Greetings from London.

Oil and gas, that’s all it’s ever been about …

There was a lot going on this week, but it’s all being overshadowed by the fascinating geopolitical game over Cyprus. This is a stage on which a country’s pending financial collapse hinges explicitly on its hydrocarbons potential, and whoever turns up with aid will win access to exploration blocks.

Yesterday morning, Oilprice.com’s Jen Alic took us through the nuances of this game, noting that Russia could bail out Cyprus in return for a nice chuck of exploration acreage offshore. By the close of the day, that is exactly how things appeared to be unfolding. Later in the day, it began to emerge that Gazprom had reportedly offered Cyprus a bailout deal in return for offshore exploration rights. But by Friday, Russian and Greek Cypriot officials had said no deal had been reached. The deal Cyprus put on the table was the creation of a Cypriot state company with control of gas reserves into which Russian companies could invest, along with a nice stake in Cypriot banks to be rescued by the Russian investment fund. It’s not enough for Moscow, which is holding out for more—and likely to get it if the EU refuses to budge.

This all came after the EU tried to get Cyprus to agree to partially fund an EU bailout package by putting a levy on bank deposits and offering account-holders compensation in the form of potential gas futures. This is where the EU was caught playing dirty—and it’s all about Russia. Russian oligarchs use Cyprus for their offshore banking needs, and as such hold a lot of the bigger accounts that would have been targeted under this scheme.

The EU would never have done this in the past because Russia would have just turned off the gas spigots that control European supplies. What’s behind the new bravado? Quite simply, 122 trillion cubic feet of Mediterranean gas in the Levant Basin, discovered by Israel (in a US-Israeli partnership), and in Lebanon, Syria and Cyprus. If all goes well, the estimated 425 billion cubic meters (16 trillion cubic feet) of gas found in Israel’s Leviathan field will eventually be pumped via undersea pipeline directly to Turkey and then on to Europe. Another Israeli gasfield, Tamar, has 250 billion cubic meters (9 trillion cubic feet) and production should begin in April. This is Europe’s answer to the Russian gas stranglehold. It’s no longer afraid of Russia turning the spigot off.

However, it gets tricky when Cyprus isn’t playing along. The Greek Cypriots rejected the EU bailout scheme and headed straight for Moscow, knowing full well the power of negotiation behind the island’s estimated 60 trillion cubic feet of gas.

Moscow played hard to get for a few days, but it wants Cyprus because if Europe gets ahold of the island’s gas then Russia will certainly lose its hegemony over the European market. And it’s not ready quite yet. Its diversification plans to Asian markets has not been solidified.
This is a race to the finish line to develop Mediterranean gas. When all is said and done, this Mediterranean gas could provide 40% of Europe’s total gas needs.

Europe took a gamble here with Cyprus through bailout politics. Russia’s energy strategy is far more decisive. Not only will Russia now get a nice chuck of Cyprus’ offshore exploration acreage—it also saves its oligarchs from a probably 10% loss in their Cyprus bank accounts courtesy of the now-rejected EU bank deposit levy scheme.

Cyprus has known from the beginning that its bailout is tied to its potential petrol dollars, while the EU has attempted to couch this in all manner of moral-high-ground rhetoric.

What will the EU do now? Will it bail Cyprus out on kinder terms to keep Russia from getting hold of the island’s gas? Monday is D-Day: This is the deadline the European Central Bank has set for Cyprus to come up with $6 billion in order to “qualify” for a bailout package.

Cyprus is playing Russia and the EU offer each other right now, hoping to bring the specter of a deal with Russia close enough to make Brussels blink and give Cyprus more negotiating power.

Watch the deals in progress with this in mind: Not only is Cyprus’ financial collapse at stake here. Also at stake is Russia’s monopoly on the European gas market and the Europe’s entire gas future.

And this is where you simply can’t miss this week’s premium newsletter, where trader Dan Dicker highlights a US E&P company that stands to make big earnings on this geopolitical game. What we’re offering is a combination that is hard to come by these days: Heads up from one of the most prominent traders out there backed up by geopolitical insight that puts all the pieces of the puzzle in place. You won’t need to ‘mind the gaps’ here. There aren’t any.

We also have a very detailed report on the subsea sector that forward looking investors should definitely take a look at.


This week’s analysis piece is taken from the Executive Report section of Premium and takes a look at new opportunities for investors and companies in Turkmenistan. This leading Caspian gas exporter with massive untapped oil and gas potential is now open for business after years of eccentric isolation—and the playing field is wide, wide open. More Below…

I hope you enjoy the report below and have a nice weekend.

James Stafford
Editor, Oilprice.com

Turkmenistan: Opportunities in Diversification

This leading Caspian gas exporter with massive untapped oil and gas potential is now open for business after years of eccentric isolation—and the playing field is wide, wide open.

