The Caspian Sea region's natural gas potential is, by some measures, more significant than its oil potential. Regional proven natural gas reserves are estimated at 232 trillion cubic feet ( T cf), comparable to those in Nigeria . Natural gas production from Azerbaijan , Kazakhstan , Turkmenistan , and Uzbekistan in 200 5 was approximately 5.2 T cf, comparab le to three quarters of Canada ’s production . Turkmenistan and Uzbekistan are the region’s largest natural gas exporters, but Kazakhstan has exported smaller volumes due to a lack of export infrastructure. The Caspian region's leading oil producers.

I n coming months with the commercial start of the South Caucasus Pipeline (SCP) , Azerbaijan will be able to send gas exports to the West . Still, with only one major foreign investment focusing primarily on natural gas ( Azerbaijan 's Shah Deniz ) , the region will need considerable investment in upstream projects and export infrastructure before its full potential can be realized.

Since the early 1990s , gas production from the Caspian has been characterized by modest annual increases from Uzbekistan , and by a dramatic collapse (then partial recovery) from Turkmenistan (see Fig. 3 below). After 1991 t hese fluctuations occurred because natural gas from the Caspian Sea region, mostly from Turkmenistan , became a competitor with Gazprom, the Russian state natural gas company. Since all of the pipelines connecting the region to world markets were owned by Gazprom and routed through Russia , Turkmen natural gas was squeezed out of the market. As a result, Turkmenistan 's incentives for increasing its production of natural gas disappeared. The country's output dropped throughout the 1990s, plummeting from 2.02 Tcf in 1992 to just 466 billion cubic feet (Bcf) in 1998 when the country was locked in a pricing dispute with Russia over the export of its natural gas. In 1999, a Turkmen-Russian agreement took hold, and in 2000, production skyrocketed to 1.64 Tcf before reaching 2 .3 Tcf in 200 5 (see Figure 3 ).

After a pricing dispute which halted Turkmenistan's natural gas exports in late 2004, Turkmenistan re-negotiated a 2003 agreement on the quantities and prices of its natural gas exports to Russia and to Ukraine. Turkmenistan's September 2006 agreement with Russia guarantees initial natural gas exports of 212 bcf in 2005, increasing to 1.8 Tcf in 2007, and remaining at 2.8 Tcf from 2009-2028.

The exact volumes in the agreements are not transparent, although press reports indicate deliveries to Gazprom (Russia) will range from 2.1-2.5 Bcf in 2007, 1.5-1.8 Bcf of which will go to Ukraine. Under current agreements, Turkmenistan supplies Ukraine with natural gas at $2.83 per million cubic feet (mmcf), or $100 per thousand cubic meter (mcm), a 54 percent increase from previous levels. Turkmenistan is not supplying gas to Ukraine directly in 2006 but rather to RosUkrEnergo, the intermediary in the Russia-Ukraine gas deal reached in January 2006. The company has already signed contracts for 1.5 Tcf of gas with Turkmenistan, 300 Bcf with Kazakhstan, and 247 billion cubic feet with Uzbekistan for 2007.

In contrast, Uzbekistan has maintained natural gas production growth by avoiding Russia 's pipeline system and by concentrating on the domestic market and on exports to its immediate neighbors. Uzbekistan is the third largest natural gas producer in the Commonwealth of Independent States and one of the top ten natural gas-producing countries in the world. Since becoming independent, Uzbekistan has ramped up its natural gas production by nearly 50 percent, from 1.51 Tcf in 1992 to 2.1 Tcf in 2005 (see graph). Uzbekistan ’s exports of natural gas to Russia increased by 14% in 2005 to around 290 billion cubic feet, and are expected to stay roughly the same during 2006. Uzbek exports of natural gas to Russia are expected to grow from a $1.5 billion Gazprom investment program to develop gas condensate fields in the Ustyurt region. Gazprom also will take part in the reconstruction of the Central-Asia Center pipeline.

Azerbaijan and Kazakhstan plan to increase their own natural gas production significantly by 2010 in order to become net natural gas exporters. Azerbaijan 's major natural gas production increases in the future are expected to come from the development of the aforementioned Shah Deniz field. Kazakhstan 's natural gas production increases are expected to come primarily from associated natural gas at Kazakhstan 's three largest fields: Tengiz, Karachaganak, and Kashagan (consult the Kazakhstan Country Analysis Brief for more details).

More detail on prospective offshore natural gas projects in the Caspian Region can be found in the natural gas sections of the following three region/country analysis briefs: Azerbaijan , Kazakhstan , and Central Asia .

The South Caucasus Pipeline (SCP), also named the Baku-Tbilisi-Erzurum pipeline, will run parallel to the BTC oil pipeline for most of its route before connecting to the Turkish gas infrastructure near the town of Erzurum. At a cost of roughly $1 billion, the 550-mile long South Caucasus pipeline is designed to carry natural gas from Azerbaijan's Shah Deniz field, and have an initial capacity of 0.8 bcf/d by the first quarter of 2007. Slow construction in the Turkish section of the pipeline’s route has repeatedly delayed the project.

The pipeline will be expanded to 1.5 bcf/d depending on market conditions, and eventually to 3 Bcf/d. Roughly 610 million cubic feet per day (MMcf/d) of the Shah Deniz gas will be sold to Turkey, 145 MMcf/d to Azerbaijan, and up to 77 MMcf/d to Georgia. Early June 2005, Georgia offered Azerbaijan to buy an additional 290 MMcf/d of gas. However, this will only be possible in the second phase of the project.

Countries east of the Caspian Sea export most of their natural gas via the Central Asia Center (CAC) pipeline, which is routed into the Russian natural gas pipeline system. Capacity will be increased to 5.2 bcf/d in 2007, from 4.4 Bcf/d currently. Natural gas is exported further to European and world markets through the Gazprom transport system. In an effort to diversify export routes, a number of natural gas pipelines originating in Central Asia are under consideration. Central Asia also has a number of internal pipelines, including the Tashkent-Bishkek-Almaty pipeline , to serve natural gas customers in the region.

An additional way for Caspian region exporters to supply Asian demand would be to pipe oil and natural gas south through Iran to the Persian Gulf or southwest to Afghanistan. The Afghanistan option, which Turkmenistan has been promoting, would entail building pipelines across war-ravaged Afghan territory to reach markets in Pakistan and possibly India. With the removal of the Taliban in Afghanistan in December 2001, proposals to build a Trans-Afghan natural gas pipeline have emerged. The Trans-Afghan pipeline, also called the Turkmenistan-Afghanistan-Pakistan (TAP) pipeline, would span over 1,000 miles from a point in Turkmenistan to Fazilka (India) on the Pakistan-India border. A feasibility study, commissioned by the Asian Development Bank, was completed in 2005. The lack of an international investor, independent verification of Turkemnistan’s gas reserves, and security concerns have kept construction from beginning.

Development of a southern pipeline through Iran would be problematic under the Iran and Libya Sanctions Act, which imposes sanctions on non-U.S. companies investing in the Iranian oil and natural gas sectors. U.S. companies already are prohibited from conducting business with Iran under U.S law. In 1997, however, Turkmenistan and Iran completed the $190 million Korpezhe-Kurt Kui pipeline linking the two countries, thereby becoming the first natural gas export pipeline from Central Asia to bypass Russia. According to terms of the 25-year contract between the two countries, Iran will take between 177 Bcf and 212 Bcf of natural gas from Turkmenistan annually, with 35 percent of Turkmen supplies allocated as payment for Iran's contribution to building the pipeline.