tuesdays in turkmenistan: the potential of Galkynysh

I have been sitting on this post for a couple weeks. Now that I'm back in the blogging spirit, this is a good time to post. It would have come out last week had it not been for my visit to Ashgabat last week. In fact, my visit was partially related to this subject, but alas, no further details can be provided on the matter.

There is a massive gas field in Turkmenistan called Galkynysh. The field, which used to be called Yoloten, is massive. One of the largest gas fields in the world ever to exist. If you have ever heard me speak about the potential of this country and where its financial future lies, it is this field I have in mind. It is the country's goal to produce gas from this field soon, and eventually reach quantities that will sustain pipelines to China, India, Europe and anywhere else they can find a market. Turkmenistan has the opportunity to become like some of the oil-rich Gulf nations. High resource wealth mixed with low local population means a very-high average standard of living can be achieved. There are two major social stumbling blocks in addition to the many technical and geopolitical ones. Only touching on the technical aspects briefly, I want to mention that this is not an easy field. Drilling will require a reasonably high level of technical sophistication. In terms of geopolitics, gas means pipelines for Turkmenistan as a land-locked nation (ignoring the Caspian). Pipelines need to be built and maintained. Ok, there's one to China now (in addition to the one through Kazakhstan and Russia). But building one to India, through Afghanistan and Pakistan, will not be easy and a trans-Caspian line to Azerbaijan and eventually Europe will also meet with resistance, mostly from Russia. I think these are actually all fixable problems. Some of it is technical, some is political, and money will carry the day to get things done.

Back to the social stumbling blocks. First, a high average standard of living does not mean a good standard of living for everyone. Some people will do very well, and there are always some who do exceedingly well for themselves in places like this, while others will do moderately well (ie: the future professional/middle class), and there will be those who do not fare so well. Perhaps progress will bypass their lives or social programs will not reach all corners of the country or perhaps plain old ethnic divisions will continue. Ashgabat has become a shining marble beacon already, but the rest of the country has yet to be so fortunate. How long and how extreme can the disparity become until it creates unrest? The next 10-20 years will be interesting to say the least.

The other social stumbling block is labor. As in, where does the labor come from? Does Turkmenistan want to go the same direction as some of the Gulf states and import significant amounts of expats? For its own sake, I think it should not and in practical terms, it may not be able to anyway. Countries like Bahrain and Qatar have less than one million citizens each, but have total populations that are more than half-expat. Saudi Arabia is the world's largest oil producer with less than a tenth the population of the U.S. (which itself produces more oil than most people realize). Turkmenistan, with 5-6 million residents does not seem eager to embrace significant amounts of outside labor. For sure it exists, as evidenced by significant numbers of Turkish construction projects. However, the Chinese, despite their investments into the country, have been rebuffed many times and only a limited number of visas are available for Chinese nationals to support the operations of the Chinese state company CNPC in the eastern part of Turkmenistan. And vast waves of cheap labor from India and Southeast Asia like you see in Bahrain, Qatar, and U.A.E., have yet to flood into the country. There are obvious hurdles in terms of getting visas, but additionally, local labor is still relatively cheap. The challenge lies with the quality of local labor. It would benefit the country to significantly invest in education and health services. The benefits are numerous: educated labor force, reduced population growth (which is rather high), and the ability to employ the nation's citizens in the nation's own projects. This allows more of the investment to stay in the country instead of going abroad with expats like myself.

There is so much potential here. Turkmenistan has before it so much opportunity, but fulfilling these opportunities depends on the people here, especially the political leaders.

natural gas still falling

In the midst of this earnings report week, let’s take another look at the travails of the U.S. natural gas market. The incredibly mild winter across much of the country has driven storage to record highs for this time of year. We entered the winter season with about as much gas in storage as the two previous winters in 09-10 and 10-11. However, we’re now leaving the winter draw down period with storage levels nearly 50% higher than any previous level for this time of year. I even made a handy chart where you can see this for yourself. I even made a handy chart where you can see this for yourself. It is quite clear that the peak storage level has been very similar the last three years, but the draw down this winter was much smaller than normal. This has been a major factor in driving down the spot prices for natural gas in the last six months. (Spot prices are not the same as the residential prices you pay unless your residence is a natural gas power plant.) This also correlates quite nicely (in a certain definition of the word) with the decline in the drilling rig count over the past four months.

When I last looked at this issue two-and-a-half months ago I thought prices were near a bottom then but not about to rebound. I was half-wrong. Spot prices have come down another 25% since then, obviously nowhere near a bottom, though it was more or less correct that they were not rebounding either. The outlook is still a bit grim for natural gas as a direct investment vehicle. I’m still not sure we’ve reached the bottom and there’s still no compelling reason for prices to turnaround. Perhaps an incredibly hot, and thus high-electricity demand summer will create more demand than normal for natural gas to run power plants during the summer months. However, additional capacity is just too readily available at the moment. What could have a clear and strong impact on prices is regulation. If hydraulic fracturing came under serious governmental restrictions, that might curtail some drilling and production activity and ultimately decrease available supply.

Today, Halliburton actually reported rather strong earnings in the face of the challenges in the North American drilling market. That stands in stark contrast to the profit warning that Baker-Hughes issued a few weeks ago. I can’t pretend to be surprised. HAL has always been a very aggressive company, even that one time they made that computer in that spaceship, and they have something of a “home field” advantage in North America. Meanwhile, Baker is seemingly still adjusting to their acquisition of BJS and trying to get everything to click properly. Or, well, it could be several other things that they’ve had difficulty with and it’s not much use speculating what is driving their internal decision making process. Let’s see what my employer and 70% domicile provider says on Friday.