UPDATE 1-Big Turkmen field to produce gas next year

Thu Nov 15, 2012 9:43am EST

* Galkynysh pivotal in supplying Europe, south Asia with gas

* Europe pushes Ashgabat to sign contract on gas sales

* Washington ignores Moscow's objections to Caspian route

* U.S. backs TAPI project despite security concerns

By Marat Gurt

ASHGABAT, Nov 15 (Reuters) - Turkmenistan plans to begin production at the world's second-largest gas field next year, a senior Turkmen official said, opening up new EU- and U.S.-backed supply routes to Europe and Asia at the risk of Russian opposition.

The Central Asian nation plans to build two pipelines to carry gas from the Galkynysh field. One would run to Pakistan and India and the other would cross the Caspian Sea en route to the European Union, easing the bloc's dependence on Russian gas.

"We can launch industrial output at Galkynysh next year," the Turkmen government official, who declined to be named because he is not authorised to speak publicly on the matter.

"Right now, three gas-processing plants are being built, and two of them are certain to be ready in January or February," he said on the sidelines of an energy conference.

Turkmenistan's natural gas reserves rank fourth in the world behind those of Russia, Iran and Qatar, BP data shows. Auditor Gaffney, Cline & Associates has estimated reserves at Galkynysh at between 13.1 trillion and 21.2 trillion cubic metres.

The field, named after the Turkmen word for renaissance, is better known by its previous title, South Iolotan.

It is being developed under a service contract by China's CNPC, Dubai-based Gulf Oil & Gas Fze, London-listed Petrofac and a Korean consortium of LG International Corp and Hyundai Engineering Co Ltd.

Western energy majors, frustrated by Turkmenistan's apparent reticence to open up its prized onshore gas deposits, have cast doubts over the country's ability to finance and operate such a field without foreign investment.

Douglas Uchikura, president of Chevron Nebitgaz B.V., the local unit of Chevron Corp, estimated the investment required by Turkmenistan to triple natural gas output by 2030 in the "tens of billions of dollars".

"It would seem that Turkmenistan would welcome long-term, large-scale FDI (foreign direct investment) in light of what could otherwise become a daunting, if not impossible, task," Uchikura told the energy conference on Thursday.

He said he hoped that "an invitation for foreign direct investment in the onshore natural gas sector, on mutually beneficial terms and conditions, is on the horizon".

CARVING A NICHE

As the start of production draws closer, senior Western diplomats have urged Turkmenistan to waste no time in carving out a niche for itself in the lucrative gas market.

The European Union is in talks with Turkmenistan and Azerbaijan on building a trans-Caspian pipeline to Europe.

Patricia Flor, EU representative for Central Asia, urged Turkmenistan "to reach agreement with EU energy companies on a commercial contract, which would define volumes and price".

"It is important to sign this agreement as soon as possible," she told Reuters. "World markets are volatile. Talking about energy markets, we should bear in mind such agreements are long-term."

The Turkmen official said: "We would like to receive guarantees on transit and purchase (volumes)." He said Turkmenistan was ready to supply 30 billion cubic metres of gas to the pipeline annually.

Wary of potential competition with Caspian gas producers on the European market, Russia has objected to plans to lay the 300 km (188-mile) Trans-Caspian pipeline.

Russia, which is one of the five littoral nations of the Caspian, says the sea's legal status is not yet defined and the project could endanger the fragile ecosystem of the shallow sea.

Russia itself has been the traditional market for Turkmen gas but has reduced purchases to about 10 billion cubic metres (bcm) per year from 40-45 bcm annually in the last two years.

Because of the drop in exports to Russia, Turkmenistan currently produces less than its annual capacity of 75 bcm. Energy major BP estimates last year's output at 59.5 bcm.

Turkmenistan, which also exports gas to Iran and China, plans to increase annual output to 250 bcm by 2030.

WARMER U.S. TIES

Ties between the United States and Turkmen President Kurbanguly Berdymukhamedov are warmer than with his flamboyant predecessor Saparmurat Niyazov. U.S. officials have stated support for the project and see no legal issues.

"If Turkmenistan and Azerbaijan agree on a pipeline that crosses only their territorial waters, no other country has veto power over that decision," said Lynne Tracy, deputy assistant secretary of state at the Bureau of South and Central Asian Affairs.

The 1,735 km (1,085-mile) TAPI pipeline to Pakistan and India, meanwhile, faces security challenges because it must cross Afghanistan. Turkmen officials have said it could carry 1 trillion cubic metres of gas over 30 years, or 33 bcm a year.

"The road ahead is long for this project, but the benefits could be significant," Tracy said.

Joerg Weller, general manager for ExxonMobil's Turkmen unit, said the U.S. company would consider joining the TAPI project if asked.

"We are ready to consider taking part in the consortium. We have great possibilities and we are interested," he said, speaking in Russian. "But we're an oil and gas company, and we would like to produce the gas that we transport."