Energy Investment And Trade Opportunities Emerging In Central Asia, Northwest China

James P. Dorian
State of Hawaii
Honolulu

Tojiev Utkur Abbasovich
Uzbek Academy of Sciences
Tashkent

Mikhail S. Tonkopy
Kazakh State Academy of Management
Almaty

Obozov Alaibek Jumabekovich
Kyun State Project
Bishkek

Qiu Daxiong
Tsinghua University
Beijing

Cooperation in the business of oil and natural gas among governments of Central Asia and Northwest China could help the countries overcome obstacles to development of their vast petroleum resources.

The most important obstacle facing these countries is also the one most widely discussed: limited infrastructure for transporting energy. But there are other problems holding back oil and gas development. They include poor communications infrastructure, unstable government structures, political conflict, payments difficulties, and inadequate energy policies.

For countries analyzed in a recent Asian Development Bank (ADB) study of economic cooperation in the region-Uzbekistan, Kazakhstan, the Kyrgyz Republic, and the Xinjiang autonomous region of the People's Republic of China (Xinjiang PRC)-oil and gas are the most abundant and valuable natural resources (Table 1 [39,152 bytes]). Kazakhstan has large reserves of oil and is the region's primary oil producer, while Uzbekistan has significant reserves of gas. Xinjiang PRC has an uncertain-although generally promising-potential for oil in the Tarim basin. These energy resources form the basis for future economic growth and development, and hydrocarbon exports promise to generate significant foreign exchange revenues.

Further potential exists in two countries excluded from the ADB study-Turkmenistan, not yet a bank member but one of the world's largest producers of natural gas, and Tajikistan, which has applied for ADB membership and has potential for development of hydroelectric power.

While Central Asia is poised to become a major world supplier of energy, especially oil and gas, countries in the region emphasize energy self-sufficiency at the expense of developing new trading linkages. Governments thus tend to ignore the benefits of regional cooperation and remain reluctant to commit to area-wide trade and other forms of cooperation.

Yet several factors suggest that increased regional cooperation in oil and gas in Central Asia is both possible and necessary:

• Economic growth in the region will generate increased demand for energy. Energy shortages are already occurring in Xinjiang PRC, for example, where strong economic growth is outpacing energy supplies.
• An uneven geographic distribution of energy resources among the countries leaves each in need of energy forms that can be more efficiently supplied by other countries in the region (Fig. 1 [184,534 bytes]). The Kyrgyz Republic has few proven gas and oil reserves and depends heavily on imports from Kazakhstan and Uzbekistan. Kazakhstan, despite being well-endowed with oil and gas resources, depends on the Kyrgyz Republic and Uzbekistan for 60% of its electricity and purchases gas from Uzbekistan. Uzbekistan depends on electricity supplied by Kyrgyz hydroelectric power stations to meet seasonal electric needs. Xinjiang PRC is actively seeking to import electricity and oil to meet chronic shortages.
• Periodic energy shortages occur in the three former Soviet republics as a result of inadequate infrastructure, poor maintenance of facilities, and management problems resulting from the breakdown of the former region-wide energy network of the Soviet period. Sustaining economic growth and development requires that these shortages be met by importing energy from neighboring countries.
• The large distances between energy-producing locations and the markets for that energy mean that developing local markets within the region can lower transportation costs and increase the returns from energy development. These interdependencies highlight the potential, and perhaps even the imperative, for regional economic cooperation in the energy sector.

The ADB study of regional resources and opportunities for cooperation identified several potential projects, including the possibility of Kazakh crude being exported by pipeline to Xinjiang PRC. The tremendous gas resources in Turkmenistan are considered in all discussion of future hydrocarbon development plans of Central Asia.

Oil, gas sectors

Oil is the second most important energy resource with an export potential in the region. Kazakhstan has proved reserves of 1.1 billion metric tons. Xinjiang PRC has proved reserves of 2 billion tons and, according to the Xinjiang PRC State Planning Commission, expects to add 1.5 billion tons in 1998. Uzbekistan has modest oil reserves (100 million tons), while the Kyrgyz Republic and Tajikistan produce only small quantities of oil.

