Uzbekistan steps up efforts to attract foreign investment in petroleum sector

• Uzbekistan's Major Oil and Gas Fields and Infrastructure[112,656 bytes]
• Uzbekistan: Summary of High and Low Scenarios [152,019, bytes]
• Uzbekistan's Supply, Demand, and Net Exports [48,220 bytes]
• Uzbekistan Oil Status [85,875 bytes]
• Uzbekistan PSA's On Offer [165,007 bytes]
• Uzbekistan Natural Gas [121,060 bytes]

Uzbekistan is stepping up efforts to attract foreign oil and gas investment. The heavily populated central Asian republic in the former Soviet Union (FSU) continues to advance a strong program of refinery modernization without direct foreign equity participation (see related story, p. 20).

That approach is in keeping with the government's preference for loan-financed projects under which foreign companies perform services on a contractual basis.

The government hopes to have sufficient capacity in place to allow net exports of refined products after the turn of the century.

In addition to its refinery modernization program, Uzbekistan plans to increase its production of both crude oil and natural gas by about 25% by 2000. Much of this added production will be earmarked for domestic consumption, and the original scheme called for much of the investment in its upstream sector to also come from domestic sources and foreign loans.

But a recently heightened emphasis on exploration and development has spurred the government to offer participation in Uzbekistan's upstream sector to foreign companies.

The idea is for Uzbekistan to eventually become a modest net exporter of oil and gas.

Uzbekistan state firm Uzbek- neftegaz late last month offered six oil and gas exploration and development license areas near the Aral Sea to foreign firms.

Whether that effort leads to a greater-than-expected surge in oil and gas production-and thus to an increase in exports of both commodities-may be more problematic than merely gauging future discovery, production, and demand levels.

Uzbekistan also faces formidable competition on energy exports from its central Asian neighbors Azerbaijan, Kazakhstan, and Turkmenistan. And with lack of direct access to the Caspian Sea, this landlocked nation's oil and gas exports must move through more transit countries to reach foreign markets than do its neighbors'.

Uzbek potential

The pressure has not been as great on Uzbekistan to open its doors to foreign E&D investment as it has for neighbors Azerbaijan and Kazakhstan.

To some degree, that is the result of Uzbekistan's status as largely self-sufficient in energy. But, to a greater degree, it is because the hydrocarbon potential of this country is never described in the same breathless tones as is that of Azerbaijan and Kazakhstan.

Still, Uzbekistan contains significant natural gas reserves and production, along with some oil and condensate production, and a growing downstream sector.

Uzbekistan's output of natural gas during January-May 1998 rose to 23.94 billion cu m (bcm) from 21.92 bcm in the same period last year, reported Uzbekneftegas. Comparing the same periods, output increases were also logged for: crude and condensate, to 3.53 million metric tons from 3.3 million tons; gasoline, to 588,200 tons from 552,300 tons; and diesel, to 838,000 tons from 824,100 tons. Fuel oil production in the first 5 months fell to 803,300 tons from 857,300 tons a year ago.

It also has an oil and gas transportation infrastructure, as well as downstream facilities (see map, p. 18).

The country is dotted with many hydrocarbon prospects; many seismic leads have been identified in the Aral Sea license areas (see map, p. 21).

What remains uncertain is the degree to which Uzbekistan can evolve into a significant energy exporter-especially of natural gas.

The International Energy Agency (IEA), in a study on the Caspian Sea region's oil and gas supply potential, said that the official government goal of 12 million metric tons/year of oil production by 2010 and 14 million tons/year by 2020 appears feasible, as does the goal of 63 bcm of gas production by 2010. For a low case scenario, IEA trims those forecasts by 10% each for 2010 and 2020, "reflecting technical and other delays rather than demand constraints for the small amounts available for export."

The agency contends that Uzbekistan's limited capability for expanded oil and gas exports will mean that it won't enjoy the same spurt of economic growth driven by energy exports that its neighbors will.

IEA reckons that Uzbek oil exports will total only 2 million tons, in the high case scenario, in both 2010 and 2020.

"Gas exports," the agency noted, "would be the small difference between domestic production and consumption and could vary strongly over time, depending more on economic growth rates than on gas production.

"In the high case, (gas exports) are expected to drop to zero and to become negative by 2020. In the low case, 5 bcm would be exported in 2010 and 6 bcm in 2020."

IEA predicts that Uzbekistan's energy sector will grow less than will its economy, pegged to grow at a rate of 3-4.5% during 2000-20: "In the high and low cases, energy output is expected to grow 2%/year and 1.8%/year, respectively.

"These scenarios assume a considerable reduction of energy intensity in the economy. Uzbekistan has liberalized its energy prices more thoroughly than Turkmenistan has, although not as much as Azerbaijan or Kazakhstan."

Uzbek petroleum overview

IEA notes that Uzbekistan is the only FSU country that has not experienced a drop in oil and gas production following the dissolution of the U.S.S.R., and, since 1994, has been almost self-sufficient in energy (on a net basis).

