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U.A.E.'s Bid for Caspian Gas May Threaten Russia's Grip on European Supply

The United Arab Emirates is tapping its $328 billion sovereign wealth fund to invest in gas-rich Turkmenistan, seeking fuel for its own use while potentially challenging Russia’s dominance as a supplier to Europe.

“We want to invest and we’ve been conducting negotiations for a long time,” U.A.E. Oil Minister Mohamed al-Hamli said in an interview in the Turkmen capital, Ashgabat. “We have a special relationship with Turkmenistan. There is a genuine interest and a genuine determination with both countries to exploit this possibility.”

Access to Turkmen gas reserves, the world’s fourth-largest, would help the U.A.E. curb imports of the fuel as growing demand from power stations outstrips supply. At the same time, the Arab country has a stake in a planned pipeline to Europe, which gets a quarter of its gas from Russia and suffered shortages last year as exporter OAO Gazprom and transit nation Ukraine bickered over prices.

The U.A.E. has money to spend after amassing a $328 billion fund from oil sales, according to a valuation by the U.S. Council on Foreign Relations at the end of 2008. Having explored for crude in Turkmenistan for 10 years through Dubai-based Dragon Oil Plc, it’s now seeking to tap Turkmen gas as the Central Asian country opens up to more foreign investment.

Photographer: Tomohriro Ohsumi/Bloomberg

Mohamed al-Hamli, president of the Organization of Petroleum Exporting Countries (OPEC), and energy minister of the United Arab Emirates, listens during a joint news conference following the 3rd Asian Ministerial Energy Roundtable Meeting in Tokyo, last year. Close

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Photographer: Tomohriro Ohsumi/Bloomberg

Mohamed al-Hamli, president of the Organization of Petroleum Exporting Countries (OPEC), and energy minister of the United Arab Emirates, listens during a joint news conference following the 3rd Asian Ministerial Energy Roundtable Meeting in Tokyo, last year.

The U.A.E. is well placed to win offshore exploration rights in Turkmenistan, al-Hamli said, after Abu Dhabi’s state- owned Mubadala Development Co. said last month that it’s “interested in opportunities in the Caspian.”

Push to Diversify

“The driver for this from the point of view of the Emirates is the diversification angle, to extend their energy tentacles beyond pure oil in terms of products and export routes,” said Chris Weafer, chief strategist at UralSib Financial Corp. “Because the Emirates has a considerable amount of financial resources it is accelerating the importance of Central Asia as an energy supplier to Europe.”

Turkmenistan produced about 68 billion cubic meters of gas in 2008, BP Plc data show. That’s roughly equal to output in the U.K., a nation with 12 times more people. Turkmen ambitions to pump as much as 250 billion cubic meters a year by 2030 may establish the country as a major exporter as demand grows.

One export option is Nabucco, a planned pipeline that would bring Caspian-region gas to Europe via Turkey starting in 2014. The U.A.E. is backing the link, which would bypass Russia, through its 20 percent shareholding in project leader OMV AG.

Rival Pipes

Nabucco competes with Gazprom’s South Stream pipe project, slated to send gas from Russia to Europe by the end of 2015. Some recipient countries have hedged their bets by supporting both ventures: Vienna-based OMV agreed on April 24 to conduct a feasibility study to run South Stream through Austria, while Hungary has also endorsed both projects.

Europe is looking to diversify its sources of gas as consumption of the fuel is forecast to rise at an average annual rate of 0.8 percent through 2030, according to a November outlook from the International Energy Agency. That level of demand may be sufficient to justify both pipeline projects, OMV has said.

Turkmenistan stepped up efforts to attract investors after Gurbanguly Berdymukhammedov became president in late 2006, following the unexpected death of Saparmurat Niyazov. Governments from the European Union to East Asia have since jostled for access to gas reserves that are estimated at 7.94 trillion cubic meters, according to BP data.

Mubadala, Conoco

Abu Dhabi’s Mubadala is bidding for Turkmen fields with ConocoPhillips, a person close to the alliance said last month. A separate venture between the companies plans to drill in the Kazakh part of the Caspian Sea next quarter.

“We have good chances” of winning an offshore block in Turkmenistan, al-Hamli said. “We have the resources, we have the financial incentive to invest and we have also a number of partners who are experienced in this field that are happy to join us, so we are really very optimistic.”

Turkmenistan late last year began supplying gas to China and expanded pipeline capacity to Iran. The government has said it’s also studying options to supply Europe after Turkmenistan’s sole western-bound link -- a Soviet-era pipeline to Russia -- was halted last year following an explosion and a collapse in European demand.

Turkmen Finances Strained

As Russia all but stopped gas purchases last year to adjust to lower consumption, Turkmenistan’s export revenue declined. Its finances may come under further strain this year as Moscow- based Gazprom plans to buy only 10 billion cubic meters of Turkmen gas, a 75 percent drop from 2008.

Meanwhile, a proposed eightfold increase in China’s gas imports from Turkmenistan won’t materialize until 2013 or 2014, China National Petroleum Corp. said in November.

With China potentially taking only 5 billion cubic meters this year and Nabucco still in the financing stage, Turkmenistan may seek to strengthen links with Russia at the expense of Europe, according to political risk consultants Stratfor.

“If Turkmenistan wants to increase its exports, it may have no choice but to turn to Russia,” Austin, Texas-based Stratfor said in an April 29 note. Russia “may be willing to consider increasing its imports for a price. For Moscow, that price comes in the form of complete political loyalty from Turkmenistan.”

Gazprom aims to supply 32 percent of Europe’s gas in 2020. Its efforts to secure Central Asian fuel, potentially for South Stream, could hamper Nabucco’s plans to get gas from the region.

Caspian Sea Dispute

Nabucco faces an obstacle in transporting Turkmen gas across the Caspian Sea, whose maritime borders are disputed by the littoral states. The venture will initially seek supplies from Azerbaijan and Iraq, where shareholders OMV and Mol Nyrt. entered into a gas venture last year with U.A.E. companies Crescent Petroleum Co. and Dana Gas PJSC.

“The interest seems purely to be a commercial one at the level of U.A.E. companies, rather than the government of the U.A.E. having an overarching political interest,” said Alex Munton, an analyst at Wood Mackenzie Consultants Ltd.

The Persian Gulf nation’s own gas reserves, the world’s seventh-largest, are high in sulfur, making them costly to develop. Its lack of suitable supplies has forced it to invest in new nuclear plants to meet power demand that’s forecast to double to 40,000 megawatts by 2020, according to government studies.

To contact the reporters on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net; Ayesha Daya in Dubai at adaya1@bloomberg.net.

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