Uzbekistan - Energy

With proven natural gas reserves of 1.58 trillion cubic meters, Uzbekistan is the third largest natural gas producer in the former Soviet Union after Russia and Turkmenistan and one of the top ten natural gas-producing countries in the world. Uzbekistan also contains around 594 million barrels of proven oil reserves, and there are 190 discovered oil and natural gas fields in the country. The natural resource sector is strictly controlled by the Government of Uzbekistan (GOU). The GOU, however, relies on foreign firms to provide funds, equipment and expertise to help extract and export its resources. Uzbekneftegaz, a state-controlled national holding company, has responsibility for managing the sector, including supervising tender offers and other proposals for oil and gas concessions.

On February 23, 2001, the Uzbek government adopted a resolution on "Deepening Reforms in the Energy Sector" which could indicate a more favorable investment climate. The February 2001 resolution called for turning various state-owned energy functions into corporations and partially privatizing them. The Ministry of Power Energy was renamed Uzbekenergo State Joint-Stock Company. The Uzbek government also announced that major power plants and distribution units would be turned into joint-stock companies with some shares offered to foreign investors. However, it was announced that Uzbekenergo would continue to control these companies.

The February 2001 resolution presented a 10-year plan for reconstruction of electric generating and transmission facilities that will require major foreign investments. The Uzbek government estimated the cost of the 10-year program to be $1.4 billion (based on the exchange rate then of 387.5 som per dollar). The 10-year program laid out detailed estimates of power plant capacity to be built, reconstructed, or retired, on a plant-by-plant basis. It also spelled out the power lines, substations, and switching networks needed and presented financial estimates of the money expected from foreign investment, the money to come from privatization sales, and the money from Uzbek investment. Uzbekistan has indicated that all receipts from selling energy enterprises will be used in the energy sector. In November 2000, the Uzbek government issued Resolution No. 456, which states that procurement of projects using foreign contractors should be done with an open tender process. These rules allow for bidders to propose financing sources, such as long term loan arrangements, and get exceptional preferences.

Uzbekistan has been a net energy exporter since 1996. Uzbekistan is the world's eighth largest natural gas producer, and is also a major oil producer. However, oil and gas exports are limited by the available pipeline capacity. Uzbekistan produces most of its electricity from natural gas-fired units and is a net exporter of electricity. However, the power plants and transmission system needs substantial rehabilitation, which will require foreign investment.

Oil

Uzbekistan currently possesses about 600 million barrels of proven oil reserves, but this is soon expected to increase. There are 171 oil and gas fields, over 60% of which are in the Bukhara-Kiva region, which accounts for about 70% of Uzbekistan's oil production. The second largest is the Fergana region, which contains about 20% of Uzbekistan's oil fields. There are also oil deposits being developed in southwestern Uzbekistan at Kokdumalak, Shurtan, Olan, Urgin, and south-Tandirchi. Oil exploration is also being pursued on the Ustyurt plateau and in the Aral Sea.

The Uzbek government is offering production sharing agreements (PSAs) in over 80 of the oil fields (estimated to contain about 1.2 billion barrels of oil), which is expected to attract $400 million in investment. Of the oil fields offered, 78 are contained in 16 exploration blocks. There are also eight individual fields -- four in the Southwest Gissar Basin (Dzharkuduk, Gumbulak, South Kizilbairak, and South Tandircha) and four in the Amudarya region (North Shurtan, Shakarbulak, South Kemachi, and Umid).

Uzbekistan is also trying to get foreign investors to increase production in existing oil fields. A joint venture has been formed with Baker Hughes to increase production of the North Urtabulak field. Baker Hughes is investing $8 million in this project and it is expected to increase production of the North Urtabulak field to over 6,000 barrels per day (b/d). Uzbekistan has also given Baker Hughes the option to develop the Adamtash, South Kemachi, and Umid fields, with total investment expected to be as much as $120 million.

In 2001, Uzbekistan awarded licenses to UzPEC, a subsidiary of Trinity Energy of the U.K., to explore and develop fields in Southwest Gissar and Central Ustyurt which are expected to produce oil and gas condensate. Under the PSA, UzPEC is expected to invest over $400 million over a 40-year period with $200 million of it coming in the first five years.

Because of all the growing interest in Uzbekistan as a source of petroleum, Uzbekistan has been able to dramatically increased its production of crude oil since 1990; in the early 1990s, Uzbekistan was a net importer of oil, but now it is a net exporter. An historical summary of petroleum production and consumption in Uzbekistan is shown in Table 2

Uzbekneftegaz is the state-owned holding company that was created in 1998 when the government merged nine companies in the oil and gas sector. Since independence, the Uzbek government has invested more than $1.2 billion in Uzbekneftegaz, but foreign investors have been reluctant to invest because of the strict currency controls. Currently, Uzbekistan is trying to privatize 49% of Uzbekneftegaz.

Besides the partial privatization of Uzbekneftegaz, Uzbekistan is also trying to sell minority shares in its subsidiaries, including 44% of Uzneftegazdobycha, the oil and gas exploration subsidiary. There is also an offer to sell 39% of Uzneftepererabotka (oil refining) and 39% of Uzburneftegaz (drilling company). In April 2000, the President of Uzbekistan announced these privatization initiatives and also announced that foreign companies who invest in exploration and extraction would receive tax exemptions and options to produce any oil or gas they discover for a fixed period of time.

