Reforms set to revitalise Uzbekistan’s energy industry
Unveiled in July, a new roadmap for Uzbekistan’s energy sector lays out plans for the restructuring and modernisation of state-owned firms and a major expansion of the industry with foreign investment
Even by the standards of Central Asia, Uzbekistan is rich in natural resources. The country boasts more than 270 hydrocarbon deposits and is second in the region for natural gas production, and in the top 20 globally.
A recent independent audit put Uzbekistan’s reserves of natural gas at more than one trillion cubic metres, while liquid hydrocarbon reserves are estimated at around 150 million tonnes. Income from the oil and gas sector accounts for 10% of GDP and 15% of budgetary revenues.
Unfortunately, the potential of the industry has not previously been fully realised due to inefficient management and lack of investment in exploration, infrastructure and technology.
As a result, despite an 8% increase in natural gas production in Uzbekistan over the past 20 years, the proportion produced by Uzbek firms has fallen to 29%. Moreover, for the past five years, the rate of natural gas reserves replacement has averaged barely 70%.
The sector is clearly ripe for reform — and, under new president Shavkat Mirziyoyev, policymakers have taken up the challenge. In 2018, a comprehensive study of the oil and gas industry was commissioned by the government, with the backing of the Asian Development Bank.
“We were given the goal of working out how to bring the sector up to international standards,” says Ulugbek Ashurov, deputy chairman of Uzbekneftegaz. “We spent a year studying the practices of international oil companies, as well as taking an inventory of the situation in Uzbekistan.”
The results of this investigation were revealed in July, when President Mirziyoyev laid out plans for a radical overhaul of Uzbekistan’s energy industry.
At the heart of the government’s programme is a major restructuring of state-owned oil and gas giant Uzbekneftegaz (UNG).
This included the merger of four subsidiaries of UNG — drilling company Uzburneftgaz, oil and gas producer Uzneftegazdobycha, petroleum refining firm Uznefteprodukt, and machinery and equipment manufacturer Uzneftegazmash — with the parent company.
Six oil and gas producing and gas processing entities were also brought under the direct management of UNG, while all the company’s service companies and nearly 300 non-core assets were marked for disposal.
UNG is now responsible for upstream and downstream operations in the state sector, comprising exploration, production, recycling and reproduction.
Midstream operations have been handed to Uztransgaz, which has been unbundled from UNG and transferred to the ownership of the Agency for Management of State Assets.
As well as sole responsibility for Uzbekistan’s high-pressure pipelines, Uztransgaz’s remit includes purchasing natural gas from extraction and processing organisations, and selling it to end users and new regional gas distribution entity Hududgaztaminot.
The latter was established to manage the local distribution of gas to consumers within Uzbekistan, with responsibilities including the operation and maintenance of distribution networks, and the purchase, storage and sale of liquified gas to consumers.
Hududgaztaminot’s corporate structure includes 14 local distributors, which have been earmarked as potential candidates for foreign investment through public private partnerships.
A working committee, chaired by prime minister Abdulla Aripov has been established to oversee the implementation of the government’s programme for the energy industry.
The committee has been tasked with monitoring the progress of reforms, ensuring continued technical and financial support from international development institutions, government bodies and consultants, and approving roadmaps for the achievement of the key goals of the project.
These include modernising Uzbekistan’s gas transmission system — more than half of the country’s 13,000km of main gas pipelines are more than 30 years old and 58% of its gas compressor units need replacing — and, above all, increasing hydrocarbon production volumes.
This will be achieved both through exploration and the enhanced exploitation of existing fields in conjunction with leading international oil and gas companies.
On the exploration side, UNG is already working with long-standing global partners including Russia’s Lukoil and Gazprom, China National Petroleum Corporation and Korea National Oil Corporation, as well as new market entrants from countries including the UK, France, India and Azerbaijan.