Net energy exports in 1996 totaled 2.5 million tons of oil equivalent (mtoe), or about 5% of domestic output-almost all of it natural gas.

In 1996, Uzbekistan produced about 49 mtoe of primary energy, up 25% from 1991. That breaks out as about 77% natural gas and 15% oil, along with a little coal and hydropower (see chart, p. 23). Most of this 5-year gain came in crude oil production, which almost tripled; gas production recorded modest gains. Kokdumalak oil and gas field accounted for most of the increase in oil output.

With a recent decline in Turkmenistan gas production, Uzbekistan is now the biggest natural gas producer in central Asia. However, Uzbek gas production appears to have leveled out in late 1996 and early 1997, IEA notes.

Overall, the government has identified 32 oil and gas fields to be developed, another 18 to be rehabilitated, and 9 major prospects to be explored.

According to the IEA study, there are five hydrocarbon-prone regions in Uzbekistan: Ust-Yurt, Bukhara-Kiva, southwestern Gissar, Surkhandarya, and Fergana. More than 150 oil and/or gas fields have been discovered, and about 60 currently are producing. The major fields are Gazli, Shurtan, Kokdumalak, and Mingbulak. Producing hor- izons range from a depth of 800 m in Bukhara-Kiva to 6,000 m in the central Fergana depression.

Oil potential

Uzbekneftegaz estimates the country's oil reserves at 3.9 billion bbl, said IEA, "while most outside sources give significantly lower figures.

"A 1997 U.S. government report put proven oil reserves at 27 million metric tons (200 million bbl), with another 135 million tons possible. Another source estimates proven and possible reserves at 513 million tons for crude oil and 162-216 million tons for condensate.

"One reason for the discrepancies is that resource classifications used in Uzbekistan and other former Soviet republics are not easily comparable with those used outside the FSU. Uzbek officials may include some potential reserves, classifying as proven some reservoirs that have not been delineated by drilling, as well as reservoirs with untested occurrences encountered during drilling."

Gas potential

IEA notes that estimates of Uzbekistan's proven natural gas reserves range from 1.6 trillion cu m (tcm) to 2.1 tcm, with additional possible reserves of about 1 tcm.

The government estimates gas reserves at 2.007 tcm proven and 5.439 tcm possible.

Uzbekistan increased proven reserves by 30 bcm in 1994 and 160 bcm in 1995, with recent additions to reserves coming from continuing appraisal of:

• Basrakelmesh Zapadniy and Urga fields in the Barsa-Kelmesh depression in the western region.
• Berdykuduk and Shakarbulak fields in the Chardzhou structural terrace.
• Chegara and Istmok fields in the Gissar foothills.
• Kalandar, Shoda, and Suzma Severniy fields; new oil and gas fields at Mullakhol and Uchburgan; and a new deep pool at Kokdumalak, all in the Amy Darya basin.

E&D license round

Potential investors in Uzbekistan E&D have a choice of projects arrangements: as joint venture partners with Uzbekneftegas, as partners in production-sharing agreements, or as outright license holders.

The government requires potential bidders to register interest in the blocks by Sept. 1, by providing company details and by purchasing data packages from Jebco Seismic Ltd., London and Houston, or from Uzbekneftegaz.

Adrian Heafford, senior geologist as Jebco, said Uzbekneftegaz also wants to get some idea of what potential investors want out of negotiations. Although the country has offered licenses before, there has been little interest shown.

'Uzbekneftegaz wants an exercise in listening to what western oil companies would like," said Heafford, "rather than saying: 'Take it or leave it.'"

By Oct. 1, the state firm intends to have analyzed the responses from potential bidders and will announce further information on terms and conditions based on what foreign companies have said.

"From this point," said Heafford, "there could be anything from bilateral discussions to a full licensing round, depending on the amount of interest shown."

The potential investors would then be invited to submit more detailed proposals on Nov. 1, after which Uzbek- neftegaz intends to take about 1 month to announce license awards.

In May, the Uzbek government enacted new petroleum laws in which the key clause offers protection against subsequent legislation. Heafford said this is designed to secure current fiscal terms that are relatively attractive.

Jebco said the rates of return for foreign investors are expected to be about 30% for gas, while capital investment is expected to be recouped within 3-4 years. Among terms on offer are tax holidays and tax reductions in projects with more than 30% foreign funding.

What's offered

The six tracts on offer cover a total 51,700 sq km around the southern and western reaches of the Aral Sea. Four of the blocks include discoveries, mainly containing gas. All six contain gas pipelines linked to the Gazprom distribution grid.

The Kuanysh block covers 4,200 sq km and contains Kuanysh gas/condensate field, and 12 exploration prospects have been identified.

Kuanysh field has estimated reserves of 2 bcm of gas and 800,000 tons of condensate. Fourteen wells have been drilled, and the field has been partly developed and is shut in awaiting tie-in to the gas grid.

