Business & Economics:
UZBEKISTAN LOOKS TO DIVERSIFY ITS ENERGY OPTIONS
6/06/07

No one could miss the fact that Russian companies were a major presence at the Oil and Gas Uzbekistan Exhibition, held recently in Tashkent. But the high profile of Russian firms at the trade fair does not mean that Moscow’s dominating role in Uzbekistan’s energy sphere is especially welcomed by President Islam Karimov’s administration.

On the surface, the energy partnership between Russia and Uzbekistan seems stronger than ever, underscored by Tashkent’s participation in Russian efforts to expand and upgrade a pipeline supply network, known as Central Asia-Center. [For background see the Eurasia Insight archive]. If the overhaul goes according to plan, Russia should be able to maintain its stranglehold on Central Asian natural gas, and possibly be in position to realize its long-held dream of creating an international gas cartel.

Observers in Tashkent report that Uzbek officials are increasingly concerned about Moscow’s growing influence over Uzbekistan’s energy sector. “The Russians [the Russian companies] are not more welcome than the Western companies, or the Chinese,” said a Tashkent-based foreign businessman, speaking on condition of anonymity.

Uzbek authorities are eager to diversify their energy options. The problem is that politics is severely limiting their choices. Relations with the United States and European Union plunged following the Andijan events of 2005, when government security forces opened fire on unarmed protesters. [For background see the Eurasia Insight archive]. Lingering tension precludes any deals with US and EU firms at this time.

Tashkent has vigorously pursued closer energy ties with its only other viable option – China. In late April, the state energy company, UzbekNefteGaz reached a deal with the China National Petroleum Corp. to construct a 530-kilometer pipeline with a projected capacity of 30 billion cubic meters (bcm) of gas per year. Uzbek company officials said the project is intended to facilitate a 2006 deal between China and gas-rich Turkmenistan, under which Ashgabat pledged to supply Beijing with 30 bcm of gas annually starting in 2009. [For background see the Eurasia Insight archive].

Uzbekistan itself produced 62.5 bcm in 2006, roughly 80 percent of which was used for domestic consumption. The remainder was exported to Russia and neighboring Central Asian states. Some experts believe Uzbekistan may possess far larger reserves of gas than are presently known.

Privately, UzbekNefteGaz representatives hint that they want to use the Chinese export route as leverage to get the Russian energy giant Gazprom to pay a higher price for the gas it buys from Tashkent. The Russian company currently pays $100 per thousand cubic meters, piping it to Russia before re-exporting it to Europe, where Uzbek gas fetches the going market rate of $220/tcm or more. Russian officials do not seem overly concerned about the Uzbek-Chinese pipeline deal, believing that it will be years, if ever, before the planned export route becomes operational.

Gazprom and LukOil, another Russian energy giant, have agreements in place to explore Uzbek sites that possibly contain energy deposits, many of them located on or near the rapidly shrinking Aral Sea. [For background see the Eurasia Insight archive]. Theses projects have proceeded at a snail’s pace, however. For much of 2007, Uzbek and Russian officials have haggled over the initiatives.

Earlier this year, Tashkent accused Gazprom of not living up to its investment commitments, coming up with only about one-tenth of the $300 million that it had pledged to pump into exploration and development projects. Russian officials, meanwhile, complained about Uzbek government obstructionism. An early March visit to Tashkent by Russian Prime Minister Mikhail Fradkov failed to make much headway in resolving lingering differences. [For background see the Eurasia Insight archive].

The impression that some foreigners in Tashkent get is that Karimov’s administration is playing for time. Tashkent needs Russia’s political support at this time, but does not want to grow economically dependent on Vladimir Putin’s Kremlin. Perhaps with the passage of time, circumstances will change, and Uzbek authorities could find new partners for energy ventures, or at least create an appearance of competition that enables them to drive harder bargains with Russian firms, some observers believe. “It seems that the Uzbek administration is purposely working very slowly, and in a very complicated way,” the foreign entrepreneur stated.

Other observers say Uzbek officials have a demonstrated ability to undermine their own policy objectives. To back up their contention, they point to the April decision of another Chinese firm, Sinopec, to withdraw from a $110-million deal that was inked in 2005. The Chinese entity reportedly backed out due to exorbitantly high tax rates set by the Uzbek government.