Cooperation harmony

Role and place of Uzbekistan in global energy processes
Published in Oil&Gas Vertical Journal, May 2007

Uzbekistan is already playing a visible role in maintaining stability on the international energy market. Considering the current situation on the global market, Uzbekistan with its growing gas production will be playing an increasingly important role.

Due to the increasing world energy demand, the competition is growing among major importers for access to hydrocarbon fields and control over oil and gas transportation routes. The attempt of hydrocarbon supplying countries to align their respective national energy policies is a kind of response to that trend. Taking consistent actions to raise natural gas production and exports Uzbekistan is interested in stable and predictable energy markets. This could be achieved through a constructive interaction of all interested parties. The SCO Energy Club is a good venue for such interaction.

Uzbekistan is playing an important role in the regional and global energy system, especially in its gas segment. Over the last several years, natural gas production in Uzbekistan has been together with increasing large additions to the country`s natural gas resource base. This progress is the result of close attention on the part of the Uzbek government to the energy industry and protection of foreign investments. As a result of a well-substantiated government policy the energy sector has become more attractive to foreign investors who show increasingly high interest in energy business opportunities in Uzbekistan.

Russian and Asian companies are most active on the Uzbek investment market. To date, Russian companies have invested about $2.5 billion in Uzbekistan`s fuel and energy industry. Specifically, Gazprom and LUKOIL concluded agreements with Uzbekistan for the development of promising gas areas. LUKOIL is executing the Shady-Kandym-Hauzak project with gas reserves estimated at 330bcm worth $1 billion.

In January 2006, Gazprom signed two agreements with Uzbekneftegaz establishing principles for geological exploration of seven investment blocks in the Ustyurt region and the key provisions of the production sharing agreement (PSA) for several fields in the country`s western regions. Gazprom is planning to invest in its Uzbek exploration and field development projects over $610M from 2007 to 2011. The Russian Company is already involved in the additional development project in the Shakhpakhty field. In 2004, gas production in the field amounted to 200 million cubic meters; in 2005, about 500 million cubic meters. By the end of 2006, gas production in that field was close to 1 bcm.

Gazprom is Uzbekistan`s leading gas trading partner. Under the Agreement for strategic Partnership between Uzbekneftegaz and Gazprom. Uzbekistan exported to Russia 7bcm of gas in 2004; 8.15bcm in 2005; and about 10bcmin 2006.

Special note should be made on the activity of the International Consortium of five companies: Uzbekneftegaz, LUKOIL, CNPC (China), KNOC (South Korea), and Petronas (Malaysia). The Consortium was established for oil and gas geological exploration in the Uzbek sector of the Aral Sea.

Such a high interest in Uzbekistan on the part of Russian and Asian companies is explained by the fact that these companies fully understand the role of our country in global energy supply. This role is bound to grow on increasingly large investment in gas exploration and production, as well as the ongoing upward change in the country`s reserve estimates already reaching 3tcm. At that, potential recoverable reserves in Uzbekistan are estimated at another 5tcm.

In addition, the situation on the world energy market demonstrating several long-term trends encourages foreign investors to look at Uzbekistan`s gas resources.

Energy Market Trends

Several basic trends determine the development of the global energy market.

First, it is the growing global demand for oil and natural gas, which is already considered as a key issue in the early 21 st century. Analysts predict that in the coming 15 to 20 years global oil consumption will be growing at a rate of at least 2 to 2.5 million barrels a year. While in 2002, the global oil demand was 78 million barrels/day, by 2015 it is expected to reach 103 million barrels a day; by 2025, 119 million barrels a day.

The global demand for natural gas is expected to grow at an equally high rate. The importance of gas is likely to increase in view of the growing environmental concerns in the world leading countries. The growth in natural gas demand is projected at a level of 2.5% a year to 2005. By 2025 its global consumption is expected to grow from the current 3tcm to 5.2tcm and amount to 28% of global energy consumption.

