THE YOUNG CENTRAL ASIAN STATE ATTRACTS FOREIGN INVESTORS TO DEVELOP ONE OF ITS KEY INDUSTRIES

D. FAYZULLAYEV

Candidate of Economic Sciences

Uzbekistan was one of the most important gas storerooms of the Soviet Union during the Soviet era. Billions of cubic meters of Uzbek and Turkmen natural gas were sent annually through the well - known Central Asia-Center gas pipeline to the central part of the country, and then to Eastern and Western Europe. Uzbekistan's gaining of state independence seemed to the elite of this state a gift of fate, a direct road to fabulous enrichment - both personal and, if I may say so, state: economic recovery, some improvement in the material situation of the country's citizens. Together with the Karakum gold (which is a separate topic), the hydrocarbon raw materials seemed to open the way to solving many economic and political problems.

In the middle of the second decade of Uzbekistan's independence, it's a good time to see if these expectations have come true.

The first thing that turned out was that the existing gas reserves are not unlimited, and for the development of new fields, as well as for maintaining the infrastructure of existing fields, huge funds are needed, which the young republic did not have. The only way to solve the problem is to attract foreign investment. But it was not easy to do this: hundreds of millions of dollars were needed, and potential investors would like at least to gain confidence that the money will not be lost, will not be wasted.

There were more than enough reasons to doubt this in the early 1990s. The political situation in the country only seemed stable - from time to time Islamic radicals made themselves felt, making attempts at armed demonstrations against the legitimate authorities in different regions of the republic. Even more worrisome was neighboring Afghanistan: the war raging on its territory seemed about to spread to Uzbekistan. The economic risk of doing business in this country decreased only after the change of political power in Afghanistan.

However, the Americans made an attempt to enter the Uzbek gas market long before the final stabilization of the situation in this country and in the region as a whole. In 1994, the American company Enron Oil and Hpp International established a joint venture with the national holding company (NHC) Uzbekneftegaz for the purpose of geological exploration, production and subsequent export ^of Uzbek gas1 . The Kandym gas field, which has been explored to some extent but not previously developed, with total natural gas reserves of more than 150 billion cubic meters, was chosen as the base area for joint work. ²

The main issue that interested the new joint venture was the search for opportunities to deliver Kandym gas to Europe. To this end, in 1997, it was decided to involve the Russian company Gazprom, which is very experienced in gas transportation matters, to participate in the project. The negotiations lasted about two years, but in the end, Gazprom refused to cooperate, focusing on the problems of exporting Turkmen gas. The stumbling block was the difference in price

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gas on the domestic Russian market (then the price per 1000 cubic meters ranged in Russia from $ 5 to $ 8).³ and a significantly higher price of Uzbek gas offered for export.

A year later, in 1998, Enron also declined to participate in the joint venture, considering the project commercially unattractive, at least at that time ^.4 Factors such as the remoteness of Uzbekistan from world gas markets, the underdeveloped transport infrastructure of the republic, potential competition from Russia and Turkmenistan, as well as the unstable investment climate in the republic due to its territorial proximity to Afghanistan, which was then under the rule of the Taliban, also played a role.

The failure to establish cooperation between Uzbekneftegaz and Enron has had a negative impact on Uzbekistan's reputation among potential investors. Over the next three years, all attempts to attract them to the republic's gas industry ended in failure. It was only in 2001 that the investment crisis was finally overcome: a production sharing agreement was signed between Uzbekneftegaz and the British company UzPEK Limited, which in turn is a subsidiary of Trinity Energy. ⁵ Under this agreement, UzPEK became the operator of a project to develop gas reserves at two "blocks" in the north-western part of Uzbekistan. At the same time, UzPEK should receive 70% of the gas produced, and this share could increase if new significant gas reserves are discovered. In May 2001, the company received a license to operate in Uzbekistan.

A few words about what the British got in the Republic of Uzbekistan.