In spite of the large reserves, Central Asia is a net importer of oil. Oil production decreased in all the former Soviet republics except Uzbekistan during 1991-95. Production generally began to recover in 1995, continuing into 1996 and 1997.

Kazakhstan, Turkmenistan, and Uzbekistan are projected to have positive oil balances within Central Asia by 2000, with Kazakhstan's surplus reaching an estimated 350,000 b/d. This represents an increase of oil production in Kazakhstan of nearly 50% (150,000 b/d) between 1995 and 2000.

Oil balances in the Kyrgyz Republic and Tajikistan are expected to worsen towards the end of the decade, with both countries suffering a deficit of 100,000 b/d by 2000. Limited reserves and a lack of oil exploration and exploitation will continue to aggravate the oil imbalance of both countries.

Despite earlier predictions of massive oil resources in Xinjiang PRC's Tarim basin, recent evidence suggests that actual reserves are more modest. Oil reserves are estimated at 30 billion tons, concentrated in the Junggar, Tarim, and Turfan-Hami basins. Annual output of crude oil in Xinjiang PRC is about 15.4 million tons and is expected to reach 24 million tons by 2000. Oil consumption is currently 14 million tons/year and is expected to rise to about 23 million tons/year by 2000.

Although current and projected oil production exceeds current and projected oil consumption in Xinjiang PRC, national policies require it to ship 50% of its crude oil production to other provinces in the PRC, resulting in an oil deficit in Xinjiang PRC itself. Regional cooperation is thus an important means to alleviate potential future energy shortages in the area.

Although the Central Asian subregion is a net importer of oil, there is strong potential for it (and especially the former Soviet republics) to become a net exporter. Kazakhstan is in a position to export oil. Uzbekistan, which produces 8 million tons/year of oil and condensate, could increase output relatively easily should a viable external market be identified.

The major impediment to achieving this objective is the difficulty oil-producing areas have in transporting crude oil to new markets. All current oil pipelines in the former Soviet republics run through the Russian Federation, which has limited and even blocked the shipment of Central Asian oil on the pretext that the high sulfur content damages the pipelines. Opening new market channels for Central Asian oil that bypass the Russian Federation is essential for realizing the export potential of this resource.

Gas-producing region

On an energy-equivalent basis, Central Asia is predominantly a gas-producing region, with Turkmenistan and Uzbekistan contributing substantially to the regional total. Proved gas reserves amount to 6.6 trillion cu m (tcm)-2.9 tcm in Turkmenistan, 1.9 tcm in Uzbekistan, and 1.8 tcm in Kazakhstan.¹ This represents about one tenth of the total known gas reserves in the Commonwealth of Independent States.

Turkmenistan and Uzbekistan are the two major gas producers in the region, although Kazakhstan also has significant gas deposits. Xinjiang PRC is self-sufficient in gas production.

Until recently Turkmenistan produced about 80 billion cu m (bcm)/year of gas (worth about $6.9 billion at current market prices). Payment problems in the Ukraine and actions by the Russian gas line company Gasprom have forced Turkmenistan to cut production to about 30 bcm/year.

Uzbekistan currently produces 50 bcm/year (worth about $4.3 billion at current market prices). Uzbekneftegas, the national gas company, estimates it can export 5-10 bcm/year (worth $460-830 million at current market prices) indefinitely.

Gas from the region is high in sulfur and must be treated before it can be shipped through pipelines. Uzbekneftegas has a treatment facility that can handle all of the gas it produces. In the past, Uzbekneftegas has also treated much of Turkmenistan's gas. With the termination of gas shipments to the Ukraine, however, it no longer performs this service.

Transportation is a major problem facing the gas industry in Central Asia, especially in the former Soviet republics. The transportation network for gas was established during the Soviet era and reflected the priorities of the Soviet Union. Gas flowed through Soviet-owned pipelines northwest to major processing centers in European Russia.

With the discovery of gas in Siberia, export to these traditional markets declined, although gas continues to be distributed through the pipelines to other republics in the Soviet system. These gas lines all pass through the Russian Federation. Gasprom enjoys a virtual monopoly on gas transported through Russia and has used this monopoly to increase transit tariffs and impose other restrictions on gas coming from the region. Recently, it announced that gas from Turkmenistan would not be passed to Western Europe.²

A second pipeline was built to carry gas from Turkmenistan and western Uzbekistan to Kazakhstan, but a planned renovation and upgrading of that pipeline have not been completed. Obtaining access to markets that does not require transiting the Russian Federation is an important objective for both Turkmenistan and Uzbekistan.