There are three oil refineries in Uzbekistan, with a combined capacity of 220,000 b/d; the two older refineries are at Fergana and Alty-Arik and the newest refinery is at Bukhara. The Bukhara refinery was built in the 1990s at a cost of $400 million, and currently has a capacity of 50,000 b/d, which is expected to be expanded to 100,000 b/d. Bukhara can refine both crude oil and natural gas condensate.

In 2000, Uzbek refineries operated at below capacity, refining 5.2 million tons (104,200 b/d) of crude oil and condensate. In 2000, the Uzbek refineries produced 31,000 b/d of diesel, 27,200 b/d of gasoline, 26,700 b/d of heating oil, 6,600 b/d of kerosene, and 2,600 b/d of lubricants and other products. The refined products are shipped via railroad and truck. Uzbekistan has entered joint ventures with foreign firms to upgrade refinery capacity. In 2001, Mitsui of Japan completed a $200 million upgrade at the Fergana refinery, expanding the desulfurization system. Texaco and Uzbekistan's Uzneftepererabotka formed the UZ-Texaco joint venture in 1996 to produce and market Texaco brand lubricants for engines, transmissions and hydraulic systems. Under Texaco's arrangement with the Uzbek government, they are allowed to convert earning in soms into dollars, which is usually not permitted by Uzbekistan in its contracts with outsiders.

Natural Gas

Uzbekistan has estimated natural gas reserves of 66.2 trillion cubic feet (Tcf), with the largest reserves in the Ustyurt Region. There are 52 natural gas fields in Uzbekistan with 12 major deposits, including Gazli, Shurtan, Pamuk, and Khauzak. These deposits, which account for 95% of gas production, are mainly in the Amudarya basin and the Murabek area in the southwest of Uzbekistan. The largest production is from the Gazli field. The second largest production is from Shurtan, which began producing in 1980 and accounted for 36% of Uzbekistan's natural gas production in 2000.

Uzbekistan produced 1.96 trillion cubic feet (Tcf) of natural gas in 2000, with the Shurtan and Kokdumalak natural gas fields having the largest output. Old fields with declining production included Uchkir and Yangikazen. The development of the existing gas fields at Kandym and Garbi has continued. Uzbekistan's Uzbekneftegaz has signed a 50-50 product-sharing agreement with Russia's Itera for exploration and development of new reserves.

In January 2001, Trinity Energy of Britain reached agreement with the Uzbek government to invest $400 million in gas exploration and production over a 40-year period. This effort is directed at producing from gas deposits in the Plato Ustyurt region.

In March 2002, Uzbekneftegaz signed a PSA with two Russian firms, Itera and Lukoil. As part of the deal, they formed a joint stock company to develop new gas fields in Uzbekistan, especially the Kandym field; Uzbekneftegaz owns 10% of the new company and Itera and Lukoil own 45% each. The first investments in the project are $377 million. The reserves in the natural gas fields covered by the PSA are estimated to be 8.1 Tcf, including 5.4 Tcf at Kandym. It is estimated that production could start at 159 billion cubic feet (Bcf) per year and eventually increase to peak production of 280 Bcf to 350 Bcf annually.

Uzbek natural gas is high in sulfur content and the sulfur level must be reduced considerably in processing. The Mubarek gas processing plant is the largest one in the nation and it has a capacity of over 1 Tcf.

In December 2001, the pumping stations for the Shurtan Gas Chemical Complex started operating. The complex represents an investment of $1 billion. The Japanese Bank of International Commerce supplied $400 million of this money and the U.S. Ex-Im Bank supplied $200 million. The gas processing plant at the Shurtan Gas Chemical Complex will be able to clean the gas and compress it. The Complex will also have plants to produce 125,000 tons of polyethylene and 137,000 tons of liquified natural gas per year. The Complex is located in the Shurtan gas field in southwestern Uzbekistan in the Kashkadarinsky region.

Uzbekistan exports natural gas to Kazakhstan, Kyrgyzstan, Russia, Ukraine, and Tajikistan. Uzbekistan has an arrangement with Tajikistan trading natural gas for pipeline passage rights, and in 2000, Uzbekistan traded $25 million of gas for this transit right for the pipeline that crosses the Leninabad region in northern Tajikistan. Under current arrangements, gas from Turkmenistan transits across Uzbekistan. A typical route is Uzbekistan-Kazakhstan-Russia.

Turkmenistan supplied 700 Bcf of gas to Russia in 2000. This could increase to 1.8 Tcf in the next several years. While Russia has paid for gas deliveries from Uzbekistan in a timely manner, Uzbekistan has experienced trouble collecting payment for gas delivered to Kazakhstan and Kyrgyzstan. This has resulted in Uzbekistan cutting off deliveries to these countries to compel payment for past deliveries. The gas export arrangement with Kazakhstan is continuing to evolve as both countries seek a more favorable deal. Kazakhstan has been paying $1.13 per million Btu to Uzbekistan, but the Kazakhs have announced their intention to use more of their own gas, extracted from the Amangeldy gas field in Kazakhstan. In dealing with Kyrgyzstan, Uzbekistan sells gas at $1.19 per million Btu. Kyrgyzstan pays for it 50% in cash and 50% in Kyrgyz products (including water during the Uzbek cotton growing season). There have been several instances where Uzbekistan has stopped delivery to Kyrgyzstan in retaliation for late payment, the most recent in January 2001.