Second, it is an increasingly larger share of the Asian energy sector in the global oil, natural gas, and electric power consumption. In 2004 and 2005, oil consumption in Asia for the first time exceeded that in North America. Energy consumption in Asia is growing at such a high rate that in the next 10 to 15 years the Asian countries may account for at least a half of the global hydrocarbon consumption. The Asian market is shaped primarily by three countries: China. Japan, and India. By total oil consumption, the Chinese market has moved to the second place in the world after the US and ahead of Japan. The country presently absorbs at least 7 million barrels of oil a day including 3 million barrels of imported crude. However, in terms of natural gas consumption. China is less significant on the global market. Natural gas accounts for merely 3% of energy consumption in China; coal. 69%; and oil, 22%.

However, the situation may change in the near future considering Beijing`s plans to lower the share of coal in its electric power generation sector in favor nuclear energy and natural gas. China is already laying the groundwork for such a transition in the form of contracts for natural gas production with foreign companies, the construction of gas pipelines and LNG receiving terminals.

Even though it is behind the Chinese market by oil consumption the Japanese market is well ahead of the Chinese market by the size of energy imports. The country essentially meets its entire domestic demand for oil (5.5 million barrels/day) by imported crude. The situation with natural gas is similar. Japan is the world largest importer of LNG. The country`s ultimate natural gas consumption exceeds 10Obcm/year. Experts agree that Japan`s dependence on oil and natural imports is bound to increase.

The third largest hydrocarbon consumer is India. The Indian market presently absorbs nearly 2.7 million barrels of oil a day, of which 846 thousand barrels are produced locally. Even though India is well behind Japan and China by the indicators, in the future the gap may narrow, considering the high rate of economic growth demonstrated by India (8.5% in 2006). The same holds for natural gas. In 2004, India for the first time needed more hydrocarbons than was produced in its own fields, and the country was compelled to begin LNG import from Qatar.

Nonetheless, the rapid energy demand growth in Asian countries does not mean that the European and North American markets will be marginalized. These markets will retain their key role in the formation of the global energy demand. Apparently, the global market may change configuration with the lead roles to be played by the American/European/Asian triad.

Third, it is the growing political and military destabilization in some of the world leading oil and gas producing regions, primarily in the Persian Gulf, and Latin America. The war in Iraq has brought about unprecedented price rise and interruptions in oil supply, primarily because of subversive actions in the Kirkuk-Ceyhan oil pipeline. The Iran nuclear program is presently a source of grave concern and tension in the US/Iranian relations, which may further destabilize the global oil and gas market. Difficulties have been observed in the US relations with Venezuela, a major hydro¬carbon exporter in Latin America. The current political analysis indicates that political unpredictability in these regions is unlikely to go away in any foreseeable future, if anything, it will only increase.

Fourth, it is higher competition among leading hydrocarbon importing countries for access to production sources, oil and gas transportation infrastructure and pipeline routes. The Caspian and Central regions are of importance here. Russia remains a leading partner of these countries and a major portion of hydrocarbon shipments from Central Asia goes through Russia. Over the last several years, Russian companies have significantly strengthened their positions in the region`s upstream sector.

On the other hand. China is strengthening its position as well. The country has successfully implemented construction of the Atasu-Alashankou oil pipeline to carry the Kazakh crude to Chinese refineries in the country`s northwestern region. The Chinese companies are actively seeking access to Kazakhstan`s oil fields. In addition Beijing is considering natural gas import from Kazakhstan and Turkmenistan, for which purpose a pipeline system may be built in the future to carry gas to the Chinese market.

American and European companies have also strengthened their influence in Central Asia and Southern Caucasus in the hydrocarbon production and transportation sphere. Western investors have strong presence in the oil and gas industry of Kazakhstan and Azerbaijan. The US and EU managed to implement two pipeline projects: the Baku-Tbilisi-Ceyhan pipeline and Baku-Erzerum pipeline. A significant interest has been registered on the part of western companies in oil and natural gas Trans-Caspian routes from Kazakhstan and Turkmenistan to Azerbaijan and the EU.

