Rovshan Ibrahimov: The current situation and future of the oil and gas sector in Uzbekistan
In an article written for CABAR.asia, Rovshan Ibrahimov, an expert in the field of energy diplomacy, analyzes the fuel and energy complex of Uzbekistan and Uzbek gas export markets.
Uzbekistan, as well as two other former Soviet republics located in Central Asia – Kazakhstan and Turkmenistan, has rich hydrocarbon resources. As in the case with its neighbors, this is a determining factor in the development of the country. The presence of oil and gas deposits is a panacea for any country for resolving economic problems and even for achieving its political goals. Uzbekistan is no exception. After gaining independence in 1991, the country began to actively look for ways to increase production of their natural resources and for the markets to sell them. Natural gas, along with cotton, is a brand of the country. Oil plays a lesser role. According to the confirmed data of official Tashkent, potential oil resources in the country amount to more than 5.3 billion tonnes, gas condensate – 480 million tonnes, natural gas – about 5 billion cubic meters. Oil and natural gas are produced in the country in five oil and gas fields: “Ustyurt“, “Bukhara-Khivi“, “Southwestern Hissar“, “Surkhandarya” and “Ferghana“.
Over the entire period of exploration works in Uzbekistan, there have been discovered 246 oil and gas fields. Consumption of energy resources is also high in Uzbekistan. The Uzbek economy is quite energy-intensive; the country is ranked the 10th in the consumption of gas in the world.
In the oil and gas industry of Uzbekistan constitute about 16% of GDP, and its share in the revenue part of the budget is more than 20%.
HISTORY OF UZBEK OIL AND GAS INDUSTRY
The first wells on the territory of Uzbekistan were drilled as early as in 1880 in the Ferghana region.
It is known that oil had been already extracted and processed into kerosene in the Shorsu area near Kokand in 1885. The kerosene was then brought to large
cities such as Tashkent, Andijan and Kokand on carts and camels. The residual oil was used as fuel on the railroad “Tashkent – Kokand.”
cities such as Tashkent, Andijan and Kokand on carts and camels. The residual oil was used as fuel on the railroad “Tashkent – Kokand.”
At the beginning of the 20th century, there was discovered a deposit “Chimion” in Uzbekistan, and the first oil-extracting enterprise in the territory of Turkestan region was created on “Chimion”. The construction of an oil refinery plant was completed, too. Subsequently, Nobel Brothers bought the field and the plant. Before the revolution, oil production was also started in other fields. An important event was the commissioning of the pipeline “Chimion – Vannovskaya” in 1908.
Revolution and civil war in Russia suspended the development of crude oil in the region. After the establishment of Soviet power, industries were nationalized, and a public trust “Uzbekneft” was established. In 1925, “Uzbekneft” turned for help to the Azerbaijani oil industry association “Azneft“, and oil specialists from Baku came to Uzbekistan.
In the following years, new deposits had been discovered and developed. Oil production began to increase in Uzbekistan. Search for promising deposits took place in the Bukhara-Khiva region and Surkhandarya. In the new regions, there were opened deposits of “Nefteabad“, “Changyrtash“, “Kokaidy“, “Lyalmikar“, gas deposits of “Karaiz“, “South Alamyshik“, “Uchkyzyl“, “Kakaydy“. Of great importance in terms of approval of oil and gas industry in Uzbekistan was the discovery of “Haudag” deposit in 1934. In 1944, there was commissioned the first gas pipeline “Oilfield Andijan – city of Andijan“, thanks to which there started the gasification of settlements in Uzbekistan.
In 1953, in the Bukhara region, there was discovered the first natural gas field – “Setalantepe“. This event played a major role in the future development of Uzbekistan, in general, and began the formation of the gas industry in Uzbekistan, in particular. In subsequent years, there were discovered other gas fields here – “Tashkuduk“, “Ki-Merek“, “Yangikazgan“, “Uchkyr.” Thus, there was formed the Bukhara-Khiva oil and gas region.
An important event occurred in 1956, when an oil and gas field of “Gazly” was discovered in Romitan district of Bukhara-Khiva oil and gas region of Uzbekistan, with reserves of 500 billion cubic meters. Thus, Uzbekistan turned into a producer of natural gas. Natural gas from this field is delivered to industrial facilities of the Urals and the European part of the Soviet Union. To transport the gas, “Bukhara – Ural” pipeline was built.
