EurasiaNet Business & Economics - Russia's Central Asia Energy Strategy Experiences a Few Setbacks

BUSINESS & ECONOMICS

RUSSIA’S CENTRAL ASIA ENERGY STRATEGY EXPERIENCES A FEW SETBACKS
5/11/07

Russia has suffered several setbacks in its ongoing efforts to secure its energy dominance in Central Asia. Both Uzbek and Tajik officials have taken steps of late to reduce Russia’s energy position in their respective countries.

Under a surprise deal signed late in April, Uzbekistan announced its intention to build a 530-kilometer natural gas pipeline to China. The route would have a capacity of 30 billion cubic meters (bcm) a year, an amount constituting roughly half of the Central Asian state’s annual gas production. If implemented, Uzbekistan would stoke energy competition between Russia and China, and presumably would secure for itself higher profits, as well as a greater degree of political leeway. Uzbekistan is world’s 13th largest natural-gas producer and the third largest producer among former Soviet states after Russia and Turkmenistan. The key Chinese partner in the new pipeline project is the China National Petroleum Corp. (CNPC).

A statement announcing the pipeline plan was released on April 30, signed by Ma Kai, the director of China’s National Development and Reform Commission, and Uzbek Deputy Prime Minister Rustam Azimov. The statement did not provide details of the project, offering no information on costs, construction timeframe or the precise route. Uzbekistan does not share a border with China, and it’s unclear which of the three possibilities -- Kazakhstan, Kyrgyzstan or even Tajikistan � would be used as a transit country.

Kazakhstan seems the likeliest bet, as it already has a pipeline connection to China’s "West-East" network, which supplies coastal regions via Xinjiang Province. Astana also appears eager to cast itself as a gateway for the export of Central Asian energy to China. On May 2, for example, Kazakh Prime Minister Karim Masimov discussed a pipeline extension with Turkmen leader Kurbanguly Berdymukhammedov during talks in Ashgabat. According to a Chinese-Turkmen pact, Ashgabat is expected to begin exporting gas to China by 2009. [For background see the Eurasia Insight archive].

If implemented, the Uzbek-Chinese pipeline would undermine Russia’s ability to manipulate Central Asia’s gas market. Uzbek authorities moved quickly to strengthen economic and political ties in the months following the 2005 Andijan massacre. [For background see the Eurasia Insight archive]. But recently, Tashkent seems to have soured on the idea of a special relationship with Moscow. A sign of an Uzbek shift came in 2006, when officials in Tashkent threatened to revoke an exploration license granted to the Russian conglomerate Gazprom, accusing the company of failing to fulfill investment commitments. Gazprom officials blamed the delay on the failure of Uzbek authorities to issue proper permits. Russian Prime Minister Mikhail Fradkov’s visit to Tashkent last March reportedly failed to resolve the Gazprom issue.

Gazprom bought 9 bcm of gas from Uzbekistan in 2006, and convinced the Uzbek government to sell it 13 bcm in 2007. It has unsuccessfully tried for years to get Uzbekistan to boost its annual supplies to 17-18 bcm, although in 2006 Gazprom agreed to pay $100 per thousand cubic meters (TCM), up $60 per tcm.

Chinese companies also have encountered trouble in the Uzbek energy market. Earlier in April, China’s state-run Sinopec reportedly withdrew from an oil & gas joint venture with Uzbekneftegas - because of high oil-extraction tax rates. After the signing, the project remained stalled. In 2005, Tashkent increased taxes from 12.3 percent for crude oil and 18.5 percent for natural gas to 32 percent and 58 percent respectively. Although the rates subsequently dropped to 20 percent and 30 percent respectively in 2007, they are still seen as prohibitively high.

A potential obstacle to the realization of Tashkent’s pipeline plan is connected with Uzbekistan’s gas production capabilities. Uzbekistan’s total annual production stands at about 60 bcm, and much of it is used for domestic consumption. In 2006, Uzbekistan produced 62 bcm, but exported just a little over 12 bcm, including the 9 bcm purchased by Gazprom. The remainder went to neighboring states Kazakhstan, Kyrgyzstan and Tajikistan.

Active exploration is underway in the Aral Sea region, but no major new findings have been announced recently. According to a report distributed by the Press-Uz.Info news agency, citing a presidential degree, a CNCP affiliate will supply Uzbekneftegas with over $209 million in drilling equipment. Of the total, $177.6 million will be covered by a 15-year loan by China’s Eximbank, and Uzbekneftegas will be responsible for only $31.5 million in financing.

Meanwhile, Russian-Tajik tension revolves around hydropower. On April 26, Tajik officials announced the collapse of a $1-billion deal, under which the Russian aluminum concern OAO Rusal was to have built a hydropower plant, known as the Rogun Dam. Rusal is also embroiled in a dispute with Tajik officials over efforts to modernize a massive aluminum plant in Tursunzade, not far from the Uzbek border.

Tajik authorities’ displeasure is rooted in suspicion that Uzbek political pressure prompted Rusal to scale back plans for Rogun construction and aluminum plant modernization. Both projects, if completed, would greatly enhance Tajikistan’s political leverage in its dealings with Uzbekistan. Uzbek authorities say an expansion of the Tajik facility would cause severe environmental harm to Uzbekistan. [For background see the Eurasia Insight archive].

With Tajikistan evidently souring on the prospects of cooperation with Russia, Dushanbe appears ready to turn to Iran for help. The topic of Iranian assistance for the Tursunzade plant came up during talks between Tajik officials and visiting Iranian Defense Minister Mustafa Mohammad Najjar in late April, the Ferghana.ru website reported.

Tajik officials have indicated that any Russian firm, except Rusal, will be able to join an international consortium being assembled to complete the Rogun project. Another Russian state-controlled entity, United Energy Systems, has expressed interest in completing the Rogun hydropower plant.

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