Fifth, it is the attempts by hydrocarbon exporting countries to ensure alignment and coordination of their energy policies. One of the latest initiatives is the establishment of the so-called "Gas OPEC" and a project for creating a gas alliance in Latin America proposed by Venezuela. The main goal of such alliances is to turn hydrocarbon suppliers into price givers on the global oil and gas market. This entails a serious political aspect. Multiple experts believe that the Gas OPEC comprising Russia, Iran, Qatar, Algeria, Trinidad, and Tobago will have a major impact on the global energy policy. The establishment of such a cartel will seriously impact the global energy market and considerably strengthen the position of hydrocarbon exporting countries. In addition, it may impact the structure of hydrocarbon shipments.

The Gas OPEC will hopefully encourage further growth in the natural gas trade and lower the share of pipeline sales. Some experts believe that by 2020, the share of LNG in the world gas trade will grow to 40% - 45%, which would enable the exporting countries to jointly coordinate production, pursue a more flexible transportation strategy guided, among other things, by political considerations.

The above described trends undoubtedly exert direct or indirect influence on Uzbekistan`s energy policy, all the more so, that the country is located in the heart of the Central Asian region, and is crossed by major pipeline, the Central Asia – Center pipeline carrying the Turkmen and Uzbek gas to Russia and European markets. In addition, Uzbekistan with its gas plays an important role in the energy security system of Kyrgyzstan, Tajikistan and Kazakhstan.

In this connection, such trends as higher competition among importers for hydrocarbon sources and transportation routes, and broadening zone of instability around Central Asia are against the best interests of Uzbekistan, which needs a stable and predictable market in Central Asia and in the world. Such stability is of key importance for raising natural gas production and export and attracting foreign investment. Therefore, Uzbekistan`s highest political priority is to ensure regional security and turn the Central Asian region into z zone of mutual cooperation for all interested parties. The Uzbek export community holds a similar view. Experts are studying and supporting models for multilateral regional cooperation capable of mitigating or preventing critical situations in realizing the oil and gas potential of the Central Asian countries, and developing their ties with consuming countries.

Of all the models recently offered to analysts and specialists for review, the idea of coordinating efforts of producing and consuming countries in the framework of the Shanghai Cooperation Organization lead to most heated discussions. This is the so-called SCO Energy Club. The Russian Federation president V. Putin officially voiced this idea in 2006.

The Center for Political Studies studied the idea in detail, and organized a number of international conferences and round tables involving officials of energy companies from the SCO member countries and observers. Regional analysts described the International Conference named “Central Asia Energy Market: trends and perspectives” (December 2005) as a first “theoretical” phase in reviewing the Energy Club`s idea. The round table held on February 26, 2007, on Perspectives for the SCO Energy Club Formation was referred to as practical discussion of the idea.

Notably, all experts from the SCO member countries were unanimous in saying that the round table should be put in the context of coordinated efforts of the Energy Diplomacy Organization member countries. These efforts are aimed at developing mutually acceptable and mutually beneficial approaches to fuel and energy cooperation, maintaining the intergovernmental energy dialogue, and ensuring regional energy security.

In this connection the Energy Club as was mentioned by its members may serve as a good venue for addressing a number of urgent issues and developing various proposals. The timeliness of the Energy Club idea is evidenced by the fact that bilateral cooperation is prevailing, while multilateral cooperation has not taken root in the region as yet.

Members of the discussions held at the round table discussed and idea of attracting research centers and independent analytical centers to the SCO Club. Such expert organizations could make significant contribution to various aspects of energy cooperation and facilitate consolidation of the Energy Club ideas. The Center for Political Studies was encouraged to create a sort of a forum for independent research centers, which could take permanent membership of such a forum. This forum could provide good opportunities for professional discussions of the most urgent issues and serve as a sort of catalyst for developing ideas tat may not always be accepted or voiced as official level.

The measures taken in Uzbekistan and their results demonstrate that not only Uzbekistan, but also all regional countries have an understanding of the need to expedite mutually beneficial cooperation in the oil and gas sphere based on the free-of-crises energy development in the Central Asia and the SCO member countries.

It is important to avoid excessive politicizing of the access issue to energy sources and the choice of transportation routes, which could adversely impact all members of the energy process. The multilateral approach and efforts to find mutually beneficial solutions for the members of the regional energy projects are the best and most promising way of interaction.