In subsequent years, new oil and gas fields were discovered in the republic. In 1985, there was discovered a large oil and gas field of “Kokdumalak“, located on the border with Turkmenistan. This field is very important for the gas sector of Uzbekistan. Up to 70% of oil reserves in the country are in this deposit. After gaining independence, Uzbekistan and Turkmenistan signed an agreement in 1997, under which a part of the oil produced at the field had to be delivered free to the Seidi oil refinery in Turkmenistan up until 2012. The extractable reserves are estimated at 54.3 million tonnes of oil, 67.4 million tonnes of condensate and 128 billion cubic meters of natural gas.
In general, the oil fields were explored in the autonomous republic of Karakalpakstan, Kashkadarya, Bukhara, Surkhandarya, Namangan, Andijan and Ferghana regions. The bulk of oil reserves are concentrated in the Kashkadarya region.
An important event for the fuel and energy complex of Uzbekistan was the beginning of the operation of Mubarek Gas Processing Plant in Kashkadarya region in 1972, which, at that time, was one of the largest in the world. The commissioning of this enterprise was the beginning of gas processing in Uzbekistan. Another major gas processing plant was built in Shurtan in 1980.
Development of the oil and gas sector of Uzbekistan after independence
An interesting development of the energy sector was observed after Uzbekistan gained independence. Unlike other post-Soviet states of Central Asia, whose economies are based on oil and gas extraction, Uzbekistan managed to avoid recession rates of oil and gas extraction. Moreover, during the period from 1991 to 1998, production of oil and condensate increased from 2.8 million tonnes to the peak level of 8.2 million in 1998. The main production of oil and gas condensate was ensured by the exploitation of “Kokdumalak” deposit.
However, the increase in production was achieved at great cost. Improper use has led to the depletion of already limited reserves. In addition, it is worth noting that oil production in the country is negligible. After that, there was a recession whose culmination was in 2001. At that time, the average production was about 3.5 million tonnes of oil and condensate per year, including the gas condensate. However, in subsequent years, again in contrast to other former republics of the Soviet Union, there was a decline in oil and gas production in Uzbekistan. And this trend is irreversible. Oil and natural gas reserves are getting depleted.
In 2012, there was produced 1.57 million tonnes of oil, the rest was the condensate. In 2013, there was produced even less – only 2.9 million tonnes. At the same time, oil production continues to decline. Total reserves of proven oil reserves in Uzbekistan is about 530 million tonnes. However, even these relatively modest reserves are located in the depths of around 100 oil, gas and gas condensate fields. This complicates the process of their extraction. According to the Uzbek authorities, oil reserves will suffice for the next 20 years. The produced oil is not even enough to meet the needs of the country. Uzbekistan is only half self-sufficient in oil, despite the fact that having a relatively large population – about 30 million people, the annual consumption of oil in the country is very modest, and in 2013, it was only 3.9 million tonnes. The difference between the produced and consumed oil was imported. At the same time, imports of oil are growing every year.
A somewhat different picture can be seen in the sector of natural gas. In 2014, Uzbekistan was in 15th place in the world in production of natural gas, having produced approximately 57.3 billion cubic meters of gas. There is a drop in the production of natural gas, too. For example, gas production in 2012 amounted to about 63 billion cubic meters. In addition, there were produced 273.6 ths. tonnes of liquefied gas. In 2013, the country produced 55.2 billion cubic meters of natural gas. Gas is mainly produced in the areas of “Gazli” and “Kashli“. However, the figures from different sources may differ because official statistics on oil, gas condensate and natural gas in Uzbekistan are not published. It is estimated that reserves of natural gas in Uzbekistan will suffice for the next 25-30 years.
Uzbekistan is trying to increase the production of oil and gas, or at least to prevent its decline. One solution to this problem is to invite foreign energy companies that have greater financial resources and advanced technology in the exploration and development. This process has continued since the beginning of the 2000s.
To this end, the legislation of the republic has been improved, significant tax benefits for foreign investors have been provided. In December 2001, there was adopted the Law “On Production Sharing Agreements“; in 2002, there was adopted the new version of the Law “On Mineral Resources“.
As a result, a number of foreign companies such as Russia’s Gazprom, Lukoil, British-Canadian company Tethys Petroleum (in 2014, the company left Uzbekistan), China’s CNPC were involved to participate in the projects in the country. These and other companies are involved in oil and gas production, and in the formation of the productive capacity of the fuel and energy complex.