The second major problem is distance. The gas fields in Turkmenistan, Uzbekistan, and Kazakhstan are far from major consumers, and exports must pass through bordering countries. Constructing pipelines to export gas, therefore, is expensive and subject to political risk.

A third major problem affecting the intraregional trade of gas among the former Soviet republics is payments. Insolvency and large outstanding interrepublic debts have suspended trade on numerous occasions. Barter trade arrangements substitute for cash payments, but these have not been stable or fully satisfying to the parties involved.

A recent example of the difficulties with barter trade arrangements occurred when southern Kazakhstan, including Almaty, was without gas for a week following Turkmenistan's decision to cut gas shipments to Ukraine via the Bukhara-Ural pipeline. Kazakhstan had received gas transported by that pipeline as compensation for the pipeline running through its territory.

Major energy trends

After decades of closed economies in Uzbekistan, Kazakhstan, the Kyrgyz Republic, and Xinjiang PRC, local government officials are now encouraging rapid development of their oil, gas, coal, and electricity sectors. This process has several distinct characteristics and implications for economic cooperation among the countries of the region.

Restructuring

Governments in the region are actively restructuring the oil, gas, coal, and electricity sectors to improve efficiencies, streamline operations, and internationalize.

In Kazakhstan and the Kyrgyz Republic, privatization is changing the agencies involved in energy production, transportation, and utilization. One benefit of this process is the gradual introduction of Western managerial and accounting practices.

Government ministries involved in energy exploration, development, and use are being reorganized, and the large state enterprises involved in the energy sector are being disaggregated, with their parts converted to "joint stock companies."

In Kazakhstan, government ministries, including those engaged in oil and gas development, have been restructured repeatedly over the past 2 years. More than half of the Kazakhstan government has been disassembled or consolidated, and further reshuffling is imminent. In 1997, a new, expanded Ministry of Energy and Natural Resources was created by combining the former Ministries of Coal Industry, Oil and Gas Industry, and Geology and Preservation of the Environment. It remains unclear how the responsibilities and functions of the former ministries will be reorganized and reassigned within the new structure. A new oil pipeline company was formed in June 1997 to handle all transportation linkages with foreign partners.

In Uzbekistan, Uzbekneftegas is being transformed into a conglomerate of joint stock oil and gas enterprises. More than 80 joint stock companies have been established by Uzbekneftegas, and more than 80% of the employees are engaged in private sector activities.³ By yearend 1997, all companies affiliated with Uzbekneftegas are slated to be converted into joint stock enterprises.

By Western standards, privatization is occurring slowly and incompletely. Instead, a continuum of public, semipublic, and private companies is emerging. This raises a number of issues for potential donors and investors.

One of the key issues emerging from the privatization (or so-called corporatization) process relates to ownership and stability. Investors and lending agencies are uncertain about the responsibilities of central and local governments. Frequent changes in structure, instability in management, and uncertain finances have increased the inherent risk of working with and investing in the new corporations.

Accountability is another key issue, particularly important to international lenders accustomed to making loans backed by national-government guarantees. To the extent that the newly "privatized" companies are independent of government, loans to the companies lack government guarantees and safeguards.

Privatization in the utilities industry in Kazakhstan led to the cancellation of a major ADB investment and is a continuing concern for international donors throughout the region.

Foreign investment

Most private foreign-investor interest in Central Asia has focused on providing technology and expertise for the development of the region's potentially huge oil and gas fields.

Several multimillion-dollar deals have been made in Kazakhstan and Turkmenistan. Uzbekistan is making strong efforts to attract foreign capital and technology to its oil and gas sectors and convened the first-ever international oil and gas exhibition in Tashkent on May 22-23, 1997. That meeting focused on recent legislation affecting resource development activities, including the 1994 Law on Foreign Investment, 1996 Law on Joint Stock Companies, 1994 Law on the Subsurface, and 1995 Law on Concessions. A new draft law on petroleum is expected to be released in 1998.

