies.
Nevertheless, now that Turkmenistan is openly seeking to attract foreign investment in its energy sector, the government will have to show that it is willing to do more than talk. Backing up its rhetoric with concrete steps to improve the investment climate will be key if Turkmenistan is to achieve its goals of securing foreign investment and realise its long-term oil and gas production targets.
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