In addition to attracting foreign investors, Tashkent also sees a way out of the situation in the development of unconventional hydrocarbons. Thus, the exploitation of oil shale has been widely discussed in the country. In 2013, the state company “Uzbekneftegaz” has started drilling at the field “Sangruntau” in Navoi region with reserves of 357 million tonnes. The company hopes to increase oil production by 1 million tonnes per year using this deposit. Total reserves of oil shale in Uzbekistan are estimated at 47 billion tonnes, they are located at a relatively shallow depth of 600 meters. Experts consider more than 60% of the territory of Uzbekistan promising for the production of oil shale. At the moment, Uzbekistan is planning to independently develop this area.
It should be noted that the processing of one tonne of oil shale produces from 110 to 250 kg of liquid hydrocarbon fuel and up to 40 kg of gas. Deposits of oil shale are located in such fields as “Urtabulak“, “Baysun“, “Djam“, “Kulbeshkak“, “Aktau“, “Sangruntau“, “Uchkyr“. The main deposits of oil shale are located in the Kyzylkum desert and mountains of Baysun.
FUEL AND ENERGY COMPLEX OF UZBEKISTAN
State industrial enterprises
In order to develop its subsoil for the extraction of oil and gas, a public corporation of oil and gas industry “Uzbekneftegaz” was created in Uzbekistan in 1992. In December 1998, on the basis of this corporation, there was created the National Holding Company “Uzbekneftegaz” with a three-level vertically integrated management system. This company is a major producer of oil and gas in the country, as well as a partner in a consortium with foreign companies.
“Uzbekneftegaz” is the monopoly operator of oil and gas sector of Uzbekistan’s economy and unites six joint stock companies:
1) “Uzgeoburneftegaz” carries out exploration activities, production drilling of oil and gas wells;
2) “Uzneftegazdobycha” specializes in the development of oil and gas fields, production of oil, gas and gas condensate, and natural gas processing;
3) “Uztransgaz” implements the transportation and underground gas storage, management of facilities transporting natural gas;
4) “Uzneftegazstroyinvest” carries out project works, capital construction and improvement of gas production, transportation and processing of oil and gas;
5) “Uzneftegazmash” produces engineering products for businesses and organizations of oil and gas and gas chemical complexes;
6) ‘Uznefteproduct “includes several oil refineries, which operate on the territory of Uzbekistan: Alty–Aryk refinery, Ferghana and Bukhara oil refineries.
The oldest company in this area is Alty-Aryk refinery, which was created in 1906 and was known as Vannovsky refinery. The total annual processing capacity of this fuel-oil plant is about 3.2 million tonnes of oil. The plant is a branch of the larger Ferghana refinery.
In turn, the Ferghana refinery was built in 1959. It should be noted that the main problem in the processing of oil and gas in Uzbekistan is high sulfur content. In 1995, the factory moved to the processing of local raw materials with a high content of sulfur compounds, and it was necessary to maintain the range and quality of products in order to compete in the global market. In this regard, the Japanese company “Mitsui” and “Toyo Engineering” reconstructed the plant. Thanks to the renewal of the plant, the sulfur content in oil products was reduced. Sulfur itself is also in demand in the market. The plant produces about 60 types of oil products. The design capacity of the plant for processing is 5.5 million tonnes per year. In 1998, the Ferghana refinery created a joint venture with Texaco Holding Incorporated company for the production of high-quality lubricants.
As for Bukhara refinery, it was built after Uzbekistan gained independence, in 1997, by a consortium led by the French company TECHNIP, when the country experienced the growth of oil production during the rise of production at the field “Kokdumalak.” This company produces 10 kinds of products: high-grade gasoline, diesel fuel and jet fuel. The design capacity of the plant is 2.5 tonnes of gas condensate per year.
It should be noted that these companies are unprofitable. This is primarily due to the fact that all the refineries cannot operate at full capacity, because of the shortage of raw materials. Thus, in 2013, the total amount of the net loss of the Ferghana refinery was 224.5 billion Uzbekistani soms (104.4 million dollars), of Bukhara Oil Refinery – 226.8 billion Uzbekistani soms (105.4 million dollars). Load level of Ferghana refinery in 2013 was only 25.9%. Bukhara refinery has a better situation – its utilization was 64.4%. In this regard, the Uzbek government is conducting a series of measures to rehabilitate these loss-making enterprises.
Despite the lack of raw materials for these enterprises, in 2005, when the oil crisis had become clear, “Uzbekneftegaz“, in partnership with a St. Petersburg company “Petromaruz“, launched Dzharkurgan refinery in Surkhandarya region. Compared with the above three refineries, this refinery is relatively small and is capable of processing up to 130 thousand tonnes per year and produce gasoline, paraffin and asphalt. The raw materials for this plant are hydrocarbons from deposits of “Kakaydy“, “Lalmikor“, “Mirshodi“, “Uchkizil“, “Hovdak“, located on the territory of Surkhandarya region.
