Uzbekistan’s role in the global gas market [NGW Magazine]

For a long time, and despite its large reserves, Uzbekistan has been only a very minor player in the global gas market. This is now changing. Tashkent, seeing the value of hard currency, has emerged from the shadows and is supplying gas to a number of countries.

Exports in 2018 added up to 13bn m³, but last year it hoped to reach at least 15bn m³: 8bn m³ to China, 4.5bn m³ to Russia and 2.5bn m³ to Kazakhstan.

However, the Russian market and co-operation with Russian companies are clearly seen as priorities, with Lukoil and Gazprom the most prominent of these.

The government has ambitious plans and is proposing to make Uzbekistan a gas hub for central Asia. And in order to produce more gas for export, Tashkent is even ready to limit local gas consumption, but with limited success.

Co-operation with Russia

Uzbekistan’s co-operation with Russia, relating to gas and oil extraction, has a long history. Lukoil, a major Russian oil company, has worked in Uzbekistan for 15 years, and has trained Uzbek specialists for work in Uzbekistan’s oil and gas industry. Co-operation between Lukoil and Uzbek companies has continued up to the present and Lukoil plans to increase the extraction of gas in the country (see box).

It is not just Lukoil but also other Russian companies which are engaged in work in Uzbekistan, and have made considerable investments. For example, Russian-Uzbek company Gazil Gas Storage wants to reconstruct Uzbekistan’s biggest gas storage facilities at a cost of $850mn.

There are other examples of co-operation between Uzbek and Russian companies including Gazprom’s direct involvement.

Indeed, Gazprom E&P International and Uzbek companies are producing gas and plan to co-operate in extraction of gas and are planning substantial investments. Natural Gas-Stream and Gas Project Development Central Asia, a branch of Gazprom International, and Uzbekneftegaz plan to invest $700mn.

Uzbekistan also supports Russia’s resumption of the purchase of Turkmen gas after a break from imports some years ago and Turkmenistan is ready to comply. At the time, both countries had their own reasons for ending the trade relationship: Turkmenistan thought that it would be able to send gas directly to Europe through the Trans-Caspian gas line and/or through another, overland project to India and Pakistan through Afghanistan (Tapi).

But neither of these pipeline projects seems to be working. Despite the agreement between the Caspian Sea states which formally allowed Turkmenistan to build the gas line, Russia and Iran can block its construction on the real or imaginary grounds of ecological risk in order to protect their own markets; and Russia has the largest navy in the Caspian Sea.

The fate of Tapi is also up in the air. Afghanistan is still embroiled in war, and even the US’s eventual departure will not change things much, for Afghanistan’s guerillas are fragmented, and if US troops leave, there could well be civil war between the different groups. Turkmenistan has also sent some gas to Iran but the two governments have quarrelled over prices and, as a result, Ashgabad lost the Iranian market. At the same time, the economic situation in Turkmenistan has deteriorated sharply and Ashgabad badly needs cash. This was most likely the reason why Ashgabad agreed to sell gas to Russia, even if the prices were not to Ashgabad’s liking. Russia’s interest in Turkmen gas was more likely due to other reasons than a shortage of gas at home.

One reason is that Russia wants to satisfy the European Union’s demands, according to which that Gazprom can only use 50% of Nord Stream 2 if it wants exemption from gas directive requirements. The rest of the capacity would be reserved for non-Gazprom sources and Turkmenistan’s gas could have formally played this role. In that scenario, Uzbekistan would be an important intermediary and, most likely, would export its own gas together with Turkmen gas.

Chinese market

After Russia, China has emerged as an important market for Uzbek gas. China has received a considerable amount of gas from central Asia, mostly from Turkmenistan where Chinese entities are developing and producing gas with Chinese state funds. It looks as if China wants to reduce its dependence on Turkmenistan.

China and Uzbekistan have discussed plans for speeding up the fourth string of gas lines. It is not clear that it would be carrying Uzbek gas, or just Turkmen gas but it was assumed that Uzbekistan would increase the delivery of its own gas to China. One might also note that Beijing acknowledged the increasing co-operation with Uzbekistan, according to Xinhuanet, news agency for the Chinese government.

Co-operation with Azerbaijan

Tashkent is also co-operating with Baku. Uzbekistan and Azerbaijan have taken concrete steps in their plan to send gas and oil to Europe. Azerbaijan’s state oil company (Socar) and Uzbekneftegaz will create a joint venture to carry out trading operations in Europe and other countries, Uzbekneftegaz said on its website. In 2016, Socar and Uzbekneftegaz signed a memorandum on co-operation in the field exploration and development of oil and gas fields and other potential areas of the energy sector.

Finally, Tajikistan, Uzbekistan’s neighbour, became an important market for Uzbek gas despite the recently quite tense relationship between Tashkent and Dushanbe.

Tajikistan gas market

Dushanbe and Tashkent have been at loggerheads almost from the beginning of the post-Soviet era, for several reasons. Dushanbe proclaimed that Tajiks were an ancient aboriginal people of central Asia, and descendants of the ancient Persian Achaemenid empire, whereas Uzbeks are relative newcomers, and therefore not fully legitimate.

People in Dushanbe also claimed to be the heirs to the Persian empire, while the Uzbeks glorified Tamerlane as the alleged founder of the Uzbek state. They had no right to take Tajik land, including the cities of Bukhara and Samarkand.

Tashkent however rejected all of these claims and demanded that Tajikistan cease the construction of a hydroelectric station which would hinder the flow of water to Uzbekistan. It also uses gas as a method of exerting pressure over Tajikistan: it stopped exports for six years, but then in April 2018 Ubekistan restarted and Tajikistan even plans to buy more, raising imports to 200mn m³ this year, through the Muzrabad-Dushanbe main gas pipeline.

In 2018 the import volume was 55mn m³, but reached 140mn last year, worth $17.7mn. Most of the gas is used in Tajik Aluminum Plant (Talco) and Dushanbe thermal power plant.

This is a two-way deal: Tajikistan resumed electricity exports to Uzbekistan after 9-year gap in April 2018. The two are also co-operating on a hydropower plant.

Gas substitution

Uzbekistan tried to secure more gas for export in several ways. First, Uzbekistan geologists discovered a new gas/oil deposit in the country and output rose. Second, it tried not to use gas for power generation and opted instead for a nuclear plant, which would save a lot of natural gas. Uzbekistan also decided to build a hydroelectric station.

But the major thrust of their efforts was aimed at cutting industrial gas demand and heating demand by local distribution companies. There were several ways in which Tashkent wanted to achieve this. First, the authorities tried to increase control over demand. Some believed that local consumers were stealing a lot of gas, with press reports in October claiming gas worth half a million dollars was stolen: better control over these matters would save a considerable amount.

Second, the authorities tried to discourage people by raising prices, albeit Tashkent was not consistent here. And last, they tried to promote the use of coal instead. Several years ago the leaders of the Tashkent oblast wanted to coerce the residents to use coal instead of gas, and this policy was endorsed by the government which tried to apply it nationwide. All of these attempts failed to win support as the population complained of the gas shortage, but the local administrations stood their ground.

It is still unclear what will be the end result of Tashkent’s desire to increase its gas exports, but if it is successful, there will be implications for the international gas market.