The Uzbek government has announced plans to offer more than 50 investment blocks to foreign investors, with a focus on hard-to-recover hydrocarbon fields. Indeed, the decree mandates the transfer of the latter to companies with relevant experience.
The expansion of geological exploration of poorly studied areas and blocks with complex geological structure is already under way with the help of foreign firms including Total, BP, Mubadala Petroleum, SOCAR, Thyssen Krupp, Tatneft, ONGC Videsh and Epsilon Development.
Tatneft and Mubadala Petroleum, along with other companies from Russia and the United Arab Emirates, are also working with UNG on increasing hydrocarbon production in depleted, stripped and suspended oil and gas fields, as well as those with hard-to-recover reserves.
Ashurov notes that the increase in production will help to meet a rise in demand for hydrocarbons driven by the rapid growth of the Uzbek economy. GDP is expected to expand by at least 5% over the coming years as the government’s reform agenda bears fruit.
The increase in domestic demand may be muted, however, by a parallel programme to improve energy efficiency in Uzbekistan, both in industry and in the household sector.
That will increase the potential for a substantial rise in natural gas exports. Already more than 15% of Uzbekistan’s natural gas production is sold outside the country. Some goes to Russia but most goes east, to Tajikistan, Kyrgyzstan, the south of Kazakhstan and China.
Ashurov sees great opportunities for UNG to serve rising demand from China for natural gas. “China is a huge market and we can see that they are now implementing a policy of moving away from coal towards cleaner energy sources,” he says. “Natural gas is a much safer and more ecological product.”
UNG is also looking to develop new export markets for both natural gas and other hydrocarbon products. “We know there is huge demand for natural gas in India and Pakistan, and we are ready to enter discussions with those countries,” says Ashurov.
“We also see opportunities for exporting products such as LPG gasoline to Tajikistan and we are exploring the options for working in Afghanistan, which could be a major export market for us.”
Petro industry development
Another key objective of the government’s reforms is the development of Uzbekistan’s petrochemical industry, particularly in the sphere of high value-added products. Responsibility for this part of the programme has been assigned to UNG, along with state-owned chemicals producer Uzkimyosanoat.
“We are currently solving a large-scale task of extracting valuable components from available raw material resources by means of their deep processing,” says Ashurov.
Progress is already being made in this area. Over the past two years, a number of key projects have been implemented, including the development of a complex of fields at Kandym.
In April 2018, a new gas processing facility with an annual production capacity of 8.1 billion cubic metres of hydrogen sulphide-containing gas was commissioned at the site. The complex is jointly owned by Lukoil and UNG, and was funded by international banks including ING, UniCredit and Deutsche Bank.
Kandym is located in the Bukhara region, which is also home to one of Uzbekistan’s largest refineries. A second major refinery, in the Fergana region, is one of the facilities where policymakers are hoping to bring in foreign investment.
“We are already in negotiations on this project and expect to have reached agreement by the end of the year,” says Ashurov.
A year earlier, the government of Uzbekistan signed a production-sharing agreement with Swiss and Cypriot investors and Uzneftegazdobycha for the Uzbekistan Independence gas field in the southern Surkhandarya region, the value of which is estimated at more than $5bn.
The first phase of the project, due to be completed by 2023, will see the construction of a gas processing plant with a capacity of 5 billion cubic meters of natural gas per year. That will be followed within three years by the construction of a gas chemical complex with a production capacity of 500,000 tonnes of polymer products.
Uzbekistan’s other major hydrocarbon production facilities include the Mubarek gas processing complex and gas chemical complexes at Shurtan and Ustyurt.
As part of the government’s programme, the Shurtan gas chemical complex — which was completed in 2000 — is being expanded with the construction of a plant for the production of synthetic liquid fuel (GTL) based on purified methane.
Work is also underway at the Bukhara refinery, where the modernisation and reconstruction of existing facilities is proceeding in parallel with the construction of a new gas chemical complex based on methanol-to-olefins (MTO) technology.
