13. Turkmenistan’s quest for economic security Najia Badykova I. Introduction Today Turkmenistan is one of the largest gas-producing countries in the Caspian Sea region. However, at present it cannot fully use its vast potential. The major problems it faces are a lack of alternative gas export routes—it is still very dependent on the existing Central Asia–Centre pipeline, which runs from Ashkhabad to Aleksandrov-Gay; the need for foreign investment and technologies to fully develop the energy industry; and competition among gas- producing countries in the region. The energy sector is central to Turkmenistan’s economic security. However, the availability of vast resources does not by itself guarantee political or eco- nomic security. These resources, being strategic by their nature, have attracted the attention of large countries which already control or are trying to maintain control over energy markets. A paradoxical situation exists in another sense as well: hydrocarbon resources can both ensure economic security and destabilize the economy at the same time. Algeria, Gabon and Nigeria, for example, have considerable hydrocarbon resources but have failed to use them in a such way as to benefit their economies because economic programmes, the development of infrastructure and the distribution of revenue also play a significant role in overall economic success. The current situation regarding the energy resources of the Caspian Sea region is volatile and almost impossible to predict, but the issue of gas exports has become crucial for its future as well as for the future of Turkmenistan, as gas is Turkmenistan’s major export commodity. II. The role of energy resources in the political and economic security of Turkmenistan The present state of the fuel and energy sector1 The energy sector is the core of the Turkmen economy. It generates 80 per cent of all foreign currency revenues and accounts for 50 per cent of budget revenues. The share of the oil and gas industry in gross domestic product (GDP) hovers around 30–50 per cent. The degree of export specialization of the energy 1 All data presented in this section are calculated by the author from official data published by the Statistical Office, Ashkhabad, in Social–Economic Situation in Turkmenistan 1998–99 and Jan.–Oct. 2000 (2000); Foreign Economic Activity of Turkmenistan 1994–97 and 1997–99 (2000); and Turkmenistan’s Industry in 1999 (2000) (in English). 232 THE S EC UR ITY OF THE C AS P IAN S EA R EGION industry is very high. Up to 92 per cent of total gas production and approximately 65–70 per cent of the oil produced are currently exported.2 Turkmenistan supplies all its needs for oil and gas products. Its economic policy is focused on minimizing dependence on exports of gas and the import of food products. For example, in 1999 grain imports fell by volume to 0.15 per cent of what they had been in 1990, while domestic grain production increased from 450 000 to 1 510 000 tons. At present Turkmenistan meets its own needs for grain for food and animal feed. There was also a significant increase in the role of oil production and oil-processing industries in the national economy during the 1990s. Oil production in 1999 was twice that of 1990, which, along with increased oil prices, boosted export revenues from oil production.3 Significant progress has been made in cotton processing. In recent years over 30 factories have been built and the proportion of locally-produced cotton that is processed has increased from 3 per cent in 1990 to 35 per cent in 1999. It is difficult to overestimate the role of the energy sector in the economy of Turkmenistan. Despite numerous programmes targeting the development of other sectors, high priority is given to the oil and gas industry and the maxim- ization of revenues from the export of hydrocarbons. The economy is organized in a such way as to allow the government to control all hard-currency trans- actions, especially revenues from gas exports. More than 50 per cent of foreign credits are allocated for the development of the gas industry while 60 per cent of total investments are directed to the energy sector. Fluctuations in the balance of trade are directly correlated with the volume of gas exports. For example, a sharp decline in exports in 1997 along with a boom in construction radically affected the balance of trade. During the four years 1997–2000 the national balance of trade went into deficit, which caused a growth of external financing and difficulties in debt servicing, but a further crisis was prevented by an increase in gas exports. During the first nine months of 2000, the balance of trade was over $400 million in surplus. The export potential Turkmenistan has strong export potential. According to the programme on Social–Economic Development of Turkmenistan to the year 2010,4 as of now more than 1000 prospective oil and gas fields have been discovered. Within the national boundaries of Turkmenistan in the Caspian Sea over 70 potential oil reservoirs have been located. Major deposits of hydrocarbon resources are con- centrated in two regions—the south Caspian and the Amu Darya river. There are 127 gas fields listed on government accounts as assets, 39 of which are being actively explored. Total gas reserves, including those in production, 2 Turkmenistan Ministry of Economy and Finance and Turkmenistan National Institute of Statistics and Forecasting, ‘National programme of President Saparmurat Turkmenbashi: Social–economic development to the year 2010’, Ashkhabad, 1999, p. 204 (in English). 