The first "block" is located in the South-West Hissar region. It includes 9 relatively small oil and gas condensate fields, their total reserves do not exceed 15 million tons of oil equivalent. Experimental commercial oil production will be carried out at the South Kyzylbarak and Koshkuduk fields. The largest field in this block is the Adamtash field, which has estimated reserves of 30 billion cubic meters of gas and 5 million tons of condensate. UzPEK holds a license to develop this block for 25 years with a possible extension of this period for another 15 years. Currently, the Kyzylbarak field is drilling wells as part of the early production phase, and about 55 million tons of oil are extracted from the subsurface per year6 .

The second block, mainly gas, is located in the Ustyurt region. It includes the Berdakh, Ugra and Shagarlyk deposits. The Ugra field, whose total reserves exceed 45 billion cubic meters of gas, has been actively developed since the mid-1990s. Two other fields require additional geological exploration. Their total reserves are estimated at 400 billion cubic meters of gas. UzPEK received a license to conduct geological exploration in the fields of this block for a period of 5 years with the right to extend it for another 3 years.

In 2001, UzPEK invested $ 31 million in this project, of which $ 12 million was a loan from the European Bank for Reconstruction and Development (EBRD). The company is expected to invest at least $ 200 million in the project in 2001-2005, with a total investment of $ 400 million. It is estimated that there will be enough gas in this region for at least 40 years. UzPEK's revenue for this period may amount to $ 1.2 billion. It is planned to sell the extracted oil to Russia, Kazakhstan and China.

In July 2003, the Russian financial and investment group Soyuzneftegaz acquired a controlling stake in UzPEK. According to experts ⁷, the reason for this step was the active introduction of Russian companies LUKOIL and Gazprom into the oil and gas market of Uzbekistan. And since Uzbek gas must not only be extracted, but also exported via a pipeline system controlled by Gazprom, it is assumed that it will be easier for the Russian company Soyuzneftegaz to agree on the terms of gas transportation with the Russian company Gazprom.

UZBEK GAS AND THE RUSSIAN MARKET

Cooperation between Russia and sovereign Uzbekistan has neither a long history nor a large number of joint projects, but the priority of the Russian market for the young republic has always been obvious. This is evidenced by the fact that the most active development of gas fields is carried out in the Ustyurt region in the north of the country, which is most closely located to Russia. The Central Asia - Center pipeline, which has an international status, passes through the territory of this region.

Western experts also speak about the exceptional importance of the Russian market for Uzbekistan. For example, Gavin Gresham, Shell's Regional Vice President, said in an interview with Reuters that Uzbekistan should focus on Russia and other CIS countries in the field of gas exports, at least until 2008, when there will be a need for additional gas supplies to Western Europe and China ^.8

Nevertheless, despite the extreme interest of Uzbekistan in gas cooperation with Russia, this cooperation developed sluggishly until 2001. We discussed the reasons above: the lack of agreement between the leadership of Uzbekistan and Gazprom on gas purchase and transit tariffs.

Uzbekistan is interested in Russia not only in terms of exporting its gas and its transit through Russian territory, but also in attracting Russian investment in the gas industry. An agreement to attract Russian investment in Uzbekistan's fuel and energy sector was reached back in 2001 during President Islam Karimov's visit to Moscow.

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uzbek colleague to find worthy investors among Russian companies ⁹ . LUKOIL, Itera and the Tyumen Oil Company (TNK) have expressed their desire to participate in this project. The final version of the alliance included LUKOIL, Itera and Uzbekneftegaz; TNK did not consider it possible to join it. In accordance with the agreements, the alliance will develop oil and gas fields in the Bukhara-Khiva and Hissar regions. Russian companies will invest in the project, and NHK will give its share to the resource part.

In July 2001, the project participants signed an agreement "On the basic principles and provisions of the production sharing agreement for the fields of the Bukhara-Khiva and Hissar oil and gas regions". According to the agreement, LUKOIL and Itera will each receive 45% of the gas produced, while Uzbekneftegaz will receive 10%. According to the head of Lukoil Vagit Alekperov, part of the gas will be supplied to Ukraine, where the company has ¹⁰ processing capacities.

