Monday, February 06, 2012

Aral Sea challenge to Kazakhstan....

Aral Sea challenge to Kazakhstan, disputes over water resources and conflicting interests of Russia and China is fraught with new tensions....
By Farkhad Sharip

As a part of Lukoil's incessant attempts to consolidate its presence in the energy sector of Central Asia, on January 17, the Russian company's board of executives endorsed the purchase by its daughter company, Lukoil Overseas, of 6.6% of shares in the transnational Aral Sea Operating Company.

Aral Sea Operating Co was set up in 2006 to explore and develop Uzbekistan's oil and gas fields in the Aral Sea on a product sharing agreement basis. With the additional acquisition, the Russian share in the transnational Aral project joined by Uzbekistan's Uzneftegaz national holding, Chinese CNPC International, South Korean KNOC Aral and Russian Lukoil Company totals 26.6%. The 6.6% of shares purchased by Lukoil earlier belonged to Malaysian Petronas Company, which abandoned the project in 2011.

Some experts believe that if the project is implemented successfully, the Aral sector of Uzbekistan may become more attractive for investors than the Caspian oil and gas fields of Kazakhstan. But so far its achievements look very modest.

Over the past six years, slightly over US$110 million were invested in the project. Initially, Uzbekistan's sector in the Aral Sea was estimated to hold around 31% of the oil and 40% of the natural gas reserves of Central Asia, which potentially would make Uzbekistan the second-largest oil producer in the region, rivaling Kazakhstan.

It seems that Gazprom chose the correct political moment to make forays into hydrocarbon reserves after the brutally quenched Andijan riots of 2005. In 2010, Gazprom Zarubezhneftegaz, a subsidiary of Gazprom, funneled US$200 million into prospective drilling of the Ustyurt fields in Uzbekistan, but with no significant results. Uzbek experts forecast gas reserves in Aral deposits at 470 billion cubic meters.

But Russians, after repeated failures to confirm these estimates, are becoming skeptical. The only plausible explanation for their staying in the Aral project seems to be the reluctance of Moscow to lose its dominant position in Uzbekistan's oil and gas sector.

Given the deepening mistrust between Russia and China, another important actor in Uzbekistan's energy sector, Russian participation in the Aral project pursues political interests rather than purely economic pragmatism. The Central Asian nations continue to seek hydrocarbon export routes that circumvent Russia. Too much independence by these countries, which possess 22 billion cubic meters of discovered gas reserves comprising 12% of world gas deposits, would be favorable to Beijing and deal a heavy blow to Moscow's key interests.

The situation in the Uzbek energy sector appears paradoxical. Last December, the population of Uzbekistan suffered a severe shortage of gas and electricity, and the government decreed to cut off hundreds of enterprises in Tashkent from gas sources. At the same time, Uzbekistan is steadily increasing its export volumes of gas.

In 2010, the volume of gas exported from Uzbekistan to Russia exceeded that of Turkmenistan to Russia and equaled 15.5 billion cubic meters (bcm), compared with 10.5 bcm in the preceding year. This year, according to Russian sources, Gazprom will buy from Uzbekistan 14.5 bcm of gas for $220 per one thousand cubic meters.

Additionally, from April 1, Uzbekistan will start gas exports to China through the gas pipeline from Turkmenistan to China, the 529-kilometer Uzbek section of which is planned to be completed by 2014. According to the contract signed by the Uzbek Uztransgaz Company and PetroChina International Ltd, the sides agreed on an annual delivery of 10 bcm to China priced at $90 per 1,000 cubic meters, which is cheaper than the gas delivered to Russia by a factor of 2.5 times.

Faced with the scarce investment into its economy and the necessity of modernizing its industry, Uzbekistan is pressed to develop hydrocarbon deposits in the Aral Sea and simultaneously expand its gas export volume, often ignoring the shortage of energy sources in domestic markets.

Clearly, the need to intensify industrial development in rivalry with Kazakhstan in Central Asia will, in the short-term, force the Uzbek government to significantly reduce its export volumes of gas. This calls into question the feasibility of the projected export targets.

Uzbekistan's quest for hydrocarbon sources develops against the background of deepening disintegration and brewing conflicts in the face of worsening energy security in Central Asia.

Southern Kazakhstan is largely dependent on Turkmen and Uzbek gas supplied from Gazprom on a swap basis for $85 and $105 per 1,000 cubic meters, respectively. According to the agreement concluded last December, Gazprom promised to deliver to southern Kazakhstan up to 3.5 bcm of Uzbek gas. However, most likely, Uzbekistan will reconsider the price for its gas in the second half of the year.

Whether the Aral Sea exploration project will yield Uzbekistan its long-sought after foreign investment and turn the country into a major oil-producing state in Central Asia remains to be seen. But its implementation in a densely populated region with longstanding disputes over water resources and conflicting interests of Russia and China is fraught with new tensions.

Farkhad Sharip is an independent journalist who lives in Alma-Aty, Kazakhstan.