Rovshan Ibrahimov: The current situation and future of the oil and gas sector in Uzbekistan In an article written for cabar.asia, Rovshan Ibrahimov, an expert in the field of energy diplomacy, analyzes the fuel and energy complex of Uzbekistan and Uzbek gas export markets. Uzbekistan, as well as two other former Soviet republics located in Central Asia – Kazakhstan and Turkmenistan, has rich hydrocarbon resources. As in the case with its neighbors, this is a determining factor in the development of the country. The presence of oil and gas deposits is a panacea for any country for resolving economic problems and even for achieving its political goals. Uzbekistan is no exception. After gaining independence in 1991, the country began to actively look for ways to increase production of their natural resources and for the markets to sell them. Natural gas, along with cotton, is a brand of the country. Oil plays a lesser role. According to the confirmed data of official Tashkent, potential oil resources in the country amount to more than 5.3 billion tonnes, gas condensate – 480 million tonnes, natural gas – about 5 billion cubic meters. Oil and natural gas are produced in the country in five oil and gas fields: “Ustyurt“, “Bukhara-Khivi“, “Southwestern Hissar“, “Surkhandarya” and “Ferghana“. Over the entire period of exploration works in Uzbekistan, there have been discovered 246 oil and gas fields. Consumption of energy resources is also high in Uzbekistan. The Uzbek economy is quite energy-intensive; the country is ranked the 10th in the consumption of gas in the world. In the oil and gas industry of Uzbekistan constitute about 16% of GDP, and its share in the revenue part of the budget is more than 20%. HISTORY OF UZBEK OIL AND GAS INDUSTRY The first wells on the territory of Uzbekistan were drilled as early as in 1880 in the Ferghana region. It is known that oil had been already extracted and processed into kerosene in the Shorsu area near Kokand in 1885. The kerosene was then brought to large cities such as Tashkent, Andijan and Kokand on carts and camels. The residual oil was used as fuel on the railroad “Tashkent – Kokand.” At the beginning of the 20th century, there was discovered a deposit “Chimion” in Uzbekistan, and the first oil-extracting enterprise in the territory of Turkestan region was created on “Chimion”. The construction of an oil refinery plant was completed, too. Subsequently, Nobel Brothers bought the field and the plant. Before the revolution, oil production was also started in other fields. An important event was the commissioning of the pipeline “Chimion – Vannovskaya” in 1908. Revolution and civil war in Russia suspended the development of crude oil in the region. Rovshan Ibrahimov: The current situation and future of the oil and gas sector in Uzbekistan After the establishment of Soviet power, industries were nationalized, and a public trust “Uzbekneft” was established. In 1925, “Uzbekneft” turned for help to the Azerbaijani oil industry association “Azneft“, and oil specialists from Baku came to Uzbekistan. In the following years, new deposits had been discovered and developed. Oil production began to increase in Uzbekistan. Search for promising deposits took place in the Bukhara- Khiva region and Surkhandarya. In the new regions, there were opened deposits of “Nefteabad“, “Changyrtash“, “Kokaidy“, “Lyalmikar“, gas deposits of “Karaiz“, “South Alamyshik“, “Uchkyzyl“, “Kakaydy“. Of great importance in terms of approval of oil and gas industry in Uzbekistan was the discovery of “Haudag” deposit in 1934. In 1944, there was commissioned the first gas pipeline “Oilfield Andijan – city of Andijan“, thanks to which there started the gasification of settlements in Uzbekistan. In 1953, in the Bukhara region, there was discovered the first natural gas field – “Setalantepe“. This event played a major role in the future development of Uzbekistan, in general, and began the formation of the gas industry in Uzbekistan, in particular. In subsequent years, there were discovered other gas fields here – “Tashkuduk“, “Ki-Merek“, “Yangikazgan“, “Uchkyr.” Thus, there was formed the Bukhara-Khiva oil and gas region. An important event occurred in 1956, when an oil and gas field of “Gazly” was discovered in Romitan district of Bukhara-Khiva oil and gas region of Uzbekistan, with reserves of 500 billion cubic meters. Thus, Uzbekistan turned into a producer of natural gas. Natural gas from this field is delivered to industrial facilities of the Urals and the European part of the Soviet Union. To transport the gas, “Bukhara – Ural” pipeline was built. In subsequent years, new oil and gas fields were discovered in the republic. In 1985, there was discovered a large oil and gas field of “Kokdumalak“, located on the border with Turkmenistan. This field is very important for the gas sector of Uzbekistan. Up to 70% of oil reserves in the country are in this deposit. After gaining independence, Uzbekistan and