And I'm not talking about the Keystone Pipeline.
In fact, this underreported story is happening in a place that few Americans energy investors would be able to locate on a world map.
But what happens there will have a real impact on their investment portfolios—for the better.
You see, recent moves by Russia, Iran and especially China have just improved U.S.-based energy prospects. That's why today we're going to focus on one country many people haven't heard much about before: Turkmenistan.
And we're ready to capture some profits from it.
Landlocked and Loaded with Fuel
These developments center on the Caspian Sea basin and the Central Asian country of Turkmenistan, in particular.
The Caspian Sea is one of the two last major new sources of oil and gas on the globe. The other (the Arctic Circle) is less accessible and much costlier to develop. So this is an important oil and gas center. (As you can see on the map below, the hub of the activity is just north of Iran.)
Five countries landlock the sea (the so-called "littoral," or shore, states): Iran, Russia, Azerbaijan, Kazakhstan and Turkmenistan.
When access to the Caspian was last the subject of a treaty in the 1940s, only two countries took part in the process—the first four current states were then all part of the Soviet Union.
Much has changed.
Aside from politics, the discovery of huge hydrocarbon reserves has fueled new international interest in this part of the world.
A New King in Natural Gas
Located on the eastern coast of the Caspian Sea, Turkmenistan has one of the top four reserves of conventional (i.e., free standing, not shale) natural gas in the world.
Of course, if it is going to sell all this natural gas, the country needs pipeline access to the major consumer markets.
And that brings the intense political nature of these matters into view.
Throughout the Soviet period, and until very recently, Russia provided that access, with a bit of creative accounting on their part.
What actually happened was that Gazprom, Russia's dominant company and the largest gas outfit in the world, bought Turkmen production at a discount for local use. This would free up Russian-produced gas for export (mainly to Europe), which they sold at a higher price than the gas they had purchased.
Clever, huh?
Now, the Turkmen government in Ashgabat (led by a president with an unpronounceable name—Gurbanguly Berdymukhammedov) has sought to diversify its export corridors, making the country less dependent on Moscow for its entry into the world market.
Matters reached a head almost two years ago—on April 9, 2009.
On that day, an explosion rocked the major pipeline crossing Turkmenistan. This was the primary gas conduit in the entire region, and despite being inside the country, it was run by Russian Gazprom.
Turkmenistan accused Gazprom and Russian engineers of purposefully creating this pipeline explosion in order to disrupt gas exports. Russian experts, in turn, blamed Turkmen negligence and the country's worn-down infrastructure. Tensions only escalated from there.
In response, Turkmenistan suspended all sales to Russia and then immediately began making earnest moves to send its gas elsewhere. The result was a huge pipeline project stretching from major fields in the eastern part of the country, across Kazakhstan and Uzbekistan, to. . .China.
The Turkmens have also committed additional exports to neighboring Iran (despite having huge natural gas reserves of its own, the northern portion of Iran is not connected to the main fields in the south), to source a new pipeline moving through Afghanistan and Pakistan to India, while also saying they will provide volume directly to Europe.
This last ingredient has stoked the fires of politics in the region. To supply the highly desired European market, Turkmen gas must connect to pipelines in Azerbaijan, and then on to Turkey. And to do this, a new pipeline must be laid on the Caspian seabed (the Trans-Caspian Gas Pipeline, or TCGP).
Now the legal status of the Caspian, along with how the individual states can access its open waters and raw materials, has been the single biggest disagreement among the five littoral states.
The proposed pipeline would connect Turkmenistan and Azerbaijan, and it has the approval of both countries, as well as support from the U.S. and the European Union (EU).
These two countries claim they need only their own approval for a project involving only them.
Yet Russia, Iran, and now Kazakhstan, adamantly oppose the TCGP. These three argue that no pipelines should be allowed under the Caspian without the consent of all five countries that border the sea.
And matters have heated up even more now that China is involved.
China Opposes the Caspian Pipeline
Late last year, Ashgabat and Beijing signed a new agreement to increase the flow of Turkmen gas to China. The new amount, to be phased in after pipeline upgrades, would reach 65 billion (B) cubic meters a year, only slightly less than what Turkmenistan has agreed to sell Russia (68B annually).
The last thing China wants is for Turkmenistan to sell its gas independently to Europe.
The price there is considerably higher, and that would allow Ashgabat to claim a prevailing higher rate in negotiations over prices with China.
China, therefore, is now supporting the Russian-Iranian-Kazakh position on TCGP.
This puts the EU in a difficult spot. It cannot simply entice the Turkmens with higher prices because it may well cost Ashgabat strained relations with a rising dominant trading partner (China).
Turkmenistan must also concern itself with a possible Russian naval response. The other four Caspian littoral states have the all-too-recent example of Russia's military move into neighboring Georgia on August 8, 2008, to remind them of the country's strength.
For them, it is an all too recent example that could be repeated in their backyard.
Turkmenistan, therefore, needs to tread carefully. This means a likely delay in supplying the European markets.
It means something else, too. . .
A Boon for American Investors
As I noted on Friday, the prospects of exporting U.S. shale gas to the European market as liquefied natural gas (LNG) is extremely promising.
Europe requires new sources of natural gas in order to offset its primary energy security concern—over reliance on Russian pipeline gas.
Europe had hoped to acquire some of that Caspian production. Now, the alliance between China and Russia against the TCGP makes this more difficult.
It also furthers the likelihood that Europe will be accepting accelerating steams of LNG from the U.S. as a ready alternative. . .
Which is great news here in the United States.
So, thank you, Moscow and Beijing!
Your gracious assistance has improved the bottom line prospects of U.S. shale gas producers. . .and their happy investors.
Sincerely,
Kent Moors, Money Morning