A total of 21 wells have been drilled on the Kuanysh block, for which Uzbekneftegaz estimates hydrocarbons in place totaling 250 million tons of oil, 325 bcm of gas, and 15 million tons of condensate.

The Urga block covers 2,500 sq km and contains Urga field, which has estimated reserves of 47 bcm of gas and 9 million tons of condensate, plus 11 identified exploration prospects.

Urga field has been developed with 12 wells and has provided a small amount of gas to meet local needs. Uzbekneftegaz pegs total hydrocarbons in place on the block at 155 million tons of oil, 265 bcm of gas, and 11 million tons of condensate.

Akchalak block covers 2,000 sq km and contains four gas/condensate fields that have been tested and developed but subsequently shut in. Sixty-eight wells have been drilled so far, and six further exploration prospects have been identified.

Uzbekneftegaz estimates total Akchalak proven reserves at 12 bcm of gas and 1.2 million tons of condensate, but anticipates hydrocarbons in place could total 125 million tons of oil, 125 bcm of gas, and 7 million tons of condensate.

The Agyin block covers 10,000 sq km and contains eight exploration prospects, but seven wells drilled to date have not made discoveries. Uzbekneftegaz postulates hydrocarbons in place could amount to 600 million tons of oil, 200 bcm of gas, and 25 million tons of condensate.

The Shakhpakhty block covers 5,000 sq km and includes the producing Shakhpakhty gas field, which has original reserves of 47.6 billion cu m of gas, of which 12 billion cu m remain.

Thirty-two wells have been drilled in Shakhpakhty field, and seven exploration prospects have been identified. Uzbekneftegaz expects the block's hydrocarbons in place will total 300 million tons of oil and 270 bcm of gas.

The Aral Sea block covers 32,000 sq km, in which only one stratigraphic test has been drilled, although 1,000 line km of 2D seismic data haVE been acquired over the southeastern corner to identify nine exploration prospects.

Uzbekneftegaz forecasts hydrocarbons in place on the Aral Sea block could amount to 100 million tons of oil, 455 bcm of gas, and 40 million tons of condensate.

Jebco says that the blocks are structurally on trend with large fields in Kazakhstan, and that few wells have penetrated the Paleozoic, which is an attractive exploration target. Most of the region's discovered field are Jurassic reservoirs.

Infrastructure

In addition to efforts in modernizing its refining infrastructure, Uzbekistan is taking other steps to reduce its reliance on imported refined products, especially diesel.

The government has launched a program, backed by a joint venture of western investors, to convert 2,000 vehicles (or about 40% of those in the farming and mining sectors) to compressed natural gas. The goal was to back out 2 billion l. of liquid fuels consumed during the next 5 years and to cut emissions of carbon monoxide by 60-70% and nitrogen oxides by 15-20%.

"The program reportedly ran into difficulties due to the western investors' inability to raise the required capital and to the (government controlled) price levels of competing fuels, which are rendering CNG uncompetitive," IEA said.

Uzbekistan's limited volume of refined product exports moves mainly by rail and road to, respectively, neighboring countries and via the Black Sea for further shipment to Europe, notes IEA: "Beyond 2010, further increases in Uzbek oil exports will be contingent on the development of new export pipeline capacity."

Uzbekistan has about 9,500 km of oil pipelines, none of which is available for crude oil exports. A crude pipeline from Omsk, Russia, to Chardzhou, Turkmenistan, could be reversed to allow exports to or via Russia. A refined products pipeline from Chinaz, Uzbekistan, to Chimkent, Kazakhstan, is currently idle.

"Volumes of Uzbek oil available for exports are unlikely to be sufficient to support the construction of a dedicated pipeline to markets beyond the FSU," IEA said. "At least in the medium term, piggybacking onto projects to export oil from Kazakhstan and Turkmenistan may provide a reasonably cost-effective export option."

On the gas infrastructure side, most Uzbek gas requires extensive processing for its high sulfur content. Most gas is processed at the Mubarek gas processing plant, where capacity recently jumped to 35 bcm/year following an expansion completed in December 1996.

Uzbekistan also has a well-developed system of gas pipelines, totaling 12,500 km and including 250 gas distribution stations and 17 compressor stations, operated by Uzbekneftegaz subsidiary Uztransgaz. The state gas company also owns and operates four underground gas storage sites with a combined capacity of about 5.5 bcm.

Uzbekistan's gas exports were almost halved during 1991-96 to 5.2 bcm, because demand fell in neighboring countries and some of those were unable to pay for gas deliveries with hard currency.

While Uzbekistan is likely to have a healthy exportable surplus of gas-about 7 bcm/year-after 2000, IEA contends that more export pipeline capacity will be required to expand exports beyond that level. Again, the potential exportable volumes probably won't be big enough to warrant a dedicated pipeline, so the most cost-effective solution may be to piggyback onto pipelines from Turkmenistan to markets in Turkey, Pakistan, India, or western China.

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