Naubet Bisenov in Almaty -

Tajikistan is the poorest of the former Soviet states – a situation the autocratic government of President Emomali Rakhmon hopes to remedy by building the world's tallest dam. A World Bank draft report on the Rogun dam gives the Tajik government grounds for optimism, but another report raises more cause for concern.

Ahead of the World Bank's July 14-18 consultations over the dam, the Washington-based lender published drafts of feasibility studies on the construction of Rogun. To the delight of President Rakhmon, the bank's assessment appears to favour the largest version of the dam being built, which would stand at 335 metres tall with an installed capacity of 3,600 megawatts (MW).

The bank's economic analysis considers nine possible Rogun design options, comprising three different dam heights (335, 300 and 265 metres), with three installed capacities for each height (starting from 2,000 MW for the smallest dam to a maximum of 3,600 MW for the tallest). The analysis also takes into account various variables such as demand for electricity, fuel costs, total investment costs and the capacity of power interconnectors with neighbouring countries.

The analysis results show that all the Rogun design options would have an overall beneficial impact on the Tajik electricity system: $69m for the smallest Rogun option to over $2.5bn for the highest in a period until 2050 (the study assumes the dam is built in 2013 and calculations are based on the 2013 US dollar rate). "The highest dam option generally shows the greatest benefit across all sensitivities, except in the Low Demand growth case when the lower need for capacity makes the smaller dam options more appropriate," the World Bank says.

This is music to the ears of the self-important president, who wants Rogun to be the tallest and have the largest capacity. However, the investment cost of building the dam would be huge relative to the size of the economy, "on the order of 50% of 2013 GDP", and "would present macroeconomic challenges even if it is part of the least-cost solution to meeting Tajik energy demand", the analysis warns. According to the World Bank, Tajikistan's GDP totalled $8.5bn last year.

Money problems

The analysis also discusses financing options for the dam, though here there is less good news for the Tajik government. Almost all of the funding options are regarded as impossible due to Tajikistan's inability to fund it on its own, or because of problems with attracting outside funding in the current atmosphere of hostility to the project from downstream countries, especially Uzbekistan. For the project to be sustainable from a macroeconomic point of view with entirely foreign-funded public sector borrowing on commercial terms, it should be financed at an interest rate of less than 10%. "This scenario remains hypothetical since the availability of such large commercial financing is unlikely irrespective of the interest rate," the analysis says.

If the government wants to fund the project through public sector domestic financing, it would need to spend an additional 5% of GDP annually on the project for a decade. This might be possible, but would imply a large reduction in disposable income for an already poor population; 36% of Tajiks lived below the poverty line in 2012. And even if the money could be raised from domestic sources – in 2010 the government tried to raise $800m by forcing public-sector workers to buy shares in the project; less than $200m was raised – converting it to foreign currency would cause a large depreciation in the national currency, the World Bank warns. As a result, the combined reduction in income and currency depreciation would reduce private consumption and private investment, forcing a reduction in social spending for several years and increasing poverty further.

The bank suggests that such a large project should involve equity participation by other players, including downstream countries and commercial partners, as broad international support would help improve financing terms. "This would reduce investment, operational, and fiscal risks and strengthen macroeconomic stability," the bank says.

A combination of Tajik government self-financing, foreign equity participation, preferential and multilateral loans, and commercial or export agency loans could generate the most favourable terms and avoid foreign control of the asset, while at the same time providing broad international involvement and reassuring neighbouring countries of compliance with agreed arrangements, the analysis concludes.

And it’s the concerns of Tajikistan's neighbours and other international bodies that could ultimately doom the project, or at least delay it for years.

Confrontation

Uzbekistan vehemently opposes damming cross-border rivers because, it fears, this will deprive its cotton fields of water and threaten millions living downstream should an earthquake destroy such dams. During a visit to downstream neighbour Kazakhstan in 2012, Uzbek President Islam Karimov urged the upstream nations of Tajikistan and Kyrgyzstan to take into account international public opinion in planning dams, otherwise it could "lead not only to confrontation but also to war".

To hamper the construction of Rogun, Tashkent has already imposed an effective transport blockade on Tajikistan, preventing the transit of construction materials for the dam.

Another report in June raised depressingly familiar concerns regarding the building of dams in developing nations. Human Rights Watch voices concern in a report about the process that will resettle 42,000 people in the 170-square-kilometre flood zone and villages near the construction site. Already the government has moved about 1,500 families who, the watchdog alleges, have been denied what was promised them. "Loss of land for farming and raising livestock, lack of employment, and poor access to essential services in resettled communities have combined to create significant hardship for resettled families,” the report says. “People who had previously relied on their lands to provide food reported that, after resettlement, they had to purchase most or all of their food at markets, leaving less money for other household needs.”