Kazakhstan's efforts to attract capital to its hydrocarbon industries have borne fruit in at least two multibillion-dollar deals with major oil and gas companies. In 1992, Chevron signed a highly publicized agreement to invest $20 billion over 40 years to develop Kazakhstan's world-class Tengiz oil field. In 1993, Kazakhstan signed a preliminary 3-year agreement with seven international companies to develop oil and gas reserves in the Caspian Sea area.

More recently, the China National Petroleum Co. purchased major positions in the Uzen and Atyrau oil fields in western Kazakhstan at a cost totaling several billion U.S. dollars.

Similarly, Uzbekistan's government-owned oil and gas industry is also offering foreign firms the opportunity to submit competitive bids on acreage for exploration. Financing from international lending agencies is also being encouraged, as evidenced by the recent loan of the European Bank for Reconstruction and Development to construct the Bukhara refinery plant. Uzbek officials are seeking potential investors to:

• Explore for and develop hydrocarbon reserves.
• Develop oil reserves beneath gas caps.
• Implement redevelopment and secondary recovery programs in selected producing fields.
• Develop previously identified oil and gas fields.

Technip of France is the principal contractor for Uzbekistan's Bukhara facility. In Fergana, Japan's Mitsui is the general contractor.

The PRC is encouraging foreign investment and participation in domestic oil activities as part of the country's open-door policy and to facilitate the renovation of its energy industry. It announced that it was opening Tarim and other inland areas to foreign involvement in February 1993, at which time the country formally abandoned its historic energy self-sufficiency strategy.

In 1997, the PRC announced plans to further open the Tarim basin for exploration by foreign companies, including blocks in the promising center of the area that had previously been barred to overseas firms. The Xinjiang PRC government officials enjoy special economic privileges to attract foreign investment because of the province's autonomous status and its remoteness.

Energy diversification

Diversification of energy sources and markets is a sound strategy the countries of Central Asia are beginning to consider.

Japan's government has considered energy diversification as fundamental to economic security. The U.S. pushed for diversification of its energy supplies after two unexpected oil price shocks in the 1970s, and greater emphasis was placed on developing alternative energy sources-notably, natural gas, solar, and wind. Although the U.S. failed in its attempt to become less reliant on Middle Eastern crudes and diversify its energy mix, Central Asia is at a juncture where the adoption of appropriate strategies can reap tremendous future benefits.

The PRC, for instance, depends heavily on the Middle East for crude oil and oil products and is thus vulnerable to erratic prices or political disruption in Middle Eastern oil supplies. The PRC could develop a viable alternative source of supply by importing Kazakhstan crude oil into Xinjiang PRC. Xinjiang PRC's crude oil currently supplies only about half of its refining capacity, and the government is planning to eventually import large quantities of Kazakh oil. The first oil from Kazakhstan destined for the PRC actually made its way by rail on Oct. 21, 1997. By 2005, 120 million tons/year of crude is expected to be produced in Kazakhstan; only 12-14 million tons of that will be consumed domestically.

Central Asia and Xinjiang PRC are also considering diversifying their markets for the longer term. Situated between two of the world's largest markets for energy-Europe to the west and Asia to the east-Central Asia could become a regional bloc for trading, transport, and sales of energy if appropriate infrastructure were built over the next 2 decades.

Opportunities for cooperation

Regional energy cooperation in Central Asia can benefit the countries of the subregion in three significant ways:

• Supplementing local energy supplies.
• Providing more economic and efficient supplies of energy to specific areas even if such resources are available locally.
• Transporting energy resources to markets outside of the region.

Trade already occurs within the region and may expand in the years ahead (Table 2 [13,694 bytes]). Uzbekistan exports gas to Kazakhstan and the Kyrgyz Republic; Kazakhstan exports coal to the Kyrgyz Republic, which exports electricity to Uzbekistan and Kazakhstan and limited supplies to Xinjiang PRC on low-voltage power lines. The Kyrgyz Republic also exports small quantities of lignite coal to Kazakhstan.

Although Central Asia has abundant energy resources, these are unevenly distributed among and within the four countries covered here (Table 3 [10,693 bytes]). This uneven distribution of resources generates the potential for mutually beneficial trade and cooperation among the countries.

