Central Asia region analysis brief

May 25, 2002 02:00 AM

Central Asia is gaining in importance to world energy markets, due to the region's vast untapped oil and natural gas reserves. Central Asia's lack of export pipelines, in addition to Central Asia's remoteness from markets, has limited development of natural resources, but foreign investment in Central Asia, particularly in Kazakhstan, could allow the region to reach its energy-producing potential.

General background
With the collapse of the USSR. in 1991, the Soviet republics of Central Asia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, became independent for the first time in their history. The Central Asian countries, whose centrally-planned economies were heavily dependent on Soviet subsidies, were unprepared for independence, and their national economies immediately went into a tailspin. The loss of markets and disrupted trading links that accompanied the collapse of the Soviet Union had devastating effects on the Central Asian economies.
Economic and political reforms have proceeded slower in Central Asia than elsewhere in the Commonwealth of Independent States (CIS). Many political leaders in the region are former communists, and autocratic decision-making is still prevalent.

Each of the Central Asian countries remains economically tied to Russia, and as a result suffered substantial losses after Russia's August 1998 financial crisis. Since then, the countries of Central Asia have become more competitive economically, and each country has experienced several years of growth. Kazakhstan and Turkmenistan, buoyed by oil and natural gas exports, respectively, have experienced the largest real gross domestic product (GDP) increases.
Although Russia still controls much of the region's oil and natural gas export routes, new export options are in development, and energy exports are likely to prove a major driver behind Central Asia's future economic growth.

Regional energy issues
Central Asia's plentiful oil and natural gas reserves have made the region an increasingly important area for world energy supply security. The TRACECA Program (Transport System Europe-Caucasus-Asia, informally known as the Great Silk Road) was launched at a EU conference in 1993, bringing together trade and transport ministers from the Central Asian and Caucasian republics to initiate a transport corridor on an east-west axis, leading to increases in oil and natural gas production from Central Asia.
Export pipelines, especially for natural gas, are still needed in order to facilitate further increases in Central Asia's energy production.

With the opening of its Caspian Pipeline Consortium (CPC) pipeline, Kazakhstan, for one, is beginning to export more oil to customers outside of the region. However, Central Asia's remoteness from world markets, as well as its lack of infrastructure to export its oil, natural gas, and electricity to customers outside the region, has meant that much of the Central Asia's energy is consumed internally.
In addition, under the Soviet Union, much of the region was intertwined economically, and the newly independent Central Asian states in many ways remain dependent on each other, especially for energy supplies. Thus, the Central Asia states each face the dilemma of finding export outlets for their energy supplies at world market prices while also securing inexpensive energy from their neighbours for their own impoverished people.

Oil exports
Central Asia's biggest oil producer is Kazakhstan, which produced approximately 811,000 bpd in 2001, followed by Turkmenistan (159,000 bpd in 2001) and Uzbekistan (137,300 bpd in 2001). With its bountiful oil reserves and a relatively business-friendly investment climate, Kazakhstan has attracted substantial foreign investment to its oil sector, providing a significant boost to its oil industry.
In addition to the Atyrau-Samaraand CPC export pipelines via Russia, Kazakhstan has a number of oil export options open to it. A number of Caspian Sea region oil export pipelines involving Kazakhstan are in development or under consideration. Export options for Turkmenistan and Uzbekistan, which is doubly landlocked, are more limited.

Turkmenistan has no oil pipelines, meaning that all the crude oil exported from Turkmenistan is shipped by sea. Even after shipping its oil by tanker to Russia's Caspian Sea port of Makhachkala, however, securing pipeline access has been a problem for Turkmenistan.
In 2000, Turkmenistan arranged with Russian pipeline company Transneft to export up to 50,000 bpd via the Makhachkala link to the Baku-Novorossiisk pipeline. Since Turkmen oil has a relatively high content of sulphur and paraffins and high viscosity, Transneft determined it was not fit for the pipeline.
In order to load the oil into the pipeline, Transneft built the Dagar processing complex so that the heavy Central Asian oil could be mixed with light West Siberian oil and brought up to the Urals export standard. However, oil companies and traders supplying oil from Central Asia refused to use the complex, and Transneft refused to load it, leaving tankers with Turkmen oil standing in port.