3 ‘Gazprom: po materialam godovogo otchota’ [Gazprom: from the annual report materials], Neftegazovaya Vertikal (Moscow), nos 7–8 (2000), pp. 63, 66. 4 ‘National programme of President Saparmurat Turkmenbashi’ (note 2). TURKMENISTAN’ S QUEST FOR ECONOMIC S EC UR ITY 233 prospective reserves and others, amount to around 23 trillion cubic metres. In oil equivalent, total hydrocarbon reserves amount to 35.5 billion tons.5 Strategic trends in the oil and gas industry of Turkmenistan The Program of Development of the Oil and Gas Industry outlines a large-scale development of the energy sector up to the year 2010.6 Priority is given to increasing gas production: total production in the period 2001–2010 is planned to be 450.9 billion cubic metres (bcm). Plans are to produce 8 bcm of gas in 2005 and 120 bcm in 2010. It is estimated that total production of oil and gas condensate over the 10 years 2001–2010 will reach 144 million tons. In 2005 annual production of oil is planned to reach 28 million tons, and in 2010, 48 million tons.7 Achieve- ment of these targets will depend on the availability of material and financial resources and investments, and the latter will depend on the level of oil prices and investment policy in Turkmenistan. Along with forecast increases in the production of oil, natural gas and gas condensate, it is planned to increase the output and improve the quality of oil refining in order to satisfy domestic demand in fuel and lubricants and increase exports. After completion of the first phase of retrofitting of the Turkmenbashi refinery, processing of oil will increase to 6 million tons per year. This will significantly increase output of all refined products, and then production of polymers will begin. After the second phase is complete by 2010 the refinery will be capable of processing 9 million tons of products annually. To increase exports of liquid gas it is planned to construct additional storage and distribution facilities in the Turkmenbashi port and at the Serhetabat (Kushka) and Atamurat (Kerki) rail stations. It is also planned to build a gas processing facility with the capacity to produce 200 000 tons of polyethylene annually. The volume of oil processing (including gas condensate) is expected to reach 12 million tons in 2005 and 15 million tons in 2010. Priority tasks include the reconstruction of the existing pipeline system and the construction of additional pipelines for domestic distribution as well as for export. The development of the gas distribution infrastructure will include providing an adequate gas supply to consumers and industrial users and new routes for the export of gas. In western Turkmenistan the development of the transport infrastructure implies the construction of pipelines for newly discovered gas fields in order to connect them subsequently to the Turkmenistan–Iran trunk route, thus creating a unified gas distribution network within the south-western region. There are already plans to construct an identical system to produce and transport liquid gas. In the interests of its economic security, Turkmenistan is pursuing a pro- gramme of multi-directional pipeline routes for its exports of oil and gas. This 5 Neftegazovaya Vertikal, nos 7–8 (2000), p. 67. 6 ‘National programme of President Saparmurat Turkmenbashi’ (note 2), p. 209. 7 ‘National programme of President Saparmurat Turkmenbashi’ (note 2). 234 THE S EC UR ITY OF THE C AS P IAN S EA R EGION involves study of: (a) the trans-Caspian route (Turkmenistan–Azerbaijan– Turkey–Europe); (b) Turkmenistan–Iran–Turkey–Europe; (c) Turkmenistan– Afghanistan–Pakistan; and (d) Turkmenistan–China. The trans-Caspian route is discussed in section IV below, and other routes for the export of gas and oil in section V.8 III. The major competitors and partners of Turkmenistan Russia has the largest gas deposits in the world. As Turkmenistan’s current gas export routes pass through Russian territory, Russia intends to continue to control the transport of Turkmen gas. Russia is also the largest exporter of gas in the world. In 1999 the Russian utility Gazprom exported record amounts of gas (126.8 bcm) to European markets, Turkey and the Commonwealth of Independent States (CIS) countries.9 Under the Blue Stream programme (the Russian alternative to a trans-Caspian pipeline project) Russia intends to supply an additional 16 bcm of gas per year to Turkey.10 Russia is also actively dis- cussing options to supply gas from eastern Siberia and Sakhalin to the Japanese and Chinese markets.