UNG has partnered with American chemicals giant Air Products, Mubadala and firms from South Korea and Singapore on the Bukhara projects.
Along with substantial increases in production and the introduction of new products, the July decree also calls for dramatic improvements in corporate governance and management across the Uzbek oil and gas industry.
“Our president has set us the goal of making all operations in the sector transparent and efficient,” says Ashurov.
UNG and Uztransgaz have introduced supervisory boards and are in the process of recruiting independent directors. Both companies have also been mandated to appoint external auditors and move to IFRS accounting standards in 2020, as well as to obtain an international credit rating.
That in turn will pave the way for the issuance of debut Eurobonds next year and initial public offerings (IPOs) over the following three years. The companies will remain under state control, however, with the government retaining a 51% stake in each.
Key to attracting investment in both companies, as well as the sector as a whole, will be the liberalisation of tariffs. Prices of natural gas and gasoline in Uzbekistan have traditionally been well below those in other Central Asian states due to generous government subsidies.
These are now being phased out. An increase in tariffs was implemented on August 15 and further rises to bring the price of gasoline in line with market rates are promised next year.
For natural gas, policymakers have moved from a single fixed price to a variable tariff range. Under the new regime, tariffs are higher for large consumers and non-energy efficient companies.
“Our goal is to implement step-by-step increases across the board to bring internal prices up to international levels,” says Ashurov. “It is important to note, however, that at the current level UNG is already profitable.”
The final key plank of the government’s energy strategy calls for the introduction of modern information and communication technologies in all operations of UNG and Uztransgaz, including automated systems for controlling and recording the production, transportation and sale of oil and gas products.
“It is safe to say that the Uzbek oil and gas industry is rapidly gaining momentum,” says Ashurov. “The industry is currently implementing both large-scale investment projects and structural transformations.
“This will enable UNG to significantly increase the production of highly liquid products necessary to meet the needs of the population, industry, transport and agriculture, and remain a crucial contributor to the economy going forward.”
Investment highlights: oil and gas
- The construction of a plant for the production of synthetic liquid fuel (GTL) based on purified methane from the Shurtan Gas Chemical Complex
- The plant will produce high-quality diesel and aviation fuels that meet stringent environmental standards, unparalleled in quality and the absence of harmful impurities. The total cost of the project: $2bn, financed by Korea Exim Bank, along with 15 commercial banks.
- Creation of a gas-chemical cluster based on methanol-to-olefins (MTO) technology.
- This will enable the manufacture of new types of products, such as polyethylene terephthalate, polystyrene, polyvinyl chloride, propylene oxide polyol, gasoline and diesel fuel, in accordance with the requirements of Euro-5.
- This project is in collaboration with Air Products and Mubadala, as well as engineering and construction companies from South Korea and Singapore.
- A joint venture with Forus JSC, a Russian company, to reconstruct the storage facility at Gazli.
- This will more than triple the gas storage capacity to 10 billion cubic metres. Work is already underway on the first phase of the project, which will double the storage capacity to six billion cubic metres by the end of 2021.
- The second phase is due to be completed in 2024.
- Infrastructure at the facility will be modernised in parallel with the reconstruction work.
- The total cost of the project: $850m
- A new gas processing facility with intended annual production capacity: 8.1 billion cubic metres of hydrogen sulphide-containing gas
- The complex is jointly owned by Lukoil and UNG, and is funded by international banks including ING, UniCredit and Deutsche Bank.
- ‘Uzbekistan Independence’ gas field in the southern Surkhandarya region
- In 2017 the Government of Uzbekistan signed a production-sharing agreement with Swiss and Cypriot investors and Uzneftegazdobycha.
- The total cost of the project: $5bn.
- The first phase of the project, due to be completed by 2023, will see the construction of a gas processing plant with a capacity of five billion cubic meters of natural gas per year. That will be followed within three years by the construction of a gas chemical complex with a production capacity of 500,000 tonnes of polymer products.