Economics and opposition are certainly problems for the Rogun dam, but they are probably surmountable. Perhaps the greatest threat to the project, though, is the discovery of huge oil and gas resources in Tajikistan.

Oil and gas

Uzbekistan's frequent suspension of gas supplies to Tajikistan and Kyrgyzstan, especially during winter, might have forced those two countries to turn to hydropower as an alternative source of energy, but has also raised efforts to look for their own sources of oil and gas.

Cash-strapped Tajikistan is looking at a China-led Turkmenistan-Uzbekistan-Tajikistan-Kyrgyzstan-China gas pipeline, known as Line D, as a handy source of funds for the Rogun project. The pipe is expected to pump 25bn cm/y of Turkmen gas to China. Kyrgyz authorities believe that the pipeline would raise about $1bn in transit fees and taxes annually; Tajikistan's revenue should match that. But analysts say the gas pipeline is also encouraging oil and gas companies to explore Tajikistan's own promising oil and gas fields.

There are two oil and gas basins in Tajikistan, according to Tethys Petroleum, which is exploring for hydrocarbons there: in the the Fergana basin in the north of the country, while in the south lies the Tajik-Afghan basin, an extension of the prolific Amu Darya basin. "Tajikistan is part of the same geological basin which Turkmenistan and Uzbekistan share, but it hadn't been developed in Soviet times," Tethys Petroleum's executive chairman, David Robson, tells bne in an interview. "Tajikistan, from the geological perspective, is a country where there is a lot of potential for oil and gas."

Robson explains that the Soviet-era discoveries in Central Asia were mainly in shallow layers; the Soviets didn't need to look into deeper layers in Tajikistan because they could easily pump oil and gas from fields in Uzbekistan and Turkmenistan. Tethys, which arrived in Tajikistan in 2007, made the first oil discovery since the country gained independence in 1991 near the Afghan border. "Then, of course, we were heavily involved in bringing partners Total and CNPC [China National Petroleum Corporation], but that prospect just wasn't big enough to excite them," Robson says of his attempts to draw the attention of big players to Tajikistan. "What excites them and us is what's going on in deeper horizons, which have never been drilled in Tajikistan. No well has ever been drilled through the lawyer of salt which keeps the big fields in Turkmenistan."

Robson says Tethys has acquired seismic data that indicate "enormous" reserves of hydrocarbons in Tajikistan – over 3 trillion cm of recoverable gas and around 8bn barrels of oil and gas condensate. "I know Total and CNPC share similar optimism now," he says. "Three of us – Tethys, Total and CNPC – all share a lot of confidence that there is certainly something there which could be enormous in size."

Robson points out that CNPC's intent to build a pipeline from Turkmenistan to China via Tajikistan is a good sign for oil and gas exploration in the country. "If things work there – and there are still a lot of ifs – there is sufficient gas there in Tajikistan to fuel the current Chinese gas demand for 22 years just on its own," he says, though adds it's risky because reservoirs are at a depth of 7km and under high pressure with gas containing hydrogen sulphide.

In June 2013, Tethys announced the completion of a farm-out agreement with Total and CNPC, with each acquiring a one-third interest in the Bokhtar production sharing agreement in southern Tajikistan. They also set up a consortium, the Bokhtar Operating Company, which they jointly own and manage. Data from the Bokhtar block compares favourably to that from Turkmenistan's supergiant Galkynysh gasfield, as "they look exactly the same," Robson tells bne. "We are confident we will find something, but it's gonna be a deep, expensive process."

Total and CNPC are "carrying" Tethys' costs of drilling the first well to the tune of $80m, but since the company's contract area is "massive" – some 36,000 square km – the parties are now working on obtaining more seismic data to identify the sweet spot for drilling the first well next year. Robson estimates the first well will cost $60m to drill, although Gazprom has spent $120m to drill a well to that depth. Overall investment will run into "several hundred millions" over the next three years, of which a third will have to be covered by Tethys itself.

The discovery of "supergiant" reserves of gas at Bokhtar would not only solve Tajikistan's economic and energy woos, but might also turn the country into a big player on the regional gas market to rival Turkmenistan and Uzbekistan. If so, it may also persuade President Rakhmon to abandon the Rogun project.