Turkmenistan eventually accepted rail transportation of its oil. Owing to reduced Kazakh and Azeri oil in the Russian pipeline system, Transneft has relented to accept increased Turkmen oil exports in the Makhachkala-Novorossiisk pipeline in order to utilize more of the pipeline's capacity. Turkmenistan is planning to export about 20,000 bpd via Makhachkala in 2002.
Turkmenistan increasingly has turned to swap agreements with Iran in order to export its oil, with Turkmen oil being delivered to the Iranian Caspian port of Neka. The oil swaps began in July 1998. Dragon Oil, which produced approximately 7,000 bpd in 2001 in a production-sharing agreement (PSA) with Turkmenistan, has exported its share of this production through a swap deal with Iran since 1998, and in April 2000 the company signed a new 10-year swap agreement with Iran. US economic sanctions on Iran have prohibited American oilcompanies with investments in Turkmenistan from participating in the oil swaps.
Also, any significant investment in an Iranian oil project by a foreign energy company may be subject to the Iran and Libya Sanctions Act, which the US Congress renewed in August 2001. Uzbekistan's only current oil export option is to reverse an existing crude oil pipeline that brings oil from Omsk, Russia, to Uzbek refineries.

Uzbekistan has signed a Memorandum of Understanding with Turkmenistan, Afghanistan, and Pakistan to build the Central Asia Oil Pipeline (CAOP), which, if constructed, would transport Uzbek and Turkmen oil via Afghanistan to a proposed new deepwater port at Gwadar on Pakistan's Arabian Sea coast. Continuing unrest in Afghanistan has stalled any progress on the CAOP, and the relatively small volumes of Uzbek oil that will be available for export over the next 10-20 years are insufficient to support the construction of a new export pipeline without additional volumes from other Central Asian countries.

Natural gas exports
The five former Soviet Central Asian countries hold nearly 4 % of the world's natural gas reserves, and both Uzbekistan and Turkmenistan are already major natural gas producers. In 2000, Uzbekistan produced 1.99 tcf of natural gas, followed closely by Turkmenistan, which produced 1.64 tcf of natural gas in that same year.
Although it only produced 314.3 bn cf of natural gas in 2000, Kazakhstan has considerable proven natural gas reserves, and the country's possible reserves in its sector of the Caspian Sea could make Kazakhstan a major natural gas producer in coming years.
As Kazakhstan, Turkmenistan, and Uzbekistan continue to develop their natural gas industries and increase their production, senior Russian officials -- including President Vladimir Putin -- have called for a Eurasian alliance to offset the impact of European natural gas market liberalization.
According to Putin, the so-called "Gas OPEC," uniting Russia with the three big natural gas-producing countries in Central Asia, would "bring an element of stability into the transportation of natural gas on a long-term basis."

Analysts have criticized the alliance proposal as a Russian attempt to exercise control over Central Asian natural gas exports. Central Asia's main natural gas export, the Central Asia-Centre pipeline, already is routed into the Russian natural gas pipeline system, as is the Bukhara-Urals pipeline.
In an effort to diversify export routes, a number of natural gas pipelines originating in Central Asia are under consideration. In addition to Caspian Sea natural gas export pipeline proposals, such as the Trans-Caspian Gas Pipeline, a pipeline that exports Turkmen natural gas via to Iran, the Korpezhe-Kurt Kui pipeline, has already been constructed, and a proposed Trans-Afghan pipeline is under consideration to export Central Asian natural gas via Afghanistan to Pakistan. Central Asia also has a number of internal pipelines, including the Tashkent-Bishkek-Almaty pipeline, to serve natural gas customers in the region.

Central Asia-Centre pipeline
The Central Asia-Centre pipeline, built in 1974, has two branches. The western branch delivers Turkmen natural gas from near the Caspian Sea region to the north, while the eastern branch pipes natural gas from eastern Turkmenistan and southern Uzbekistan in a northwest direction across Uzbekistan. The pipeline branches meet in western Kazakhstan, where they run further directly north and enter the Russian natural gas pipeline system. Turkmenistan has been the chief exporter of natural gas via the Central Asia-Centre pipeline, which has a 3.53-tcf combined capacity.
Over 90 % of Turkmenistan's natural gas exports via the pipeline go through the eastern branch, since the majority of Turkmen natural gas production is in the eastern part of the country, and also because the western branch of the pipeline is in poor technical condition. In 2001, Turkmenistan had planned to export 1.41 tcf of natural gas via the Central Asia-Centre pipeline, including 1.06 tcf to Ukraine and another 353 bn cf to Russia. However, Turkmenistan exported only about 1.16 tcf via this route, which Turkmen officials attributed to the limited capacity of the Kazakh segment of the pipeline.

Turkmenistan has sought to reconstruct compressor plants and pipeline sections of the western branch that are on its territory, but Turkmen President Saparmurat Niyazov has complained that sections of the pipeline that are in Uzbekistan and Kazakhstan are obsolete and require modernization. According to Turkmenistan, capacity on the Central Asia-Centre pipeline is only about 2.4-2.5 tcf presently due to a lack of maintenance and repair.
Turkmenistan has stated that this is restraining its export capacity to the north, since the country could increase its natural gas production if the pipeline's capacity were increased. In 2002, Turkmenistan is planning to export 1.77 tcf of natural gas via the Central Asia-Centre pipeline, with 1.41 tcf to be piped via Russia to Ukraine.

