Central Asia Energy Advisor

This week in Central Asia we are concerned about continued delays in production in Kazakhstan's supergiant Kashagan; Gazprom's solidification of control over the energy sector in Kyrgyzstan and an emerging political crisis in Uzbekistan that will bode ill for foreign investors who require high-level alliances to operate in this corrupt environment.

KAZAKHSTAN

•    The last week of December saw Russia and Kazakhstan sign an intergovernmental agreement on oil transport from Russia to China via Kazakhstan.

•    Kazakhstan re-imposed a temporary ban on the export of some petroleum production, which took effect on 1 January 2014. The temporary export ban is on light distillates, kerosene, gas oil and other petroleum products in order to prevent a critical shortage of oil products and a price spike in Kazakhstan.  Special gasoline products and domestic heating oil are exempted from the ban. The ban was originally implemented in January 2013 for six months, so this will be the second time the ban was extended, for another six-month period.

•    On 25 December, Kazakhstan announced plans to increase oil production up to 83 million tons for 2014. This does not include oil production from the supergiant Kashagan oil field where recoverable reserves are estimated at 11 billion barrels, with over 1 trillion cubic meters of natural gas reserves.

•    OPEC predicts Kazakhstan's oil production will increase by 50,000 barrels per day and reach 1.7 million bpd in 2014, while the US Energy Information Agency (EIA) predicts a 40,000 bpd increase in oil production up to 1.65 million bpd for this year.

•    The supergiant Kashagan has met with several delays, most recently due to the malfunctioning pipelines-a subject on which experts will be releasing a situation report within the next two weeks. The pipelines are being tested by the UK-based Welding Institute (TWI) in Cambridge to determine the cause of leaks.  The resumption of production will depend on the findings of this report.  Production at Kashagan began on 11 September, but was suspended on 24 September due to a gas leak. After repairs, production was again resumed, but halted on 9 October when another gas leak was discovered and other potential leaks were revealed.

KYRGYZSTAN

Gazprom is strengthening its foothold in Kyrgyzstan's upstream, midstream and downstream oil and gas sectors, the crowning achievement of which was the recent acquisition of a 100% stake in KyrgyzGaz, the state-run energy company responsible for natural gas transmission, distribution and sales. The deal was ratified by the Kyrgyz Parliament earlier in December. Under the terms of the deal, Gazprom will assume the entirety of KyrgyzGaz's debt for $1. Gazprom has vaguely pledged to begin natural gas exploration in Kyrgyzstan and to invest an initial $61 million.

Exploration is where this deal could fall apart. While Gazprom says Kyrgyzstan has more than 200 billion cubic feet of natural gas reserves, we question this estimate and its economic value, particularly considering the unfriendly geology and the near complete lack of infrastructure. As it stands, Kyrgyzstan imports about 90% of its gas from neighboring Kazakhstan and Uzbekistan. We will see Russia sweep in to solidify its foothold in Kyrgyzstan now that the US is working on its exit strategy from Afghanistan and the use of Kyrgyzstan as a base for this conflict will no longer be a necessity-meaning that Kyrgyzstan is shopping around for new benefactors.    

•    During the last week of December, Kyrgyz officials met with Gazprom officials in Moscow to discuss further investments, including in the areas of exploration and natural gas transmission.

•    It should now be considered a fait accompli that Kyrgyzstan will join the Russian-led Customs Union of former Soviet States. All blustering by Kyrgyz President Almazbek Atambayev to the effect that the country will only join the union on its own terms is empty and meant for public consumption only. Atambayev claims that Kyrgyzstan will join the customs union only if the country's national interests are met, but at this point it is safe to say that Russia largely owns Kyrgyzstan.

TURKMENISTAN  

•    On 18 December, Kyrgyzstan and China assigned an agreement on the construction of a $2-billion gas pipeline running from Turkmenistan to China via Kyrgyzstan. This is the transnational Turkmenistan-China gas pipeline, which will also include Uzbekistan and Tajikistan along its route. The pipeline was commissioned in late 2009. Once complete it will mean an increase of some 40 billion cubic meters of Turkmen gas for China annually-ramping total volumes to China up to 65 billion cubic meters. Turkmenistan produces between 70 billion and 80 billion cubic meters of gas per year.

•    Turkmenistan plans to increase its gas production to 250 billion cubic meters by 2030-most of it destined for export.

UZBEKISTAN

This week in Uzbekistan we are primarily concerned with the ongoing investigation into Tethys Petroleum-registered in the Cayman Islands--allegedly for stealing government-owned oil. This is a direct result of an emerging political crisis that has seen the powerful daughter of President Islam Karimov challenged for the first time. According to Russian sources, Uzbek authorities are accusing Tethys of stealing up to $40 million worth of government-owned oil. A figure identified as Tethys' head of operations in Uzbekistan, Bakhrom Salakhitdinov has been arrested in the probe as of the first week of December. Operating in Uzbekistan and Tajikistan is a tricky business that requires the formation of alliances at the highest levels, and at the first sign of political crisis these relationships will come under attack. Tethys operates in both countries, and it had earlier this year announced new oil and gas exploration projects in Uzbekistan.

The level of corruption here is one of the worst in the world, and Tethys' problems now are related to a change in fortunes for the Gulnara Karimova, whose business empire is collapsing under the weight of corruption. Plagued by money-laundering scandals across Europe, the loyalty base at home is now crumbling and key allies are lining up against her, making her planned succession, eventually, to the presidency now uncertain.  

OP Tactical's intelligence units in Central Asia are monitoring the emerging crisis in Uzbekistan and can provide detailed influence-mapping and probability scenarios for clients with operations in or affected by developments here.

•    A continued decline in oil production is expected for Uzbekistan this year

•    Uzbekistan has an estimated 340 billion barrels of oil shale deposits and it began first drilling in March 2013; from this it plans to produce 2 million tons annual of liquids from oil shale between 2014 and 2015. The key venue here is the Sangruntau deposit.

•    Analysts predict that if the Uzbek government maintains fuel import restrictions without upgrading state-owned refineries or attracting private downstream investment, demand could be suppressed further.

•    LUKoil, Russia's second largest oil producer, has announced plans to invest $5 billion in Uzbek projects over a five-year time period.