Turkmenistan is hoping to lure more foreign companies in to explore and develop oil and gas resources, and to this end earlier this month Turkmen officials spent two days in Dubai selling their potential.

What is that potential? The fourth largest natural gas reserves in the world (estimated at around 265 trillion cubic feet) and proven oil reserves of around 600 million barrels. The country has 153 gas fields (142 onshore and 11 offshore), 82 gas condensate fields, and 38 oil fields.

Most of these proven reserves are in the South Caspian Basin and the western Garashyzlyk onshore area. But there is also unexplored potential in Turkmenistan’s area of the Caspian Sea, which the government believes contains over 80 billion barrels of oil. They need to boost exploration and production, which peaked at 213,000 bbl/d in 2004 and then declined slightly to about 202,000 bbl/d in 2010. Half of this production feeds the domestic market.

The problem with Caspian Sea exploration is that some of this unexplored territory is disputed by Turkmenistan, Azerbaijan, Kazakhstan, Russia and Iran.

Oil infrastructure is also a problem: There are no international oil pipelines to get product to market with the exception of a small pipeline that runs from Kazakhstan to Uzbekistan, which is now largely used to import Uzbek crude. Turkmenistan can also export small volumes across the Caspian to Azerbaijan and Russia.

Existing Turkmen crude is also of a poor quality, so no one’s really rushing to get their hands on these exports.


Natural Gas Focus

Turkmenistan’s oil potential has been overshadowed, however, by its stronger focus on the natural gas sector.

A recent independent audit confirmed that Turkmenistan’s supergiant Galkynysh gas field is the second-largest reserve in the world—rivaled only by the South Pars gas field, shared by Qatar and Iran. And production at this field is about to begin—in June or July. The Galkynysh field has between 13.1 trillion and 21.2 trillion cubic meters of natural gas.

Aside from Galkynysh, Turkmenistan has 10 gas fields with over 3.5 trillion cubic feet each. These are mostly in the Amu Darya Basin (southeast), the Murgab Basin and the South Caspian Basin (west).

Recent major discoveries have been at South Yolotan in the east, and this should bump the proven reserves from more mature fields quite significantly.

Right now, Turkmenistan has largely got access to three markets: Russia, Iran and China, because this is where the pipelines lead. Most of Turkmenistan’s gas goes to Russia, where it helps Gazprom keep a stranglehold on European markets. Turkmenistan is hoping to cut out the middle man here.

Iran imports about 18 million cubic meters of gas a day from Turkmenistan, and as much as 30 million cubic meters in winter months.

TurkmenGas is supplying around 20 bill cubic meters a year to China, but that could rise to 65 billion cub meters by 2020. China is a major market for Turkmenistan—but the country is hoping to get into other markets. To this end, it has two pipelines planned: the first to Pakistan and India, the second to the European Union countries, via the Caspian Sea.

One of the key new priorities of this eccentric government is to diversify its natural gas markets, and it’s attempting to lure in new foreign investors by touting new innovations, high-pace development and new hydrocarbon discoveries.

The new energy strategy, unveiled in 2010, is to more than triple gas production to over 8.1 trillion cubic feet per year by 2030. The potential is vast, but expensive: Turkmen gas is high in hydrogen sulfide and carbon dioxide, with higher pressure and temperatures, which makes extraction more technologically challenging.

For now, there is little competition for foreign investors: China’s CNPC is THE ONLY foreign company that enjoys direct access to any onshore gas development projects in Turkmenistan. It’s largely an open playing field.

LNG Ramp-Up

Turkmenistan’s liquefied natural gas (LNG) market is also expecting a bit of a boom.

This year, Turkmenistan plans to increase its exports of LNG. High-tech upgrades to an LNG complex in the country’s east came on line earlier this year to ramp up production. In 2012, the complex produced some 144,000 tons of LNG as well as significant amounts of gas condensate.

In terms of markets, the country is in talks to transport LNG to Azerbaijan in LNG tankers, and then on to the Black Sea ports of Batumi and Pot in Georgia via rail. From there, the LNG could be exported further afield to Romania. But they are also looking into the Azerbaijan-Georgia-Romania Interconnector (AGRI) gas pipeline project.

Bottom Line: Turkmenistan has vast potential, but markets and infrastructure are its key problems. Geographically, the country is not close enough to end-use markets, and it needs capital to invest in geopolitically-sensitive pipeline projects in order to get at these markets. Its diversification plans will be ambitious, and they have to be because there’s just too much competition for these markets. For that reason, look for good deals from this government which is in urgent need of investors to maintain its status as one of the Caspian’s key players. Things have changed, and this is no longer an eerily isolated country. It’s open for business in a big way.