CAPITAL: Ashgabat

MONETARY UNIT: Manat

REFINING CAPACITY: 236,970 b/cd

OIL PRODUCTION: 127,000 b/d

OIL RESERVES: 546 million bbl

GAS RESERVES: 101 tcf

Turkmenistan`s ability to develop its vast gas resources and significant oil reserves is complicated by geography. The country lacks an outlet to major shipping routes, with Kazakhstan and Uzbekistan to the north, Iran and Afghanistan to the south, and the landlocked Caspian Sea to the west. To link its gas resources to large markets, Turkmenistan must develop an export pipeline infrastructure, which necessitates finding reliable partners for right-of-way access through neighboring states and foreign firms to build the pipeline.

In addition to the question of export routes, the five nations surrounding the Caspian Sea-Turkmenistan, Kazakhstan, Russia, Azerbaijan, and Iran-in 1999 remained divided over ownership resources in the seabed. Turkmenistan, Kazakhstan, and Azerbaijan, the three nations with oil near their coastlines, wanted the Caspian divided into national sectors, while the remaining two nations, with little or no oil or gas near their coasts, wanted the sea`s resources to be shared by all five nations.

The US tried to mediate a resolution to the dispute between Turkmenistan and Azerbaijan. In May 1999, Richard Morningstar, the US special envoy for Caspian energy issues, visited the region for meetings with the Turkmen and Azerbaijani heads of state. According to press reports, the main outstanding issue was the disposition of the Serdar/Kyapaz oil and gas field, which straddles what would be the countries` median line in the Caspian.

Economy, government

Turkmenistan in 1999 was in the early stages of recovery from an economic decline that began with the collapse of the Soviet Union in 1991.

The country`s real gross domestic product fell steadily during 1992-97, with the worst year being 1997, when GDP fell 25.9%. Growth resumed in 1998, at 5%, and was projected at 10% for 1999.

The wild swings in Turkmenistan`s GDP reflected concentration of the economy on oil and gas.

The 1997 plunge in GDP followed cutoff of Turkmen access to Russian gas giant Gazprom`s pipeline network over a payment dispute. Economic growth in 1998 largely reflected increased oil sales, while the surge in GDP growth in 1999 was largely the result of the resumption of gas exports to other FSU countries and increased oil prices.

Upstream developments

The Cheleken joint venture of Dragon Oil PLC, London, and Turkmen state firm Turkmenneft let contract for an undisclosed sum to Deutag UK Ltd., Aberdeen, for drilling in LAM field off Turkmenistan in the Caspian Sea.

The deal involved drilling of up to 36 wells in the Block II field in three phases. Initially, Deutag was to refurbish a client-owned land rig in Great Yarmouth, UK, and move it to the Caspian with a view to drilling three wells from the LAM 22 platform in 2000.

If those wells were successful, three more wells would be drilled from LAM 22. A third phase would develop LAM field and nearby Zhdanov field fully with 30 additional wells.

After declining during the early 1990s, Turkmenistan`s oil production increased steadily after 1995. For 1998, oil production reached 131,000 b/d, up from 120,000 b/d in 1997.

In June 1998, President Saparmurat Niyazov signed a resolution providing for restructuring of the oil and gas activities of the Ministry of Oil and Gas into five state-owned companies. Turkmenrozgaz, in which the Turkmen state is the majority owner (with a 44% stake owned by Gazprom), is responsible for gas exports through Russia. Turkmenneftgaz is responsible for oil and gas marketing. Oil production is carried out by Turkmenneft. Oil and gas-related construction is the responsibility of Turkmenneftgazstroi, while Turkmengeologia undertakes exploration.

Turkmenistan`s gas reserves of 101 tcf are the third largest in the world after Russia and Qatar. The largest natural gas fields are in the Amu-Darya basin, with half of the country`s gas reserves located in the giant Dauletabad-Donmez field.

In addition to Amu-Darya, Turkmenistan contains large gas reserves in the Mugrab basin, particularly the giant Yashlar deposit, which contains an estimated 27 tcf.

With the assistance of foreign investors, Turkmenistan was counting on its large gas reserves and potential exports to be the focal point of its economic recovery. The main challenge was moving gas to customers able to pay in hard currency.

Turkmenistan in 1999 relied almost entirely on the Russian pipeline network for its gas exports.

GAS production was falling because of nonpayment for supplies by foreign and domestic customers and disputes with Russia over transit fees.

In 1997, Turkmenistan produced 611 bcf of gas, down from 1.31 tcf in 1996. The sharp fall in production was largely the result of the cutoff of gas supplies to Ukraine because of Ukraine`s $1.5 billion debt for previous gas supplies. There was also a dispute with Gazprom over payments for transportation, with Gazprom demanding to be paid in hard currency rather than in gas. The problems were resolved late in 1998, and gas again began to flow to Ukraine, but supplies were suspended again in April 1999 because of Ukrainian payment arrears.

Processing activity

Turkmenistan has two refineries: a 120,493 b/d plant at Chardzhou and a 116,477 b/d complex at Turkmenbashi.

Both facilities were slated for modernization and expansion to meet expected increases in oil production and demand.

Work was under way in 1999 on a $1.5 billion upgrade of the Turkmenbashi refinery with financing from German and Japanese sources. The French firm Technip was also awarded a contract in July 1999 to build a lubricants blending plant in Turkmenbashi, which was to be finished in 2001.

Transportation

As part of its strategy to increase natural gas exports, Turkmenistan was developing alternatives to Russia`s pipeline network.

The most important proposed project was the Trans-Caspian Gas Pipeline (TCGP), which would run from Turkmenistan under the Caspian Sea to Azerbaijan, through Georgia to Turkey. The first phase of the pipeline would handle roughly 565 bcf/year, with the possibility of an eventual doubling of capacity if transportation to Europe could be arranged.

Turkey signed a preliminary agreement with Turkmenistan in March 1999 for gas purchases, pledging to begin taking deliveries in 2002.

The TCGP faced large, but not insurmountable, hurdles. There were doubts that Turkey could use the Turkmen gas in addition to gas from the Blue Stream line under the Black Sea from Russia, on which construction was under way.

Concerns also were raised about financing the estimated $3 billion cost of the line. Also, Turkmen gas faced potential competition from the Shah Deniz gas discovery off Azerbaijan.

Turkish and US officials strongly supported the TCGP. US Sec. of Energy Bill Richardson visited Turkmenistan in August 1999 to promote the project.

The US Export-Import Bank and Overseas Private Investment Corp. pledged to assist with risk guarantees. Competition from the Shah Deniz field was at least a few years away, and the idea of linking Shah Deniz into the pipeline as its export route to Turkey had been discussed.