Two other factors increase the likelihood for regional cooperation in the energy sector: the PRC's need for energy and the reduced estimate for oil production in the Tarim basin. Both provide fundamental reasons for the PRC to become more fully engaged in the economic activities of neighboring former Soviet Central Asia.

Possible projects

The governments of Kazakhstan, the Kyrgyz Republic, Uzbekistan, the PRC, and Xinjiang PRC have identified specific projects in oil and gas that involve direct economic cooperation among themselves and that are considered to be a high priority for local and national development objectives (Table 4 [70,076 bytes]). The major projects would:

• Increase crude oil exports from Kazakhstan to Xinjiang PRC by improving rail transport of crude oil from Chimkent in Kazakhstan to refineries in Xinjiang PRC.
• Increase crude oil exports from Kazakhstan to Xinjiang PRC by constructing a pipeline from western Kazakhstan to the Karamay refinery in Xinjiang PRC.
• Complete a gas pipeline through the Kyrgyz Republic and Kazakhstan to Almaty to increase the export of Uzbekistan gas to Bishkek and Almaty.
• Extend the gas pipeline from Almaty to Xinjiang PRC to connect with gas lines in the PRC for the transshipment of Turkmenistan and Uzbekistan gas to eastern PRC, Korea, and Japan.

Impediments to cooperation

Throughout the region, energy policies have discouraged imports while encouraging energy exports. These policies have been justified in the name of national security and aim at building strong domestic energy industries and energy self-sufficiency.

For many decades, both the PRC and the Soviet Union believed that energy sufficiency was so important that dozens of uneconomic mines and deposits were developed at extraordinary costs. Modifying this attitude today in Central Asia is proving difficult, even though the Soviet Union collapsed in 1991 and the PRC abandoned its energy self-sufficiency policies in 1993.

Uzbekistan officials, for example, have openly expressed concerns about increasing regional cooperation in energy and still view the energy industry as vital to national security and national economic development. Like many other former Soviet republics, Uzbekistan remains wary of increased economic dependence on nearby countries, having had no independence in economic planning during 7 decades of Soviet rule.

These concerns regarding increased reliance were revealed at Uzbekistan's May 1997 international exhibition. Uzbekistan government officials stated as declared policy: "to ensure a continuous, adequate, and economic supply of energy to ultimately achieve self-sufficiency in the country's energy industry." The government's recently released "Energy Strategy of the Republic of Uzbekistan Until 2010" favors reducing dependency on foreign supplies of energy and achieving dramatic energy savings through the acquisition of advanced technologies and equipment in heavy industry.

PRC and Xinjiang PRC officials are also concerned about depending on external energy supplies. Although the PRC is considering importing Kyrgyz electricity to ease the energy shortage in southern Xinjiang PRC, the central and local governments are concerned that Kyrgyz electricity supplies would be unreliable because hydropower is very dependent on weather conditions. For this reason, Xinjiang PRC officials have recommended building a coal-fired electrical power plant near the Kyrgyz Republic border to supplement any Kyrgyz electricity supplies.

Energy infrastructure

The most significant impediment to expanding energy trade among the Central Asian republics and Xinjiang PRC is the absence of adequate transportation infrastructure.

As the ADB noted in the case of Kazakhstan: "For export purposes, or for domestic consumption across the vast expanse of the country, large pipelines are required....Significant exports will only occur when the Tengiz field in the Caspian Sea region is joined by pipeline to markets in the industrialized world."⁴ "[Therefore,]...more competitive markets for oil and gas will likely develop only with additional infrastructure development linking markets and suppliers and reducing the influence of the present noncompetitive marketing infrastructure."⁵

Similar situations exist for the energy resources in each of the three countries and the autonomous region studied.

Most roads, railroads, and oil and gas pipelines linking the Central Asian republics to world energy markets pass through the Russian Federation. These were designed to transport products to Russia, rather than among the countries of the region. Approximately 65% of the former Soviet Union's oil and gas pipeline system lies in Russian territory, and all shipments of Central Asian oil and gas by pipeline must transit Russia.

Russian officials charge hard currency for shipment of industrial commodities on rails and roads through their territory to the coast or Europe. Although energy exports generate hard currency, the lack of foreign exchange and the exorbitant tariffs charged by the Russians have hindered Central Asian exports.

