Russia Tightens Its Grip On Uzbeki Gas. But Will It Hold?

January 28, 2009

Russia Tightens Its Grip On Uzbeki Gas. But Will It Hold? Martin McCauley writes: January 23rd 2009 was a red letter day for the Russian energy giants, Gazprom and Lukoil.

In Tashkent, President Islam Karimov of Uzbekistan and President Dmitry Medvedev of Russia signed a bilateral agreement on gas exports. It confirms Russia’s monopoly of the export of Uzbek gas. In return, Gazprom and Lukoil will now pay $305 per thousand cubic metres, almost double the present price.

President Karimov stated that Uzbekistan was selling gas only to Russia. ‘It is of no concern whom Russia sells the gas on to,’ he said. ‘It is Russia’s prerogative’.

The deal is very important to Gazprom. It can sell some of the Uzbek gas to Russian consumers and the rest can be sold to Europe as ‘Russian gas’. With Gazprom production from Russian wells declining, Uzbek gas becomes even more important.

Russia has convinced Uzbekistan, as it has Turkmenistan, to sell its gas for onward transmission to other markets only to Gazprom and Lukoil. It would appear that the hopes of the European Union to acquire Uzbek gas and move it through the planned Nabucco pipeline project via Turkey to Europe have been dashed. Uzbekistan does have the right to sell small amounts of gas to its Central Asian neighbours, Kazakhstan, Kyrgyzstan and Tajikistan, and also to Iran. However, the overwhelming proportion of Uzbek gas output will flow to Russia.

During the talks with the Russina leader President Karimov offered to increase deliveries to 16 billion cubic metres of gas this year. He held out the prospect of this rising to 31 billion cubic metres. The extra gas would come from Lukoil projects in Uzbekistan which are just coming on stream.

The great increase in gas exports will require the laying of new pipelines. The two sides agreed on this as well.

At present Uzbekistan produces about 60 billion cubic metres of gas annually. Most of this is consumed domestically. This testifies to its inefficient use and this is exacerbated by state subsidies. Uzbekistan has only exported about 13 billion cubic metres annually during the last few years.

Most of this gas was sold to Gazprom that in turn sold it to its subsidiary, RosUkrEnergo, which it owns jointly with several Ukrainian businessmen. The latter then sold it on to Ukraine.

Gas production in Uzbekistan has remained almost unchanged over the last few years. This was due to underinvestment and lack of pipeline capacity. Tashkent is to use more coal to generate energy. This will provide more gas for export.

Uzbek gas flows into Russia via Kazakhstan through the pre-1991 Soviet Central Asia-Centre pipeline. This system also carries Turkmen gas to Russia. The pipeline is in urgent need of renovation and expansion. It would appear that it is planned to accommodate increased Turkmen gas exports to Russia as well.

On the face of it, this is a very good deal for Gazprom and Lukoil. However, the planned increase in deliveries depends on laying new pipelines. Gazprom’s reputation in this regard is not exactly brilliant. Where will the capital investment come from? Gazprom does not have the money at present and is heading for a loss in 2009. The international money markets will be harder to tap into than previously.

If this deal is implemented there will simply not be enough gas to fill the Nabucco pipeline to Europe. Turkmenistan is at present building a pipeline to Xinjiang province in western China. Beijing has a voracious appetite for energy and will take all the gas that Turkmenistan is able to export.

Gas prices will come down this summer to perhaps $250 per 1,000 cubic metres. The price could even be lower. As the saying goes, there is many a slip between cup and lip. Will the ambitious deal between Russia and Uzbekistan be implemented at all?