Analysis: Uzbeks, S. Korea eye natural gas

By JOHN C.K. DALY, UPI International Correspondent   |  March 7, 2008 at 1:38 PM
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WASHINGTON, March 7 (UPI) -- While Russia's Gazprom dominates Central Asian natural gas exports through its pipeline monopoly, the leaders of the "stans" are unhappy about the arrangement, as Gazprom buys cheap and sells dear to European consumers. Seeking to break the deadlock, Uzbekistan has been investigating alternatives, and on Feb. 25 state-owned Uzbekneftegaz signed an agreement with a South Korean energy consortium led by state-run Korea Gas Corp. to develop a gas field in western Uzbekistan and construct a gas-chemical industrial complex.

Western Uzbekistan's Surgil gas field is estimated to have reserves of nearly 96 million tons of liquefied natural gas, an amount equivalent to nearly four years of South Korea's LNG consumption. The deal is generous to the Korean consortium. Joint venture partners Korean Gas Corp. and Lotte Daesan Petrochemical Corp. will each hold a 17.5 percent stake while LG Corp., STX Energy and SK Gas will each hold 5 percent, with Uzbekneftegaz holding the remaining 50 percent.

The deal, signed during a visit to Seoul by Uzbek President Islam Karimov, represents a useful marriage of convenience, as Uzbekistan is as eager to export energy as South Korea is to diversify its hydrocarbon imports. Rising energy prices have contributed to keeping South Korea's trade balance in deficit for the third consecutive month in February, which saw the country's exports total $17.9 billion; imports totaled $21.8 billion.

South Korean President Lee Myung-bak, sworn in last month after having scored a record victory margin in December's presidential election with his "Economy, First!" pledge, has moved swiftly to implement his "energy diplomacy."

On Feb. 26 Lee met not only with Karimov, but Mongolian President Nambaryn Enkhbayar and Cambodian Prime Minister Hun Sen, all of who came to Seoul to attend Lee's inauguration ceremony. During his discussions with Enkhbayar, Lee stressed the need for closer bilateral cooperation in the resource and energy sectors, while Enkhbayar requested closer South Korean-Mongolian cooperation in the high-technology fields of bioengineering, IT and climate change. In his meeting with Sen, Lee emphasized deepening bilateral ties and asked for greater support of South Korean firms wishing to enter Cambodia's resource and construction markets.

It is Uzbekistan, however, that represents the potential crown jewel of Lee's "energy diplomacy." In 2006 Uzbek natural gas production was estimated at 62.5 billion cubic meters, of which 48.4 billion cubic meters was consumed domestically and 12.5 billion cubic meters exported, more than half going to Russia and the remainder to neighboring Central Asian states.

It is Uzbekistan's largely untapped natural gas reserves that are the real prize, however, as in 2006 the country's proven reserves stood at 1.798 trillion cubic meters. Uzbekistan is currently producing natural gas from 52 fields; with 12 major deposits it is the third-largest natural gas producer in the former Soviet Union, exceeded only by Russia and Turkmenistan, and is now one of the world's Top 15 natural gas producers. Since becoming independent in 1991, Uzbekistan has increased its natural gas production by nearly 40 percent, from 42 billion cubic meters annually to 62.5 billion cubic meters in 2006.

The recent South Korean-Uzbek Surgil gas field joint venture follows on earlier arrangements with foreign producers, including a 2006 35-year production-sharing agreement with an Asian consortium including Malaysia's Petronas, China's CNPC, South Korea's KNOC and Lukoil to explore Uzbekistan's sector of the Aral Sea and central Ustyurt plateau. Of foreign investors, South Korea is establishing a dominant position, as earlier this year Daewoo International signed a contract to operate fields in northwestern Uzbekistan for five years. Even more worrying to Russia's hopes of complete dominance of Central Asian energy exports, in May 2007 arch-rival China signed a joint-venture accord with Uzbekneftegaz to participate in a natural gas exploration project in Namangan province.

While Karimov has been assiduously courting non-Russian energy investors, he adroitly has not shut Russia completely out of the picture. Following protracted negotiations a year ago, Russia's Soyuzneftegaz signed a new 36-year PSA with Uzbekneftegaz to invest $462 million to develop gas fields in the Ustyurt plateau region and the Southwest Gissar concessions. Last month Lukoil acquired a controlling interest in the PSA and is hoping for eventual production of 3 billion cubic meters annually.

Nor has Uzbekistan completely shut out Gazprom. In 2004 Gazprom and Uzbekneftegaz signed a $15 million, 15-year PSA to develop Uzbekistan's northwestern Shakhpati field. Two years later, in December 2006, Gazprom received exploration licenses to develop seven Uzbek concessions with combined reserves of 1 trillion cubic meters, and intends to invest $400 million by 2011 and $1.5 billion over the contract life to develop their concessions, from which they eventually hope to produce 13.6 billion to 16.4 billion cubic meters annually.

Karimov's own "energy diplomacy" has astutely reminded Russian energy companies that the days of Moscow's total domination of Central Asia are over, and that they are no longer the region's sole customers. In an era of record-high energy prices, it is a sobering reminder to the Kremlin that the multipolar world that it so assiduously sought after the collapse of communism is slowly in fact becoming a reality.

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