Global Economics

Natural Gas: Uzbekistan Tilts to China


The Central Asian nation is trying to end Russia's stranglehold on natural gas with a pact to build a 530-kilometer pipeline to China

Uzbekistan's fresh agreement with the Chinese to build a 530-kilometer natural gas pipeline to China shows that the Central Asian nation is trying to break Russia's dominance over natural gas exports and boost revenue.

The pipeline is planned to have a capacity of 30 billion cubic meters a year, half of the nation's current annual production. Sitting on huge reserves of natural gas, the country annually produces more than 60 billion cubic meters of gas, nearly a quarter of which is exported to Russia, Kazakhstan, Kyrgyzstan, and Tajikistan. Nine and a half billion cubic meters was exported to Russia in 2006 and even more is expected this year. Most of the remainder of the nation's natural gas production is consumed domestically.

HIGH PRICES SOUGHT

Shavkat Majitov, first deputy chairman of the state-run Uzbekneftegaz company, told journalists the deal with China would allow the country to sell its gas at prices much higher than the Russian energy conglomerate Gazprom is now paying. The deal with China was signed in April.

"A producer wants to sell gas at a higher price," Majitov said. "I can't say that we sell gas at a low price but our price is much lower than the price at which Gazprom sells it at Western markets."

Uzbekistan sells gas at $100 per 1,000 cubic meters, significantly less than the price Russia gets selling gas to the West.

Given the rising demand for clean-burning energy on world markets, some officials in Uzbekistan believe Russia's domination of the market is depriving Tashkent of much-needed revenue and has hampered modernization of the industry. Much of the industry's infrastructure was built during the Soviet period.

Gazprom has signed deals to tap new gas fields and help modernize the system. But Tashkent stalled in granting Gazprom licenses to exploit new deposits of gas.

STILL CLOSE TO MOSCOW

The Chinese deal and delay in granting exploration licenses is not seen as an assault on Uzbekistan's relations with Russia. "An attempt to get out of Russia would be suicide," said an official from Uztransgaz, a gas transport subsidiary of Uzbekneftegaz.

The Russian industry defends the price it pays for natural gas from Uzbekistan, and one industry representative says Russia will continue buying the gas whereas the Chinese venture could take years to come to fruition.

Yuri Shafranik, chairman of the Association of Petroleum and Gas Producers of Russia, considers $100 per 1,000 cubic meters "a fair price." He downplayed the gas pipeline to China, noting that Russia has an established operation in Uzbekistan and has access to Europe's lucrative market.

"The talks about the building of the pipeline are sheer politics," Shafranik said in Tashkent. "Its construction would be an expensive pleasure that would not happen soon."

Similarly, the demand for natural gas is unlikely to lead Russia to suspend its operations with Uzbekistan. Maksut Anderzhanov, head of the office of Gazprom subsidiary Zarubezhneftegaz in Tashkent, said: "We work very harmoniously with the Uzbek government, with mutual understanding and satisfaction. It would be good and profitable to establish a united policy of production, transportation, and sale of natural gas."

Western relations with Uzbekistan soured after security forces opened fire on demonstrators in the eastern city of Andijan two years ago, killing at least 187 people. A crackdown on dissenters and journalists ensued. Since then, Uzbekistan has kept close to Russia while opening the door to investment from China.

The negotiations with China come as no surprise to Western officials. "For the last 200 years, Central Asia has been oriented toward the north and west," U.S. Deputy Assistant Secretary of State Evan Feigenbaum, the State Department's top official in charge of South and Central Asia, said in March. "We respect that and we acknowledge it. But the most dynamic economies in the world today are to the east and south of Central Asia."

Uzbekistan and China still must agree on a 25-year pricing formula and repayment schedule that must be approved by the two governments. Also uncertain is whether China would commit to one or two pipelines: Beijing has also signed a deal with Turkmenistan that provides for China to buy 30 billion cubic meters of Turkmen gas each year for 30 years, starting in 2009, through a pipeline that would cross Uzbekistan.

Provided by Transitions Online—Intelligent Eastern Europe

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