Written by Ariel Cohen.

The Chinese Communist Party leadership proposed the One Belt One Road (OBOR) initiative in the fall of 2013 to connect a number of economies in Eurasia and along the coasts of the Indian Ocean all the way to the Middle East together into a China-led economic zone. This area of economic development is designed to spread from China through Eurasia and the Middle East all the way to Europe.

Along this route there are several natural gas rich nations, including Azerbaijan, Iran, Kazakhstan, Russia, Turkmenistan, and Uzbekistan. All these nations are trying to expand their gas export capacity. Their main challenge comes down to production costs and the infrastructure to export their prized commodity. Currently, the two biggest importers of natural gas for Kazakhstan are China and Russia, but a lot of its natural gas is used for re-injection in the production of oil. Turkmenistan exports mostly to China due to the explosion of the pipeline to Russia in 2009 and the halt in Gazprom imports in 2016. All exporters and consumers are affected by the rise of Liquefied Natural Gas, or LNG.

China has signed long-term LNG contracts with companies from Australia, Qatar, Indonesia, Malaysia and others. These contracts’ duration is set between 15 to 25 years, and the LNG pricing is normally indexed with oil prices. The current natural gas price is roughly $8.25 per million British thermal units (mmbtu). China imported 20.2 metric tons per annum (mtpa) of LNG in 2015. Qatar, the world’s largest exporter of LNG, is beginning to reroute LNG to Europe as demand in Asia deceases, which infringes on Russia’s largest market. This LNG market trend has caused Russia to turn east with two large pipeline projects entering eastern and western China.

The eastern pipeline, Power of Siberia, is estimated to have a capacity of 61 billion cubic meters (bcm), with 38 bcm being exported to China. It is expected to be online by 2019. The western pipeline, Power of Siberia 2, is estimated to have a capacity of 30 bcm, but no final deal has been made. With China diversifying suppliers of natural gas from outside the OBOR, and Europe looking to diversify away from Russia, how do the Eurasian countries gain market share?

Kazakhstan and Turkmenistan are naturally endowed with large amounts of natural gas. Kazakhstan has about 3.8 trillion cubic meters (tcm) of natural gas reserves as of 2014, while Turkmenistan has roughly 17.5 tcm as of 2015. As mentioned before, the pipeline infrastructure is the Achilles heel for both countries’ natural gas exports.

Kazakhstan has two main export pipelines, one heads to China and the other to Russia. Kazakhstan’s solution is to reinject natural gas into oil fields to extract more oil. Turkmenistan has one sizeable and reliable exporting pipeline connecting it to China via Uzbekistan and Kazakhstan. Another pipeline allows Turkmenistan to sell gas to northern Iran, but in the past, payments were intermittent.

Due to their landlocked nature, Eurasian countries are dependent on pipelines. The OBOR initiative could be the solution to these countries’ exporting challenges. By gaining the necessary foreign investment and expertise, Eurasian gas exporting countries could diversify their pipeline network in an attempt to send more gas to foreign customers, especially in China, and diversify their customer base.

Kazakhstan and Turkmenistan in particular are in an ideal position to take advantage of the demand for natural gas. Energy starved countries like Pakistan and India, with populations around 190 million and 1.3 billion people respectively, are looking for ways to satisfy their energy needs. Pipelines like the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline would help in satisfying demand in such burgeoning populations. This pipeline could be a winner for all involved. However, Pakistan-Indian relations, terrain, and security are the main issues preventing the development of that pipeline.

The demand for natural gas from India and China is growing not only for economic reasons but also for environmental pressures, as both countries will increasingly try to ween off of coal in the next three decades. The opportunity to gain market share for Azerbaijan, Iran, Russia, Kazakhstan and Turkmenistan is there, and with the help of OBOR, that could become a reality.

On the other hand, key consumer countries and regions, including Pakistan, India, China, Indonesia, Philippines, etc. also have coasts along the oceans, which allows for LNG to be a player in these markets. As of 2014, LNG has contributed to 10% of the global natural gas supply and is expected to continue growing to 15% by 2035.

The biggest asset of LNG is its ability to move large amounts of natural gas long distances, similar to the oil market. This gives LNG great flexibility in regards to being able to enter just about any market on the globe that has regasification facility, floating or stationary.