Preparation of the final version of the agreement took a long time - 3 years. The main obstacles were some provisions of the Law of the Republic of Uzbekistan "On the production Sharing Agreement", adopted in 2001,11 In particular, the Law prohibits the transfer of investor costs from one calendar period to another, which did not allow to compensate for most of the costs before the start of gas production. To solve the problem, President of the Republic of Uzbekistan Islam Karimov signed a Decree "On measures to attract foreign investment in the development of the Kandym Group, Khauzak and Shady fields" ¹² . He defined a compromise approach, the essence of which is that "...the permissible costs of investors in the development and development of the explored deposits of the Kandym Group, Khauzak and Shady, provided under the terms of the production sharing agreement, begin with the calendar year in which commercial production begins"¹³ .

The final production sharing Agreement for the Kandym - Khauzak - Shady project was signed in June 2004 during Vladimir Putin's visit to Uzbekistan. The consortium in its final version includes LUKOIL and Uzbekneftegaz. Itera, a company specializing in the transportation of gas and oil, was decided not to participate in the project, since in 2002 another Russian company, Gazprom, received the rights of operator of the Central Asia - Center gas trunk pipeline system in Uzbekistan ^.14

In accordance with the Agreement, the term of which is set at 35 years, the shares of the consortium participants were distributed as follows: LUKOIL - 90%, Uzbekneftegaz - 10%. The planned volume of capex is $ 1 billion, and commercial gas production is scheduled to start in 2007. Total gas reserves at the fields included in the project are estimated at 283 billion cubic meters, gas condensate - up to 8 million tons. The maximum volume of gas production will be 9 billion cubic meters. m per year, and at the initial stage of the project implementation - 2.8 billion cubic meters.

The project provides for the construction of a modern gas chemical complex with a capacity of 2.8 billion cubic meters at the first stage, and after reaching the design capacity - 6 billion cubic meters of gas per year; the first stage of the enterprise is scheduled to be commissioned in 2010. In addition, the agreement provides for the drilling of 240 production wells, the laying of more than 1.5 thousand km of pipelines of various diameters and purposes, the construction of two compressor stations, as well as assembly points, high-voltage power lines, a 40 km long railway line, and highways.

This project is unique in many ways. This is the first investment project in the oil and gas industry in the history of Russian-Uzbek economic relations, and in terms of the amount of funds that are expected to be invested in it, it is the largest ever implemented in the republic. In addition, it is unique for the alliance members themselves.

For LUKOIL, the implementation of this project is nothing less than the first real entry into the global gas market. V. Alekperov, the company's President, said that LUKOIL has taken another step towards achieving its goal of becoming not only one of the largest oil companies, but also taking its rightful place in the global gas market15. There is no need to mention how important the possibility of cooperation with one of the world leaders in the hydrocarbon market, as well as the real possibility of entering the global gas market, are for Uzbekneftegaz.

Another strategic partner of Uzbekistan is the Russian company Gazprom, which signed an agreement on cooperation with the republic in the field of gas production and transportation in late 200216 . The agreement provides for three main areas of cooperation.

First. The main principles of the purchase of Uzbek gas by Russia until 2012 are defined. In accordance with this agreement, Uzbekistan has already delivered 5 billion cubic meters of gas to our country from June 2003 to May 2004, and from 2005 it is planned to reach the level of supplies of 10 billion cubic meters. m per year at a price of about $ 40 per 1000 cubic meters.

Second. A program for joint implementation of gas production projects has been developed. As determined by the agreement, since April 2004 Gazprom's subsidiaries Zarubezhneft and the Swiss Gas Project Development Central have become participants in the project to extract gas condensate from the Shakhpaty field in the Ustyurt region under production sharing conditions. The agreement is valid for 15 years. It is expected that in 2004 - 2007 investments in the development of the field will reach $ 15 million. These funds will be invested in the development of modern gas production technologies and the construction of a new booster compressor station. The Shakhpaty field will produce half a billion cubic meters of gas annually.

