Russia Strengthening Its Monopoly on Uzbek Gas

On January 23 in Tashkent, Presidents Dmitry Medvedev of Russia and Islam Karimov of Uzbekistan firmed up bilateral agreements that strengthen Russia’s monopoly on Uzbek exports of natural gas. Their quid-pro-quo involves a steep increase in Gazprom’s purchase price for Uzbek gas in return for Uzbek acceptance of Russia’s monopsony in the years ahead (Interfax, January 23, 24).

 

Under a contract signed during the final days of 2008 by Gazprom and Uzbekneftegaz, the Russian side will pay $305 per thousand cubic meters of Uzbek gas in 2009. This practically doubles the previous year’s purchase price, which was $130 in the first half of 2008 and $160 per thousand cubic meters in the second half of the year (Interfax, December 30, 2008).

 

For this price, Uzbekistan accepts total Russian control of its existing and projected gas exports. During his meeting with Medvedev in Tashkent, Karimov declared:

 

 

We are selling gas to Russia only. I would like you to understand this issue unequivocally. We have definitely agreed that the gas flowing into Russian pipelines becomes Russian gas. To whom Russia sells that gas further, how it distributes that gas, is the full prerogative of the Russian side, for Russia to decide (NTV, January 23).

 

 

That system enables Moscow to use some volumes of Central Asian gas for its own consumption and re-export other volumes as “Russian” gas to Europe. Thus, Moscow has won over Uzbekistan, as it did Turkmenistan, to sell its gas at the border directly to Gazprom, renouncing the idea of direct commercial relations with European customers. Uzbekistan and Turkmenistan only enjoy the strictly limited freedom to sell gas directly to the neighboring Central Asian countries and Iran, in volumes incomparably smaller than those flowing to Russia.

 

During these talks with Medvedev, Karimov offered to increase deliveries to 16 billion cubic meters of gas per year to Russia in 2009 and the years immediately thereafter. He also held out the prospect of an increase by another 15 to 31 billion cubic meters annually from Lukoil’s projects that are now starting to come on stream in Uzbekistan.

 

These export increases would necessitate an increase in pipeline capacity, correlated to the growth in extraction. Medvedev and Karimov confirmed the bilateral agreement to lay new pipelines for export of Uzbek and transit of Turkmen gas (Interfax, January 23).

 

Uzbekistan produces a whopping 60 billion cubic meters per year on average (UPI, December 31, 2008). Most of it is used internally, a testament to wasteful consumption exacerbated by subsidies from the state. Exports have amounted to some 13 billion cubic meters per annum in the last few years. The lion’s share is sold to Gazprom; and most of this amount has been used from 2006 to 2008 for resale to RosUkrEnergo, which in turn resold it to Ukraine, as part of the Central Asian-Russian gas mix for that country. Uzbekistan also sells small volumes of gas to neighboring Kyrgyzstan, Tajikistan, and Kazakhstan (Uzbek gas is delivered to regions situated at long distances from Kazakhstan’s Caspian gas deposits).

 

The country’s potential is substantially larger than those figures suggest. Output and exports have tended to stagnate in recent years due to chronic underinvestment in exploration and production and limited capacity of the export pipelines. Since 2007, however, Lukoil and Gazprom have launched exploration and production programs in Uzbekistan, presaging a rise in Uzbek gas exports soon to materialize. For its part, the Uzbek government has initiated a program to use more coal for generating electricity, in order to free up more natural gas for export, all of it to Russia.

 

Uzbek gas reaches Russia via Kazakhstan through the Soviet-era Central Asia-Center pipeline system. The same system also carries Turkmen gas in transit via Uzbekistan and Kazakhstan to Russia. That worn-out pipeline system operates below capacity. The Russian and Uzbek governments plan to increase (or restore) the capacity of the Uzbek section to 30 billion cubic meters annually, a figure that would apparently accommodate both Uzbek gas exports and Turkmen gas in transit. Russian Prime Minister Vladimir Putin reaffirmed this intention during his September 2008 visit to Tashkent (Interfax, September 2, 2008).