Uzbekistan the latest to fall into Moscow's line

By bne IntelliNews September 11, 2008

Nicholas Watson in Prague -

Moscow dealt a further blow to Western hopes of increasing its influence in Central Asia as Russia's ubiquitous prime minister, Vladimir Putin, popped up in the Uzbek capital to sign a series of natural gas deals, with Gazprom and Lukoil the main beneficiaries.

The first agreement struck between Putin and Uzbek President Islam Karimov on 2 September covered the price that Moscow pays for the Uzbek gas. The roughly 7bn cm of Uzbek gas that Russia imported in 2007 is part of Gazprom's gas trading scheme whereby it tries to monopolise Central Asia's exports of gas, buying them up cheaply before selling the volumes on to Western markets at a huge mark-up. Newly-emboldened countries like Uzbekistan, Kazakhstan and Turkmenistan have wised up to this scheme and pushed for higher prices; Moscow, keen not to let western governments sway these countries with higher prices, has responded by agreeing to pay about $300 per 1,000 cm of Uzbek gas from 2009, almost double the price which the firm currently pays for the gas.

"The reality is that Central Asian gas exporters have become empowered vis-à-vis Russia, yet the Russian gas giant Gazprom still holds the cards and is keeping Europe at the door," says Natalia Leshchenko of Global Insight.

The new pricing formula opened up the way for a second deal between the two countries over the construction of a new gas pipeline, which will give Uzbekistan and Turkmenistan additional export capacity for their growing volumes of gas being produced, while ensuring that this gas flows north to Russia rather than west to Turkey or Europe.

Leaders from Russia, Uzbekistan and Turkmenistan agreed back in May 2007 to build a new gas pipeline that would run parallel to the Central Asia-Centre (CAC) pipeline and to upgrade the CAC pipeline to accommodate rising Uzbek and Turkmen exports. However, they failed to finalise the agreements due to the unresolved price issues. Now pricing is out of the way, Putin and Karimov agreed to build a parallel Central Asia-Center (CAC) pipeline with an annual capacity of between 26bn-30bn cm, while the aged CAC pipeline would be upgraded to increase its capacity to 80bn-90bn cm. According to RIA Novosti news agency, only some 45bn cm is currently exported via the pipeline each year.

Uzbekistan has big plans for its gas industry, which Lukoil, whose president accompanied Putin to Tashkent, hopes to be a major part of.

According to the latest BP Statistical Review, the country had 1.74 trillion cm of proven natural gas reserves at end-2007. BP puts 2007 production at 58.5bn cm, with much of that, nearly 80%, consumed domestically. According to state-owned Uzbekneftegaz, the country planned to boost gas exports in 2007 to 14.5bn cm, 14% more than 2006. "However, comparing this with the production and consumption figures in the BP Review, it would seem that Uzbekistan failed to meet this target in 2007, with only 12.9bn cm having been available for exports," calculates Business Monitor International.

Tashkent is looking to companies like Lukoil to help raise its production. Vagit Alekperov, Lukoil's president, told reporters in Tashkent that his firm has agreed to invest about $5bn in the Kandym and Hissar gas projects in Uzbekistan over the next seven years in order to produce more than 12bn cm of gas there per year, compared with the 3bn cm/y that can now be produced. In March this year, Lukoil acquired new assets in Uzbekistan for about $580m. The contract area has seven fields: the Dzharkuduk-Yangi Kyzylcha, Gumbulak, Amanata, Pachkamar and Adamtash gas condensate fields, the South Kyzylbairak oil and gas condensate field, and the Koshkuduk oilfield.

And it's not just Russia. While Europe has so far failed to finalise any agreement on gas supply deals with Uzbekistan, Asia has been more successful. In August, construction began on the Uzbekistan-China stretch of the Central Asian gas pipeline project. The pipeline will supply China with as much as 30bn cm/y of gas and starts at the Turkmenistan-Uzbekistan border, cutting through central Uzbekistan and southern Kazakhstan before entering China's Xinjiang Autonomous Region. Also in August, PetroVietnam signed a co-operation deal with Uzbekneftegaz to acquire oil and gas assets in the country.

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