At the same time, LNG allows markets, such as Europe, to have a plethora of suppliers and not be entirely dependent on a single supplier. However, the flexibility in suppliers you gain from LNG results in higher costs of natural gas.

Permanent regasification LNG facilities cost billions of dollars to construct. Floating LNG facilities cost around $100 million. LNG export projects are even more expensive. The Gorgon project in Australia has an estimated cost of $54 billion dollars. For comparison, the Power of Siberia pipeline from eastern Russia into eastern China is estimated to cost $55 billion dollars, but it is one of the most expensive projects on the planet.

Australia itself has five more LNG projects that have estimated costs varying from $12 billion to $34 billion.  As of 2014 the global LNG fleet count is at 373 ships with 68 more on order to be built. The largest capacity LNG ship, the Q-Max, can hold about 162 mcm. However, only a select few ports can handle such gigantic ships, and most of them ship out of Qatar.

The price difference of LNG compared to piped gas can be substantial. January 2016 exports by Gazprom of gas to Europe were at $3.50/mmbtu while LNG from the U.S. to Europe was roughly $4.30/mmbtu –a significant difference. With Russia having the largest reserves in the world, it could try to cut the price of natural gas to Europe and make higher cost producers suffer. If that maneuver was implemented and successful, there is a possibility other non-LNG gas suppliers could employ the tactic to protect their market shares elsewhere – not unlike Saudi Arabia pumping more barrels to cut the price of oil in order to hurt higher-cost producers: Russia, Iran and the North American oil shale and oil sands producers.

If LNG becomes too expensive to compete in some markets, then naturally piped gas is the preferred selection. Concerning Turkmenistan and Kazakhstan, the Trans-Caspian pipeline would be a substantial exporting option. This pipeline would connect both countries’ natural gas supply to the Southern Gas corridor and the TANAP-TAP pipelines. TANAP-TAP is a pipeline system that starts in Azerbaijan and transits thru Georgia, Turkey, Greece, and Albania to end up in Italy, where it will disperse gas further into the European market. The estimated cost of the Trans-Caspian is roughly $5 billion and, with addition of compressor stations, it would provide over 30 bcma.

Another pipeline endeavor on the OBOR route is the recently inked investment agreement of the TAPI gas pipeline. This project is estimated to cost around $10 billion, and Turkmenistan is planning on exporting 33 bcma. A project like this could be an important part of OBOR due to China already having a stake in Turkmen gas and being able to help Pakistan as their partner in the China-Pakistan economic corridor. The benefit of this pipeline would be giving Turkmenistan another market to enter, as well as additional revenue for both supplier and transit countries. The main challenge to TAPI, however, is the continuing instability in Afghanistan and the tense Pakistan-India relations.

The very long pipeline projects, which go through geographically tough and security-problematic terrain, have price tags comparable to large-scale LNG projects. For example, the Southern Gas Corridor consisting of connecting three interconnected pipelines is estimated at $45 billion dollars. Pipelines are financially competitive with LNG, and the gas price is often cheaper. However, piped gas’ biggest advantage is simply the fact piped natural gas can be supplied in larger quantities in a shorter amount of time to fixed locations. The disadvantage for supplier is dependence on the market.

To conclude, Azerbaijan, Russia, Iran, Kazakhstan and Turkmenistan are in prime locations to take advantage as suppliers to energy-starved countries with large populations in the Eastern hemisphere. Their lack of an ocean coastline does not have to hinder the ability of Azerbaijan, Turkmenistan and Kazakhstan to export gas, as long as the necessary investment and security cooperation is in place. In their current situation, these countries, in conjunction with the OBOR initiative, could make significant strides in becoming major suppliers.

The OBOR initiative can help these gas-rich nations compete and succeed, providing environmentally sound fossil energy for the 21st century — until such time the renewables become economically competitive.

Ariel Cohen, Ph.D., is Senior Non-Resident Fellow at the Atlantic Council; Principal, International Market Analysis Ltd, a political risk advisory (www.IMAStrategy.com), and Director, Center for Energy, Natural Resources and Geopolitics at the Institute for the Analysis of Global Security (www.arielcohen.com) Image credit: CC by NPCA Online/Flickr.

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