Turkmenistan signed an agreement in 1997, under which a part of the oil produced at the field had to be delivered free to the Seidi oil refinery in Turkmenistan up until 2012. The extractable reserves are estimated at 54.3 million tonnes of oil, 67.4 million tonnes of condensate and 128 billion cubic meters of natural gas. In general, the oil fields were explored in the autonomous republic of Karakalpakstan, Kashkadarya, Bukhara, Surkhandarya, Namangan, Andijan and Ferghana regions. The bulk of oil reserves are concentrated in the Kashkadarya region. An important event for the fuel and energy complex of Uzbekistan was the beginning of the operation of Mubarek Gas Processing Plant in Kashkadarya region in 1972, which, at that time, was one of the largest in the world. The commissioning of this enterprise was the beginning of gas processing in Uzbekistan. Another major gas processing plant was built in Shurtan in 1980. Development of the oil and gas sector of Uzbekistan after independence Rovshan Ibrahimov: The current situation and future of the oil and gas sector in Uzbekistan An interesting development of the energy sector was observed after Uzbekistan gained independence. Unlike other post-Soviet states of Central Asia, whose economies are based on oil and gas extraction, Uzbekistan managed to avoid recession rates of oil and gas extraction. Moreover, during the period from 1991 to 1998, production of oil and condensate increased from 2.8 million tonnes to the peak level of 8.2 million in 1998. The main production of oil and gas condensate was ensured by the exploitation of “Kokdumalak” deposit. However, the increase in production was achieved at great cost. Improper use has led to the depletion of already limited reserves. In addition, it is worth noting that oil production in the country is negligible. After that, there was a recession whose culmination was in 2001. At that time, the average production was about 3.5 million tonnes of oil and condensate per year, including the gas condensate. However, in subsequent years, again in contrast to other former republics of the Soviet Union, there was a decline in oil and gas production in Uzbekistan. And this trend is irreversible. Oil and natural gas reserves are getting depleted. In 2012, there was produced 1.57 million tonnes of oil, the rest was the condensate. In 2013, there was produced even less – only 2.9 million tonnes. At the same time, oil production continues to decline. Total reserves of proven oil reserves in Uzbekistan is about 530 million tonnes. However, even these relatively modest reserves are located in the depths of around 100 oil, gas and gas condensate fields. This complicates the process of their extraction. According to the Uzbek authorities, oil reserves will suffice for the next 20 years. The produced oil is not even enough to meet the needs of the country. Uzbekistan is only half self-sufficient in oil, despite the fact that having a relatively large population – about 30 million people, the annual consumption of oil in the country is very modest, and in 2013, it was only 3.9 million tonnes. The difference between the produced and consumed oil was imported. At the same time, imports of oil are growing every year. A somewhat different picture can be seen in the sector of natural gas. In 2014, Uzbekistan was in 15th place in the world in production of natural gas, having produced approximately 57.3 billion cubic meters of gas. There is a drop in the production of natural gas, too. For example, gas production in 2012 amounted to about 63 billion cubic meters. In addition, there were produced 273.6 ths. tonnes of liquefied gas. In 2013, the country produced 55.2 billion cubic meters of natural gas. Gas is mainly produced in the areas of “Gazli” and “Kashli“. However, the figures from different sources may differ because official statistics on oil, gas condensate and natural gas in Uzbekistan are not published. It is estimated that reserves of natural gas in Uzbekistan will suffice for the next 25-30 years. Uzbekistan is trying to increase the production of oil and gas, or at least to prevent its decline. One solution to this problem is to invite foreign energy companies that have greater financial resources and advanced technology in the exploration and development. This process has continued since the beginning of the 2000s. Rovshan Ibrahimov: The current situation and future of the oil and gas sector in Uzbekistan To this end, the legislation of the republic has been improved, significant tax benefits for foreign investors have been provided. In December 2001, there was adopted the Law “On Production Sharing Agreements“; in 2002, there was adopted the new version of the Law “On Mineral Resources“. As a result, a number of foreign companies such as Russia’s Gazprom, Lukoil, British- Canadian company Tethys Petroleum (in 2014, the company left Uzbekistan), China’s CNPC were involved to participate in the projects in the country.