Uzbekistan Harbors Energy Development Plans; Russia Ready to Help

Russia is moving aggressively to help Uzbekistan fulfill ambitious energy development plans. Since the start of 2007, one Russian state-run energy entity has signed a new production sharing agreement with an Uzbek concern, and other Kremlin-controlled firms have moved forward on an array of separate deals.

On February 5, The Uzbek state-owned oil and gas monopoly Uzbekneftegaz announced the signing of a new production sharing agreement (PSA) with Soyuzneftegaz Vostok Ltd, a fully owned subsidiary of Russia's Soyuzneftegaz. The agreement involves a 5-year joint exploration period and a 36-year joint development program concerning the Central Ustyurt and South-Western Guissar hydrocarbon deposits. Uzbek President Islam Karimov issued a special decree to validate the deal, under which Soyuzneftegaz Vostok is committed to investing $466 million, including $370 million over the first three years of the contract. The agreement replaces a 2001 PSA between Uzbekneftegaz and British-registered UzPEC. In 2004, Soyuzneftegaz, headed by Russia's former energy minister Yuri Shafranik, took over UzPEC.

Russia and Uzbekistan have dramatically strengthened political and economic ties since the Andijan massacre in May 2005. [For additional information see the Eurasia Insight archive]. Russia is now Uzbekistan's top foreign trade partner with nearly a quarter of Uzbek total foreign trade. Bilateral trade turnover exceeded $2.5 billion in 2006, up from about $2 billion last year and $1.6 billion in 2004. In the energy sector, Uzbekistan exported roughly 9 billion cubic meters (bcm) of natural gas to Russia in 2006, a nearly 1 bcm increase over the previous year's export total. Some Russian energy executives have stated that Uzbek gas exports could exceed 20 bcm by 2014.

On a strategic level, Russia has provided strong political support for President Islam Karimov's repressive policies, which have been roundly condemned by international human rights organizations and Western governments. In late 2005, Karimov and Russian President Vladimir Putin signed a strategic alliance pact, paving the way for Uzbekistan's entrance into several Russian-dominated organizations - the Eurasian Economic Commonwealth (EEC) and the Collective Security Treaty Organization (CSTO). [For background see the Eurasia Insight archive].

Russia's interest in extending its economic and political influence predates the Andijan events. In June 2004, Russia and Uzbekistan concluded a partnership agreement, along with a $1 billion economic development pact. Under terms of that deal, LUKoil, another Russian energy giant, pledged to develop the Kandym, Khauzak and Shady gas fields in the south of the country, which have 280 billion cubic meters of proven reserves. LUKoil will have a 90 percent share in the project, with Uzbekneftegaz holding the remaining 10 percent.

On February 1, Russia's LUKoil Overseas announced that the Uzbek government is now committed to the exploration of the already environmentally threatened Aral Sea. [For background see the Eurasia Insight archive]. A new protocol is designed to set in motion a PSA signed last August by China National Petroleum Corporation (CNPC), Russia's LUKoil Overseas, Malaysia's Petronas Carigali Overseas, the Korean National Oil Aral Ltd and Uzbekneftegaz. The first of two exploration phases are to cover a seismic survey and the drilling of 2 wells over a period of three years. The first phase would involve $100 million in investment. The general director of LUKoil Overseas, Andrei Podbolotov, told the Ferghana.ru website that Uzbekistan presently produces about 60 bcm of gas per year.

The Russian state-controlled gas monopoly Gazprom is also looking to increase its presence in Uzbekistan. The company is interested in acquiring a 44 percent stake in the Uzbekistani pipeline monopoly Uzbektransgaz. Such a deal would facilitate the expansion of Turkmen gas to Russia via Uzbekistani pipelines. [For background see the Eurasia Insight archive]. During the summer of 2006, Karimov ordered the reorganization of Uzbekistan's pipeline network as part of the government's development plans.

In April 2006, Uzbekneftegaz and Gazprom started $1 billion venture to explore and develop oil and gas deposits in the Ustyurt plains in the western autonomous region of Karakalpakstan, which borders the Aral Sea. It is estimated that the new deposits could yield up to 5 billion cubic meters of gas annually. Gazprom has reportedly pledged to invest roughly $250 million to explore deposits in the Ustyurt region and $350 million to develop the Akchalak, Kuanysh and Urga deposits by 2011.

Beyond exploration and production, Gazprom is mulling the possible acquisition of energy companies active in Uzbekistan, including Guissar Gas, Kokdumalak Gas and Shurtan Gas, currently controlled by Swiss-registered Zeromax GmBH. In addition, Gazprom is involved in a three-way swap arrangement that began operations on January 1. Under terms of the swap, Uzbekneftegaz is bound to supply 3.5 bcm of gas to southern Kazakhstan, while a Kazakhstani company, KazMunaiGaz, is obliged to ship the same amount of gas from the Karachaganak gas field to Russia.

Although Uzbekistan has moved firmly into Russia's geopolitical camp, bilateral relations are not completely harmonious. One sore point is Uzbekistan's debt to Russia, estimated at about $500 million. Moscow and Tashkent have also struggled to cooperate on joint aircraft production. Last November, Russian officials indicated plans to move production of Il-76 military transport planes from Tashkent to the Russian town of Ulyanovsk. Russian reportedly voiced concerns that Tashkent was slow to carry out a $1.5 billion contract to supply 38 Il-76 military transport planes and Il-78 refueling tankers to China. Russia's unhappiness about this contract was cited a reason behind plans to move production from Tashkent to Ulyanovsk.

There has also been tension surrounding a joint venture concerning uranium production. Russia's Techsnabexport, the Uzbek Navoi plant and the Uzbek State Committee for Geology and Mineral Resources signed a MOU to form a joint venture that would develop the Aktau deposit with estimated reserves of nearly 4,500 tons of uranium. The venture was supposed to be operational by the end of 2006, mining up to 300 tons of uranium ore a year. However, the venture has experienced unexplained delays. Negotiations were reportedly to resume later in 2007.