Trans-Caspian Gas Pipeline
As part of its strategy to increase its natural gas exports, Turkmenistan is developing alternatives to Russia's pipeline network. Among the proposals is the 1,020-mile Trans-Caspian Gas Pipeline (TCGP), which would run from Turkmenistan under the Caspian Sea to Azerbaijan, through Georgia, and then to Turkey. The pipeline's initial natural gas throughput would be 565 bn cf, eventually rising to 1.1 tcf.
TCGP has encountered numerous problems, including competition with Azeri and Russian natural gas to supply the Turkish natural gas market. Russia's "Blue Stream" pipeline to Turkey is nearly completed, and construction on the Baku-Erzurum natural gas pipeline is scheduled to begin in 2002. Although Azerbaijan and Turkmenistan resumed talks on the TCGP in October 2001, the lack of a legal framework governing the use of the Caspian Sea continues to complicate the issue of constructing the pipeline. In addition, several of the Caspian littoral states are opposed to trans-Caspian pipelines on environmental grounds.

Korpezhe-Kurt Kui pipeline
In December 1997, Turkmenistan launched the $ 190-mm Korpezhe-Kurt Kui pipeline to Iran, the first natural gas export pipeline in Central Asia to bypass Russia. The 124-mile pipeline, which had an initial capacity of 141 bn cf, will have a peak capacity of 282 bn cf per year. In 2000, Turkmenistan exported 106 bn cf to Iran via the pipeline, with that figure increasing to 154 bn cf in 2001.
According to terms of the 25-year contract between the two countries, Turkmenistan will pipe between 177 bn cf and 212 bn cf of natural gas to Iran annually, with 35 % of Turkmen supplies allocated as payment for Iran's contribution to building the pipeline. In December 2001, the presidents of Turkmenistan and Armenia reached an agreement by which Turkmenistan will supply up to 70.6 bn cf per year to Armenia via the Korpezhe-Kurt Kui pipeline and across Iran. Implementation of this deal is contingent on the construction of a long-delayed Iran-Armenia natural gas pipeline.

Trans-Afghan pipeline
In October 1997, Unocal set up the Central Asian Gas Pipeline (Centgas) consortium to build a pipeline from Turkmenistan across Afghanistan to Pakistan. However, in early August 1998, Unocal announced that Centgas had not secured the financing necessary to begin the work, and on August 22, 1998, Unocal suspended construction plans for the pipeline due to the continuing civil war in Afghanistan and the US missile attacks on suspected terrorist training camps.
Until recently, the pipeline was considered effectively dead, but with a fragile peace in Afghanistan established and the Taliban removed from power, the idea of a trans-Afghan pipeline has been revived. Under the original plans, the pipeline would run 900 miles from the Turkmen natural gas deposit at Dauletabad through Kandahar, Afghanistan, and terminate in the Pakistani city of Multan.

Uzbekistan also signed a Memorandum of Understanding with Turkmenistan, Afghanistan, and Pakistan to participate in the Centgas pipeline project. A 460-mile stretch of the pipeline, which would have a capacity of between 706 bn cf and 1.06 tcf, would cross Afghan territory. Approximately 12 % of the pipeline's capacity would be reserved for Afghan natural gas.
Turkmen President Saparmurat Niyazov and interim Afghan leader Hamid Karzai have expressed their support for the pipeline, which would cost an estimated $ 2 bn. Uzbek President Islam Karimov is also on record advocating the pipeline. In March 2002, Karzai, Niyazov, and Pakistan President Pervez Musharraf agreed to hold trilateral talks on the pipeline proposal at the end of May 2002.

Tashkent-Bishkek-Almaty pipeline
Uzbekistan's main natural gas export pipeline has been the Tashkent-Bishkek-Almaty pipeline which runs through northern Kyrgyzstan to southern Kazakhstan. The pipeline is the main source of natural gas for Kyrgyzstan and southern Kazakhstan. Irregular supplies from Uzbekistan, illegal tapping of the pipeline by Kyrgyzstan, and mounting debts by both Kazakhstan and Kyrgyzstan for supplies already received have led to increased tension between the three neighbours.
Kyrgyzstan's agreement with Uzbekistan to supply it with water for the growing season, in addition to electricity, in exchange for natural gas supplies has served to complicate relations between the two states. For its part, Uzbekistan periodically has cut off supplies to Kyrgyzstan in an effort to force Kyrgyzstan to pay its debts for natural gas supplies, which stood at approximately $ 1.6 mm in March 2002.