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Russian and Uzbek participants of the project will be produced in the ratio of 50-50%.

The third. It is planned to reconstruct and develop the existing Uzbek gas transmission system. Currently, its capacity is 130 million cubic meters of gas per day, or 48 billion cubic meters. m per year. This capacity is barely enough to meet the obligations for the transit of 36 billion cubic meters of Turkmen gas to Ukraine, 4 billion cubic meters purchased by Tazexport in Ashgabat, as well as the already mentioned Uzbek gas purchased by Gazprom. The latter plans to gradually increase the capacity of the gas transmission system of Uzbekistan: up to 51-52 billion cubic meters. m in 2005 and up to 56 billion cubic meters. m In 2006, Gazprom is going to allocate about $ 100 million for this purpose. investments.

The implementation of this investment project is of great importance for both Russia and Uzbekistan. Russian giants of the oil and gas market have gained access to new Asian fields, thanks to which Russia, represented by its companies, has now become the leading investment partner of the Uzbek Republic in the gas industry and in the economy in general. For Uzbekistan, the implementation of the project, in addition to direct economic benefits, also means a significant improvement in the country's investment attractiveness.

INVESTMENT PROJECTS

The Republic of Uzbekistan does not stop there. Currently, Uzbekneftegaz is considering about 20 projects for the development of promising gas-bearing territories. It is also planned to attract foreign investors for their implementation. The territories proposed for development are mainly located in the Ustyurt region in the north-west of the republic. This region, located on the border of Uzbekistan and Kazakhstan, is geographically closer to Russia than other gas-bearing regions of the country. In addition, the Central Asia - Center gas pipeline runs through the territory of this particular region. Taking these factors into account, it is obvious that the development of gas fields in the Ustyurt region is more economical, especially in terms of financing the transport infrastructure and gas transportation itself.

To encourage investment in the gas industry in general, and in the Ustyurt region in particular, in April 2000, President of Uzbekistan Islam Karimov signed a Decree "On measures to attract foreign direct investment in the exploration and production of oil and gas"¹⁷ , confirming the privileged status of projects for the exploration and development of hydrocarbon reserves in the Ustyurt region. One of the main privileges guaranteed to investors is the freedom to export gas.

It should be noted that not only the Ustyurt region, but also the entire territory of the republic is now open to potential investors for conducting geological exploration. Currently, Uzbekneftegaz has developed investment projects for 16 "blocks" of various oil and gas regions, and the boundaries of "blocks" are conditional and can be changed by agreement with investors. NHK is ready to provide investors with any other land plot that is not part of the proposed projects. Today, as mentioned above, UzPEK is working on four dedicated "blocks" (three of them are located in Ustyurt). Ukrainian companies Naftogaz, Metallurgy, Industrial Union of Donbass, GAZPEX, Berlanga Holding of the Netherlands, and Kazakhoil are preparing feasibility studies for other "blocks" of projects ^.18

Uzbekistan's strategic goal is to actively attract foreign investment not only in geological exploration and gas production, but also in gas processing. The main project in this area is the Shurtan gas chemical complex, the construction of which was started in 1998. The complex is based on the recently commissioned Shurtan group of low - sulfur gas fields-South Tandyrcha, Adamtash, Gumbulak, whose gas is characterized by an increased concentration of valuable light hydrocarbons-ethane, propane and butane, as well as the so-called aromatics-valuable raw materials for many petrochemical products. With the launch of this complex in 2002, it became possible to purify all gas produced at the Shurtan and nearby fields and feed it to the gas pipeline.-

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Shurtan - Syrdarya - Tashkent wire. In 2002, ^the complex reached the design level of 125 thousand tons of polyethylene per year19 .