Rail links to the PRC require a change of rail platform wheel sets. Although there are railways and roads through Iran to the coast at Bandar-Abbas, hauling oil and gas by road or railroad is much more expensive than pipeline transport.

Inadequate pipeline infrastructure has prevented Kazakhstan from reaping the benefits of having vast amounts of oil in the western part of the country. The problems in establishing export routes to Europe led the country to consider alternative routes, including eastward to Xinjiang PRC. Other concerns, such as reducing economic dependence on the Russian Federation, also must be considered in planning pipeline routes.⁶

The primary objective of Kazakhstan's energy industry during the past several years has been to bring on-line the huge Tengiz oil deposits in northwestern Kazakhstan. Discovered in 1979, Tengiz is estimated to contain 3-10 billion bbl of oil, although it currently produces only 160,000 b/d. The project has been plagued by stalled negotiations over the construction of an export pipeline.

The Tengizchevroil joint venture began transporting crude oil to eastern Europe in 1994, marking the official start of a multibillion-dollar project. In its first years of operation, however, crude exports were limited by disagreements over pipeline routes. The Russian government also restricted transit volumes, claiming that the high sulfur content of Tengiz crude was too corrosive for Russia's pipelines. Financing issues also remain a key stumbling block in pipeline negotiations.

A pipeline project proposed by the Caspian Pipeline Consortium (CPC) would move crude from Tengiz, on the eastern Caspian Sea coast, to Novorossiisk on the Black Sea. The 1,500-km export link is to be built by the CPC, which includes the governments of Kazakhstan, Russia, and Oman, as well as eight international oil companies.

The pipeline will have a peak capacity of 67 million tons/year, or 1.34 million b/d. This is not sufficient to transport the 170 million tons/year (3.4 million b/d) Kazakhstan hopes to produce by 2010. Amoco will finance Kazakhstan's $150 million stake in the CPC as part of a deal permitting the company to transport 3 million tons of oil via the planned CPC line. The line to Novorossiisk is scheduled for completion in 1999.

New road, rail, and pipeline links from Central Asia to the outside world could follow several routes: west through Iran and Turkey (or Georgia and Azerbaijan) to the Black Sea or the Mediterranean; south through Iran to the Persian Gulf or through Afghanistan and Pakistan to the Indian Ocean; or east through the PRC to the Pacific. All routes, however, pass through vast, remote, and at times politically unstable regions.

Three pipeline routes are being considered for exporting Kazakhstan crude from Tengiz. The option of exporting crude via Iran has already been accomplished, although the project has been troubled because the quality of the Kazakh crude does not match the standards required for processing in Iranian facilities. Under a swap arrangement, approximately 1 million tons/year of crude was to be shipped to a processing plant in Iran, and Iran was to forward crude to Kazakhstan's trade partners in the Persian Gulf region.

The U.S. embargo against private-sector involvement in Iran has made any Iranian pipeline solution difficult because Western investors are reluctant to commit large sums of money in a politically unstable area.

Another option involves transporting Tengiz crude to Baku to gain access to the Mediterranean Sea via Turkey or the Black Sea via Russia. Many proposed pipeline routes involve transporting Azeri crude from Baku north to Novorossiisk, west to Batumi or Poti, or south to Midyat. The Baku-Novorossiisk route is based on an existing pipeline that is not functional in segments.

Turkish sources have claimed that an entirely new pipeline would have to be built to export Azeri crude in this direction. Costs of such a pipeline have been estimated at $1.7 billion for a 25 million ton/year line and $2.26 billion for a 40 million ton/year line.

The western route from Baku to Batumi or Poti in Georgia would follow an already existing pipeline corridor but has received little endorsement from the Turkish government because it transits the Black Sea. A Baku-Midyat route to Turkey has been considered by many parties, either through Georgia to the north or Nakhichevan in Azerbaijan to the south.

The route from Baku to Midyat and on to Ceyhan in Turkey was first assessed in 1992 by Turkish authorities and Western oil company officials. The proposed pipeline would pass through southern Azerbaijan and into the Azerbaijan territory of Nakhichevan and then into Turkey. Such a route would be vulnerable to security problems, because the Azeri territory of Nakhichevan is separated from the rest of Azerbaijan by Armenia to the north and Iran on the south. Thus any pipeline would have to pass through either Armenia or Iran or both.

