Analysis: Eye on Uzbek energy

By JOHN C.K. DALY, UPI International Correspondent   |  Dec. 27, 2007 at 3:41 PM
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WASHINGTON, Dec. 27 (UPI) -- Since the 1991 collapse of Soviet communism, the 15 newly independent republics have been scrambling both to assert their newfound independence and assert their place in the post-communist world.

Yet legacies remain. The Russian Federation under President Vladimir Putin has consistently attempted to reassert Moscow's control over the post-Soviet sphere in countries of the former Soviet Union, a policy nowhere more evident than in energy exports from the newly independent 14 nations to emerge from the debris of the Soviet Union.

The Soviet-era network of pipelines is still dominated by the Russian-controlled government pipeline monopoly Transneft. The Kremlin, having learned well its post-Soviet capitalist lessons of "buy cheap, sell dear," has tormented both producers and consumers alike.

Now a challenge has emerged from Central Asia in the form of a post-Soviet nationalist regime to Transneft's "take it or leave it" policy, with potentially enormous implications for Gazprom's 15-year monopoly.

The gauntlet has been thrown down by Uzbekistan, and investment houses around the world ought to focus their attention there most carefully, as the country for the last several years has endured an avalanche of negative publicity following the 2005 Andijan tragedy and most recently with its Dec. 23 presidential elections. The stakes are enormous in the tussle between an authoritarian nationalist patriot and a Russian governmental monopoly determined to reassert its authority over regions that it formerly dominated for three generations.

At stake is the energy security of not only the European Union but Uzbekistan's regional neighbors, along with those to the south (India) and to the east as well (China). As Uzbek President Islam Karimov attempts to negotiate more equitable terms for the export of his country's natural resources, the issue remains mired at present in many unrelated issues that Western democracies insist take precedence over regional and national concerns. Ironically, Gazprom's hardball "pipeline politics" have given Tashkent a template for its own negotiations.

The reality is that Gazprom cannot honor its existing contracts to supply its Western neighbors with natural gas without input from Central Asia, most notably Turkmenistan. Because of Uzbekistan's nationalist policies, its gas reserves have remained largely untapped up to now.

Gazprom, a state monopoly that first began making inroads into the Western European market in the 1980s despite the opposition of the Reagan administration, has embraced post-Soviet capitalism with a vengeance, stiffing its European customers while using its export pipeline monopoly to force its Central Asian producers to accept export prices a fraction of what is charged to Western consumers, along with exorbitant transit rates.

Kazakhstan and Turkmenistan have for the present accepted the arrangements and Azerbaijan was in the same league until the opening of the $3.2 billion, 1,092 million barrel per day Baku-Tbilisi-Ceyhan pipeline, which allowed Azerbaijan to veer its energy exports southwards to a Western-dominated route.

Uzbekistan has adopted a different strategy, with enormous implications for its neighbors. On Dec. 21, Gazprom issued a brief statement that Gazprom chief Alexei Miller discussed gas cooperation prospects with Karimov and Uzbek Finance Minister Rustam Azimov, but that no final agreement was reached. Last month it was reported that Uzbekneftegaz plans to negotiate with Gazprom a price increase for Uzbek natural gas from its current rate of $100 per 1,000 cubic meters in 2008, changing its pricing mechanism from regional to formula-calculated international prices.

Tashkent is in the driver's seat on the proposed arrangements, as Uzbek agreements are extremely important for Gazprom, since it needs annually an additional 50 billion cubic meters of Central Asian natural gas for transshipment to Ukraine to cover Kiev's 2008 needs, which Gazprom is unable to fulfill if it is to meet its domestic and European consumer demands. Unofficial data suggest that Karimov proposed that Gazprom purchase Uzbek gas at $180 per 1,000 cu m, a rate that would severely cut into Gazprom's profit margin and a rate that the energy giant regards as extortionate. Even worse, Tashkent is proposing an increase in transit rate fees from $1.10 to $1.80 per 1,000 cu m.

The pain of Uzbekistan's newfound energy clout will not be limited to Russia. On Dec. 19, Tajikgaz General Director Fathiddin Muhsiddinov said, "Uztransgaz (Uzbekistan) will up gas price for Tajikistan to $180 as of Jan. 1, 2008. ... The price Uztransgaz insists on is too much. It may foment a rise of inflation because prices will nearly double."

Neighboring Kyrgyzstan is also complaining. Kyrgyz Prime Minister Igor Chudinov told journalists that at previous discussions the Kyrgyz government proposed a rate of $130 for 1,000 cu m of Uzbek gas but Tashkent plans on asking a higher price for its gas over its 2007 rate of $100. A final price has yet to be determined.

Kazakhstan is also feeling the squeeze of Uzbek higher prices; in Astana, Minister for Energy and Mineral Resources Sauat Mynbayev said: "A process of drafting of the final text of the agreement is under way in Tashkent. ... There were serious risks regarding prices for natural gas until recently because the Uzbek side demanded $185 for 1,000 cu m of gas."

While controversy swirls around Eurasia's increasingly voracious need for Central Asian energy exports, thoughtful analysts are increasingly confronted with the question -- is an "authoritarian" ruler insisting that his government retain the maximum profit for his country's energy exports disreputable or in fact a patriot, and should the profits flow to Moscow or Tashkent? Lest the Kremlin squeak, it would well behoove Moscow to remember who has provided the template for retaining energy profits. Western capitals should pay close attention.

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