The complex was built by a consortium consisting of AB Lummus Global, AB Soimi (Italy), Mitsui, Toyo Engineering (Japan), and Nisso Iwai (Japan). Construction of the facilities with a total cost of $ 633.5 million was carried out at the expense of loans from the American Chase Manhattan Bank under the insurance coverage of the Japanese EXIM Bank and the German Commerz Bank and the Hermes Agency. ²⁰

Mubarek Plant, which processes 24 billion cubic meters of gas annually, is another major industrial enterprise in the country. The main production processes here are desulfurization and low-temperature separation, sulfur production, and concentrate stabilization. The raw material base of this enterprise is the Kokdumalak oil and gas condensate field, whose recoverable condensate reserves are estimated at 67 million tons. The project was implemented jointly with a consortium of companies-American Em U Kellogg and Japanese Nisso Iwai " ²¹ .

A total of 91 gas and condensate fields are currently under development in Uzbekistan ^.22

* * *

From the above examples, it is clear that the investment policy in the republic is carried out quite competently, and the funds raised are used quite effectively. Investors ' funds are allocated in key areas, including geological exploration, development of new gas and gas condensate fields, expansion of gas production in areas already under development, as well as the development of new technologies, equipment and gas processing facilities. Of course, attracting foreign investment in the gas industry of Uzbekistan is significantly facilitated by the absence of problems with the transportation of "blue fuel", since one of the main gas pipelines of the former USSR "Central Asia - Center"passes through the territory of the republic. Investors also note that, according to the agreement signed in 2002 between Uzbekneftegaz and Gazprom, as well as the agreement on cooperation in the gas industry signed a year later between Turkmenistan and Russia, the entire gas pipeline system of Central Asia passing through the territory of Turkmenistan, Uzbekistan and Kazakhstan, including the main gas pipeline "Central Asia-Center", will be upgraded. As a result of the modernization, the capacity of the latter will increase from 50 to 70 billion cubic meters. m per year ²³ .

All this suggests that in the foreseeable future, the gas industry of Uzbekistan will receive a new impetus, and the world's leading oil and gas companies will be willing to invest in the development of the fuel and energy complex of the republic.

-----

^{Gavrichev S.} 1 Uzbekistan is emerging from the shadows, www.rusengru.com. (2002, January).

² Ibid.

^{Vinogradova O.} 3 In the shadow of the Caspian stars: investment attractiveness of the oil and gas industry in Uzbekistan. www.oilcapital.ru.

⁴ Ibid.

^{Grachev S.} 5 Rising Star: Uzbekistan Emerges as Oil and Gas Investvent Oppotunity. www.vremya.ru. (14.07.2004).

^{Rebrov d} 6 Uzbekistan sold Saffron. Vremya Novostei, 14.07.2004.

⁷ Ibid.

⁸ Shell recommends that Uzbekistan sell gas in traditional markets. (Based on materials from Reuters) (16.05.2001). www.davrosa.uz.

^{Davydova M.} 9 LUKOIL and Itera found each other in Uzbekistan. Kommersant (24.07.2001).

¹⁰ Ibid.

¹¹ Law of the Republic of Uzbekistan" On the production sharing Agreement " dated 12.06.2001.

^{Taxonov A.} 12 Oil and gas production industry of Uzbekistan. www.ames.kiev.ua, 24.11.2003.

¹³ Ibid.

^{Dubnov A.} 14 Billion dollars for Islam Karimov. "Vremya novostei", www.vremya.ru. (17.06.2004).

^{Davydova M.} 15 LUKOIL and Itera found each other in Uzbekistan...

^{Grivach A.} 16 "Gazprom ""dug in" in Uzbekistan. Vremya Novostei 15.04.2004.

¹⁷ Decree of the President of Uzbekistan No. UP-2598" On measures to attract foreign direct investment in oil and gas exploration and production " dated 28.04.2000.

^{Taxonov A.} 18 Oil and gas production industry of Uzbekistan...

¹⁹ Ibid.

²⁰ Ibid.

²¹ Ibid.

^{Matrosov S.} 22 World market of natural gas: today and tomorrow. "Economic Review", 2002, N 7-8. Tashkent. www.review.uz.

²³ Agreement between Russia and Turkmenistan on Cooperation in the Gas industry of April 10, 2003. www.turkmenistan.ru