A third option moved forward in May 1997 when Russia, Kazakhstan, and the CPC formally agreed to construct a pipeline from Tengiz to the Russian Black Sea port of Novorossiisk, avoiding war-torn Chechyna. This agreement was reached after 5 years of negotiations between the Omani, Russian, Azeri, and Kazakh governments, which make up the CPC. The new, 1,500-km pipeline will be completed by yearend 1999. Construction will require an investment of $4 billion.

Xinjiang PRC's lack of infrastructure has stymied oil and gas development. As a result, China National Petroleum Corp. also has proposed building a 4,200-km pipeline from the Tarim basin to Sichuan province to support a planned 5 million ton/year refinery in Sichuan (Table 5 [32,533 bytes]). The plan is considered speculative by some state officials until yields from Tarim improve. Projected costs for the pipeline would be $1.2 billion.

The first section of the pipeline was approved in early 1994, starting from Korla and extending 490 km to Shanshan. The second part of the network, from Korla to Turpan, is awaiting approval. The newly completed railroads linking Urumqi to Lanzhou in Gansu province give credibility to this pipeline proposal. Analysts suggest that the massive project may be a profitable alternative if proven reserves in the Tarim basin reach at least 650 million tons.

Construction of Xinjiang PRC's first oil product pipeline was finished in the Karamay oil field in mid-1996. The 291-km pipeline extends from Karamay in northern Xinjiang PRC to the Wangjiagou oil depot in Urumqi. The trunkline reportedly moves 1.3 million tons of oil products from the Karamay refineries to the capital city.⁷ At a cost of 260 million yuan, the pipeline was built in about 12 months. Today, it represents the PRC's second-longest product pipeline after the 1,080-km, 159-mm pipe from Golmud Refinery in Qinghai to Lhasa, Tibet.

Improvements in infrastructure will be necessary to facilitate increased economic cooperation and foreign investment in the region. Most important, the landlocked countries of Central Asia need transportation links to other countries because oil and gas pipelines still transit Russia and roads and rail links to other points lack the capacity to transport efficiently large quantities of energy to regional and international markets.

Policies and politics

The biggest concerns to companies and international lending agencies considering investing in Central Asia are unstable tax, currency, investment, and environmental policies that jeopardize these investments.

Investors are commonly concerned about unclear or changing investment and tax policies, particularly as these relate to joint venture contract terms and conditions. Investors in oil and gas are particularly worried about securing reliable export options.

Potential investors in the hydrocarbon sector have concerns about the rise of nationalistic and separatist tendencies that may destabilize parts of Central Asia and even threaten ownership rights and regional political stability. The extended civil disturbance in Tajikistan, continued armed conflict in Afghanistan, continuing frictions in Armenia and Azerbaijan, conflict in Chechnya, and Kurdish separatist movements in Turkey constitute a permanent backdrop to development in the area and increase the risks associated with investing in the energy sector.

Costs

Oil and gas projects involving regional cooperation in Central Asia would be very expensive. Constructing or rehabilitating pipelines and constructing tank farms are expensive projects that need to be weighed carefully against the benefits.

For projects that involve exported commodities, long-term contracts between countries may be required to ensure suitable prices and rates of return to foreign companies. Financing these expensive projects would require a combination of private and public investments.

Models of cooperation

Cooperation in energy between the Central Asian countries and Europe may be guided in part by the European Energy Charter treaty, signed and ratified by Uzbekistan, Kazakhstan, and the Kyrgyz Republic. (Tajikistan has signed the treaty and is expected to ratify it soon; Turkmenistan also has signed the pact but has delayed ratifying it.)

Although it is difficult to transfer experience from one region to another, two fundamental ideas adopted by the Energy Charter can be considered critical for Central Asia.

One is to promote a consensus in all Central Asian countries on the central objectives of energy policy, such as conservation, diversification of supplies, integration of networks, environmental conservation, and even nuclear safety.

The second is to create political, legal and, if necessary, financial frameworks to rationalize the medium- and long-term supply and consumption of energy in Central Asia.