Natural gas processing
One of the companies for gas processing, as already mentioned above is the Mubarek Gas Processing Plant (GPP). Mubarek Gas Processing Plant is a subsidiary of JSC “Uzneftegazdobycha” and is one of the largest companies of this profile in the world. At present, the production capacity is 30 billion cubic meters of natural gas and more than 570 thousand tonnes of gas condensate per year. Apart from the gas condensate, the plant also produces liquefied petroleum gas and sulfur.
Another gas processing plant in the territory of Uzbekistan is the Shurtan gas processing plant. The annual capacity of this plant is 20 billion cubic meters of gas. The plant has four installations of propane-butane mixture. The plant is capable of producing 104 thousand tonnes of liquefied gas with division by 56 thousand tonnes of propane, 48 thousand tonnes of butane and 44 thousand tonnes of stable gas gasoline.
Next, let’s consider the Shurtan Gas Chemical Complex. This company processes natural gas with the production of ethylene, co-monomer and polyethylene. More than 60% of produced polyethylene is exported.
In accordance with the course of in-depth processing of raw materials, Uzbekistan jointly with a consortium of Korean companies is implementing a project for the construction of the largest in Central Asia Ustyurt Gas Chemical Complex based on “Surgil” deposit. The design capacity of the enterprise will allow to process 4 billion cubic meters of natural gas for the production of 362 thousand tonnes of polyethylene and 83 thousand tonnes of polypropylene and 100 thousand tonnes of pyrolysis gasoline.
In addition, in 2009, “Uzbekneftegaz” in partnership with the South African company “Sasol” and Malaysian Petronas is promoting a project to build on the basis of Shurtan Gas Chemical Complex an installation with processing capacity of 3.5 billion cubic meters, which will produce 672 thousand tonnes of diesel fuel, 278 thousand tonnes of jet fuel, 361 thousand tonnes of naphtha and 63 thousand tonnes of liquefied gas per year. This plant can become a leader in the global energy market for the production of high-quality fuel and other products.
Another project is implemented by the South Korean Hyundai Engineering & Construction, which is engaged in the construction of the technological part of the plant to produce synthetic fuel in the Kashkadarya region in southern Uzbekistan. The plant will process 3.5 billion cubic meters of gas and produce 864 thousand tonnes of diesel fuel, 304 thousand tonnes of jet fuel, 395 thousand tonnes of naphtha and 11.2 thous. tonnes of liquefied gas per year. Completion is scheduled for August 2017.
Natural gas exports
Uzbekistan, in contrast to other countries of the former Soviet Union with energy resources, does not export, but imports oil, because its own production is not enough. In addition, crude oil exports from the country is prohibited on the official level. Oil transportation into Uzbekistan is carried out using a pipeline “Kumkol-Shymkent-Bukhara”, “Shymkent-Pahta” and by rail.
Since there are no free volumes of crude oil in Uzbekistan, the country specializes in exporting natural gas. At the same time, despite the fact that Uzbekistan is on the third place in the production of natural gas among the former Soviet republics after Russia and Turkmenistan, gas exports from this country is relatively low. The reason for this lies in the fact that there is large domestic gas consumption in Uzbekistan. In short, according to the statistical review of BP, in 2014, Uzbekistan produced 57.3 billion cubic meters, while the consumption amounted to 48.8 billion cubic meters. For a country with a population of about 30 million people and a GDP of $ 59.7 billion, such consumption says about inefficient use of gas. Overall, Uzbekistan is no exception. It is well known that countries with energy resources, as a rule, use them less efficiently than those who are forced to import them.
Uzbekistan carries out measures to increase the efficiency of natural gas consumption in the country, but this process is very slow. One of these measures is a gradual increase in gas prices for consumers in Uzbekistan. With the rise in price of gas, its consumption is less wasteful. In addition, there was adopted a program of energy and gas saving up to 2020, when the annual consumption of natural gas by sectors of the economy in 2020 should be reduced by 5-7% compared with the level in 2013, and the consumption by the population will remain almost at the level of 2013. According to calculations, the annual export of natural gas will increase by 20% by 2020.
