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Russia's Gazprom settles Ukraine gas row, but profits could dip

The energy giant agreed Tuesday to pay 'European prices' for Central Asian gas, where it has long enjoyed below-market rates.

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In the past few years, the United States and EU intensified their attempts to convince Central Asian states to deliver its gas straight to Europe via a Trans-Caspian pipeline, bypassing Russia. High-profile US delegations and EU energy officials became frequent visitors to Ashgabat, the capital of Turkmenistan, which claims it has up to 24 trillion cubic meters of gas reserves, though no independent assessment is available.

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Europe, which worries that its dependence on Russia's energy supplies can be used by Moscow for political purposes, hopes to receive up to 30 billion cubic meters (bcm) of Turkmen gas annually if the project is implemented. It would be transported from the Caspian region, where Turkmenistan claims the largest gas reserves, to Turkey and then Europe via the proposed Nabucco pipeline. Only one link in the planned route is complete – the Baku-Tbilisi-Erzrum line, which runs from Azerbaijan to Turkey. All other routes exist only on paper.

In addition, some analysts argue that a Trans-Caspian pipeline will lose its economic incentive in the eyes of Central Asian states – especially since they locked in higher prices from Russia on Tuesday.

"It will cross eight countries and each country will charge for transit," says Mr. Smirnov. "Why would Central Asians need this route when they can ship [their] gas directly to Russia and make the same profit without much hassle?"

The Nabucco pipeline project that is aimed to diversify European energy supplies and make less dependent on Russia, will suffer from this deal as well. Mr. Krutikhin claims that without the Trans-Caspian pipeline, Europe will struggle to get enough gas to fill the pipe.

"Azerbaijan ships to Turkey a maximum of up to 6 bcm of gas. Iran can give maximum 10 bcm a year, but a recent gas crisis there shows that they also need gas for domestic use. Egypt has neither enough reserves nor serious plans to ship gas to Turkey." Thus, Nabucco is ultimately dependent on Turkmen gas, summarizes Krutikhin.

New deal for Chinese pipeline

Unlike the Trans-Caspian and Nabucco projects, the Chinese pipeline is already being implemented. Last year Turkmenistan agreed to ship 30 billion cubic meters of gas to China starting in 2009. Construction started in August 2007. Kazakhstan and Uzbekistan also joined this project and plan to ship their gas to China via this pipeline.

This project is a major blow to Russian influence in the Central Asian energy sector. For the first time, Central Asian nations will gain access to energy markets without being dependent on Russia.

Russia thus had little choice but to compromise and agree to new prices.