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BUSINESS & ECONOMICS

MIXING OIL AND WATER: CENTRAL ASIA’S EMERGING ENERGY MARKET

Gregory Gleason 8/27/01

Last month, Central Asian states signed a treaty forming a regional energy grid, rewarding lengthy international efforts to foster such cooperation. The states with abundant water have few energy resources; states with strong energy infrastructure starve for water. If it works, this grid may help harmonize Central Asian power interests. It will be harder to share water fairly.

Since the Soviet Union collapsed in 1991, Central Asian states have struggled with the slower breakdown of the Soviet energy infrastructure. The Soviet regime produced and distributed energy via a single, unified system. The transition to national independence imposed a new financial logic on this system, which quickly proved clumsy. Countries claimed the assets on their territory and hurried to make them profitable or cover their costs � but without major new investment. Representatives from countries’ energy ministries have met regularly since then, trying to coordinate the activity of five separate grids. Last month in Bishkek, this body � known as the Council of the Central Asian Energy System- crossed a threshold. Its delegates signed a long-discussed treaty forming a united energy system.

This system derives strength from its size, aggregating national grids in Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Kazakhstan’s KEGOS (Kazakhstan Energy Grid Operating System), Kyrgyzstan’s Kyrgyzenergo, Tajikistan’s Barki Tochik, Turkmenistan’s Energomashkomplekt and Uzbekistan’s Minenergo amount to 80 power stations with a total capacity of 24.5 million kW. They also link, via Kazakhstan’s 11-month old connection with Russia’s Unified Energy System, to an energy network across Eurasia. This system can potentially distribute upwards of 92 million kilowatt/hours � at prices that reflect different levels of supply and demand in different states.

That’s because the new system promises to use public, tradable prices. Energy ministries have pledged to account for power costs as a function of supply and demand rather than political priorities. Each system carries a monetary value, which changes with demand for power and available resources. This approach should allow more efficient production and distribution of power throughout the region and spur quicker decisions about when and where to send surplus power. Such efficiency will be hard to reach, but the region’s geography suggests some guiding principles. Kazakhstan, Turkmenistan and Uzbekistan are net oil and gas exporters, but import more electricity than they export. Kyrgyzstan and Tajikistan have negligible fuel energy supplies, but could produce plenty of power from water. Kyrgyzstan is a net electricity exporter.

A unified grid should foster efficient trading among the five states. In June, just prior to the treaty signing, Kyrgyzstan, Kazakhstan and Uzbekistan agreed to settle their inter-state energy accounts through commodity swaps rather than cash payments. Under the agreement, in the year ahead Kyrgyzstan will supply Kazakhstan and Uzbekistan with electricity. Uzbekistan will repay the debt with natural gas, fuel, turbine and transformer lubricants and fuel; Kazakhstan will provide coal and fuel oil. This agreement illustrates the efficiencies that public prices can spur.

Yet the economic imbalance between Caspian states that produce oil and landlocked states that consume it still drives this system. Kazakhstan, one of the new grid’s most enthusiastic proponents, took the lead in linking to Russia’s grid. It had cause to do so. After early price liberalization, Kazakhstan responded to market cues by abandoning coal production in favor of petroleum and natural gas. According to the Asian Development Bank, the country cut its electricity production by more than 50% since 1989. So despite its significant fuel reserves, Kazakhstan let its methods of electricity generation and fuel transport become outmoded and inefficient. It connects to Russia through nine lines and to the rest of Central Asia via only one. The new energy grid can provide Kazakhstan with greater supply of power, presumably at better prices.

At the same time, the new grid can’t erase all the political one-upmanship that states deploy in resource allocation. Last winter, for instance, Uzbekistan disrupted gas delivery to Kyrgyzstan, and Kyrgyzstan threatened to use its water supplies for winter heat � which would have weakened Uzbekistan’s summer irrigation program. The new grid can restrict some of this behavior, but it cannot value water � a commodity over which states are already squabbling. Some Kyrgyz parliamentarians argue that water should be priced as any other commodity to reflect its value. Kazakh President Nursultan Nazarbayev recently rejected the idea that Kazakhstan and Uzbekistan should pay for water as "unacceptable" and a violation of international norms.

This impasse illustrates that even with a new unified grid, oil-producing states control bigger purses and can distort natural resources’ value. Water is certainly more crucial to life than oil, but legal precedent continues to support the oil producing states. As one Central Asian energy analyst put it, "When oil and water mix, oil is likely to come out on top." A centralized power grid can streamline the exchange of electricity, but it cannot balance the other kind of power.

Editor�s Note: Gregory Gleason is Associate Professor of Political Science and Public Administration at the University of New Mexico.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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