In short, the free volumes that Uzbekistan could export in 2014 amounted to 8.9 billion cubic meters. Uzbekistan exports its natural gas to Russia, Kazakhstan, Kyrgyzstan, Tajikistan and China. The main partners of Uzbekistan are Russia and China. Russia is the main importer of Uzbek gas, but the trend is that the volume of supply is getting low, mainly due to the decrease in natural gas production in Uzbekistan. So, in 2013, Uzbekistan supplied to “Gazprom” only 5.65 billion cubic meters instead of the negotiated earlier 7.5 billion cubic meters of gas. For comparison, in 2009, Uzbekistan delivered 15.4 billion cubic meters to Russia. As for China, this country received 6 billion cubic meters of Uzbek gas in 2013. Consumption of Uzbek gas in the other importing countries is insignificant.
Uzbek gas export markets – is there room for maneuver?
Uzbekistan has no access to the open seas. Moreover, its geographical location is unique, because its neighboring countries have no access to the open seas either. Besides Uzbekistan, only Liechtenstein has such a feature. This means that the total length of gas pipelines in Uzbekistan, which pass through the territory of several countries, is quite large. It exceeds 13 thousand km. The capacity of the gas transportation system of Uzbekistan is 55 billion cubic meters per year, which allows pumping transit from Turkmenistan and supplying Uzbek gas for export. In the north-west of the country, there are some parts of the trans-regional gas transport systems “Central Asia-Center” and “Bukhara-Ural“.
Central Asia and the domestic market
The pipeline “Central Asia-Center” was built in 1967 to transport natural gas within the Soviet Union. This pipeline passing through the territory of Turkmenistan, Uzbekistan, Kazakhstan and Russia, turned into an international transport corridor in 1991. The current capacity of the pipeline is 40-50 billion cubic meters. The transit of Turkmen gas to Russia is also carried out through this pipeline. The pipeline needs renovation and expansion of capacity.
In 2002, there was completed a gas pipeline “Gazli–Kagan” with length of 67 km which connected the Ustyurt and Bukhara-Khiva oil and gas regions with export communications – gas pipelines “Central Asia-Center” and “Bukhara-Ural“.
Natural gas supplies to Tajikistan are carried out through the pipeline system “Kalif – Dushanbe“, which is partially filled with Turkmen gas, too, as well as through a gas pipeline “Shurtan–Sherabad” with length of 193 km, built in 2003. The pipeline helped abandon the idea of transit of Uzbek gas through Turkmenistan and meet the needs of population and industry in the south of Uzbekistan. The pipeline’s capacity is small – about 1 billion cubic meters per year. To Tajikistan, the gas is supplied on a reimbursable basis through the use of a transit pipeline in the Leninabad region.
As for the gas pipeline “Bukhara–Ural“, this major pipeline starts at the deposit of “Gazli” and has length of 4464 km. The pipeline was built in 1966 to transport natural gas to the industrial regions of the Urals: Magnitogorsk, Chelyabinsk, Sverdlovsk, Nizhny Tagil, Orsk. To date, this pipeline is very old, used effectively and in need of renovation. The pipeline is used only on its Uzbek, Turkmen and partially Kazakh sites.
Another export route for Uzbek gas is a gas pipeline “Central Asia-China.” The pipeline starts at the border between Turkmenistan and Uzbekistan, transit passes through Uzbekistan and Kazakhstan, and ends at the Chinese border crossing point of Horgos. The length of the gas pipeline on the territory of Turkmenistan is 188 km, Uzbekistan – 525 km, Kazakhstan – 1293 km, and China – more than 4.86 thousand km. Currently, there have been built three branches, and the construction of the fourth branch is expected – Turkmenistan-Uzbekistan-Tajikistan-Kyrgyzstan-China. China will finance the construction of the pipeline.
The main problem of the oil and gas sector of Uzbekistan is a sharp decline in oil and gas production. This trend will continue in the coming years. In this context, “Uzbekneftegaz” has developed a program of development of the oil and gas industry of Uzbekistan up until 2020. The program provides for an increase in growth of hydrocarbon reserves in the years of 2014-2020. In short, the increase in reserves of natural gas is expected to reach 485.5 billion cubic meters, and oil and gas condensate – 41.7 million tonnes. The company expects that the annual natural gas production in 2020 will increase to 66 billion cubic meters, and oil and gas condensate – up to 3.5 million tonnes. Thus, Uzbekistan hopes to extend the viability of this sector of the economy, whose return exceeds 130 years.
Rovshan Ibrahimov, an expert in the field of energy diplomacy, Dr. at Hankuk University of Foreign Studies (South Korea)
The views of the author do not necessarily represent the views of CABAR.asia