Public-sector objectives

The two most important public sector objectives in energy for the three former Soviet republics are (1) to overcome periodic energy shortages and dependencies on unreliable energy sources, and (2) to develop new international markets for their own energy that will provide a stable source of foreign exchange.

For Xinjiang PRC, the most important single energy objective is to obtain reliable long-term supplies to sustain its economic growth.

One means of achieving these objectives is to boost regional cooperation in oil and gas development and trade. Regional cooperation can provide benefits, including supplementing hydrocarbon supplies to isolated areas; providing more economic and efficient supplies than could be acquired from more costly, domestic sources; and providing a major boost to the region's economic growth and prosperity.

Cooperation in the oil and gas fields already occurs within Central Asia, although unevenly across the region. Uzbekistan exports gas to Kazakhstan and the Kyrgyz Republic, while Kazakhstan recently began transporting small amounts of crude oil by rail to Xinjiang PRC. There are other opportunities for increasing trade and cooperation among the countries of the region: for example, for Uzbekistan to export gas to and through the PRC.

The major impediment to regional cooperation and achieving these objectives is the absence of infrastructure for transporting energy, although specific characteristics of this problem vary from country to country. Other problems identified in the ADB study-including the insolvency of purchasers in the CIS, questionable energy policies, and internal pricing-although important, are more manageable.

For Kazakhstan, the problem is the lack of an infrastructure to transport oil to industrial sites within the country, and the lack of a means to transport oil to new markets that do not involve the mandatory shipment through Russian pipelines. For Uzbekistan (and Turkmenistan, although it was not specifically addressed in the study), the problem is the inability to transport gas to new markets and to reduce the need to ship gas through Russian pipelines. For Xinjiang PRC, the problem is the lack of an infrastructure to import the energy resources it requires.

Overcoming these infrastructure constraints is an important priority for the governments of the Central Asian countries and Xinjiang PRC and will be a focus of activity in the months and years ahead.

Acknowledgment

This article is based on a larger report prepared for the ADB under contract number COCS/97-115, TA No. 5707-REG, Regional Economic Cooperation in Central Asia, by Washington, D.C.-based Development Alternatives Inc. (DAI) and its subcontractors-Boston Institute for Developing Economies Ltd. (BIDE) and MAS International Inc. The international consultant team was led by Dr. John H. Magill of Development Alternatives Inc. Magill and DAI Inc. are gratefully acknowledged for their excellent and comprehensive preparation and editing of the larger report. Dr. David J. Green, senior economist with the ADB in Manila, is gratefully acknowledged for his diligence in supervising the overall 1997-98 study and conceiving of the project ideas. The conclusions and findings in this paper are those of the authors and should not be considered to represent the official views of the respective governments, the ADB, or Development Alternatives Inc.

References

1. "BP Statistical Review of World Energy," July 1997.
2. International Herald Tribune, Aug. 6, 1997.
3. Information provided by Uzbekneftegas, Tashkent, July 1997.
4. Asian Development Bank, Economic Report on Kazakhstan, unpublished draft, Manila, 1997, p. 16.
5. Asian Development Bank, "Kazakhstan: Country Operational Strategy," p. 12.
6. Dorian, J.P., "Oil and Gas in Russia and the Former Soviet Union," Management Report, Financial Times Energy Publishing, 1997, Chapt. 4.
7. China OGP, Beijing, Jan. 1, 1996.

The Author

James P. Dorian, PhD, is an energy and resources economist, State of Hawaii Government, Honolulu. While on leave of absence, Dorian served as the energy team leader of a 1997-98 Asian Development Bank analysis of regional economic cooperation prospects in Central Asia and China.

Tojiev Utkur Abbasovich is an energy planner, Institute of Power Engineering and Automation, Uzbek Academy of Sciences, Tashkent.

Mikhail S. Tonkopy, is head of the Department of Environmental and Resource Economics, Kazakh State Academy of Management, Almaty.

Obozov Alaibek Jumabekovich is General Director, Kyun State Project, Kyrgyz Republic, Bishkek.

Qiu Daxiong, deceased, was director, Institute for Techno-Economic and Energy System Analysis, Tsinghua University, Beijing.

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