Kyrgyzstan has complained about the supply disruptions, which frequently occur during winter, leaving Kyrgyz consumers without adequate heat and power. Adding to the conflict, in December 2001 Kyrgyz companies illegally took 0.4 bn cf of Uzbek natural gas intended for Kazakhstan. Kyrgyz authorities explained that they had to use the natural gas following the sudden suspension of Uzbek natural gas supplies to Kyrgyzstan.
In December 2001, Kyrgyzstan agreed to turn its section of the pipeline into a concession for 10 years in payment for its debts to Kazakhstan. If Kyrgyzstan had not agreed to give its 90-mile section of the Tashkent-Bishkek-Almaty pipeline in concession, Kazakhstan had drawn up plans to start building a $ 70-mm pipeline to bypass Kyrgyzstan.
As a result of Kyrgyzstan's vulnerability to supply disruptions from Uzbekistan, the Kyrgyz government has begun importing more natural gas from Kazakhstan, as well as entered into negotiations with Kazakh and Russian officials about continuing to the construction of a natural gas pipeline from Russia to Kyrgyzstan. Completing the pipeline, whose construction was halted in 1991, would require $ 60 mm.

Kazakh-Uzbek relations also have been strained over natural gas supplies via the Tashkent-Bishkek-Almaty pipeline. Kazakh officials have complained about Uzbekistan's irregular pricing policy. Uztransgaz, Uzbekistan's monopoly natural gas distribution company, repeatedly has attempted to increase its prices for supplies to southern Kazakhstan.
According to a February 2002 agreement, Uztransgaz will supply 46 bn cf of Uzbek natural gas to southern Kazakhstan at a price of $ 40 per 1,000 cm. Earlier, Uztransgaz proposed that Kazakhstan should pay $ 45 per 1,000 cm. In 2001, Kazakhstan announced its intention to develop the Amangeldy natural gas field in its southern regions in order to end the country's reliance on Uzbek imports.

Other Central Asian natural gas pipelines
Natural gas pipelines also run from Uzbekistan to Tajikistan's capital of Dushanbe, as well as through northern Tajikistan. Tajik and Uzbek officials have been operating under an arrangement where Uzbekistan supplies Tajikistan with natural gas as payment for Uzbekistan's use of a transit pipeline which crosses the Leninabad region of northern Tajikistan and links Uzbekistan's eastern territory with its natural gas fields.
Tajikistan has contracted with Uzbekistan for additional natural gas, owing to overconsumption by Tajik consumers, and Tajikgaz, Tajikistan's state natural gas distribution company, has run up a $ 2 mm debt to Uzbekistan for supplies already received.
With the volume of Turkmen natural gas transiting Kazakhstan on the rise, the Bukhara-Urals pipeline has been pressed into service. In March 2001, natural gas transit started on the previously inactive pipeline, with approximately 200 bn cf exported via the pipeline in 2001. KazTransGaz, Kazakhstan's natural gas transportation company, invested about $ 20 mm in modernizing its section of the Bukhara-Urals pipeline system in 2000.

Electricity exports
Several countries in the Central Asia region have electricity available for export, and there is also substantial untapped hydropower potential in both Kyrgyzstan and Tajikistan. In the Fergana Valley, eastern Uzbekistan, northern Tajikistan, and southern Kyrgyzstan are intertwined geographically, and because their power grids are interconnected, they are able to export power to each other as needed.
In general, Kyrgyzstan and Tajikistan export their seasonal hydropower to Uzbekistan in the summer, when both generate excess electricity, and Uzbekistan supplies Tajikistan and Kyrgyzstan with electricity in winter months. In 2001, Uzbekistan supplied 0.2 bn kWh of electricity to Tajikistan in the winter period, and received 0.3 bn kWh from Tajikistan in the summer. In October 2001, Kyrgyzstan agreed to accept 0.5 bn kWh of electricity in Uzbekistan in exchange for guaranteeing the accumulation of water in its Toktogul water reservoir so that irrigation water will last for Uzbekistan through the growing season in 2002.

Tajikistan, Uzbekistan, and Turkmenistan also have started electricity exports to Afghanistan. In mid-March 2002, Tajikistan began experimental exports to Afghanistan's northern provinces, and in that same month Uzbekistan resumed electricity shipments to Afghanistan, three years after halting deliveries.
Under an intergovernmental agreement signed on March 7, 2002, Turkmenistan is set to spend $ 520 mm on projects to export Turkmen electricity to Afghanistan. In the first stage, Turkmenistan will build and overhaul power lines, including the 50-MW Mary-Shibirgan-Mazar-e-Sharif line. In the second stage, the power line will be extended to Kabul and power capacity will increase to 200 MW. A Mary-Serkhetabat-Herat-Kandahar power line also will be built with a 200-MW capacity.

Source: EIA Country Analysis Briefs
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