Page 6 - FSUOGM Week 38 2019

FSUOGM COMMENTARY FSUOGM
Uzbekistan nears raft of deals with upstream investors
Investors have welcomed Uzbekistan’s reforms, but the potential of its oil and gas reserves has been overstated
UZBEKISTAN
WHAT:
Tashkent believes it can secure foreign upstream investors in the near future.
WHY:
There is some wrangling overcontractterms.
WHAT NEXT:
Uzbekistan’s oil and gas potential is overstated by the regime.
UZBEKISTAN is on the verge of striking a raft of deals with large foreign energy companies on upstream projects, the CEO of national oil company (NOC) Uzbekneftegaz (UNG) has said.
Three deals are slated to be signed this year, followed by five more in 2020, Bakhodir Sidikov said at the Energy Week conference in Tashkent on September 20, according to Reuters.
Potential partners for exploration and pro- duction contracts include BP, France’s Total, Azerbaijan’s SOCAR and Russian companies Rosneft and Novatek, he said. Investors want guarantees they can export what they produce, but Tashkent is instead offering them guaranteed offtake at prices “at which the project makes eco- nomic sense,” the company chief told reporters.
“We have some projects where if you use the international price you can get 60% IRR [inter- nal rates of return],” he said. “Nobody expects 60%IRR.”
Sidikov said he considered between 11 and 15-16% profitability levels to be acceptable.
Uzbekistan began opening up its under-in- vested hydrocarbon sector to foreign investment after President Shavkat Mirziyoyev took power following the death of long-serving leader Islam Karimov in late 2016. The country’s main draw is gas, with its proven reserves estimated by BP at 1.2tn cubic metres.
While investors are keen to export any gas they produce to neighbouring China, Tashkent wants to ringfence some supply for domestic consumption. Russia’s Lukoil, currently the largest foreign player in Uzbekistan’s gas sector, agreed last year to sell some of its output to UNG, despite its development contracts allowing it to ship all its supplies overseas.
Lukoil said it was interested in exploring additional areas of Uzbekistan earlier this year, despite not being mentioned by Sidikov.
A key obstacle to bringing on board foreign investors is the fact that much of Uzbekistan’s geo- logical data was on available on paper and in the Russian language, Sidikov continued. The govern- ment is currently working with US-based Schlum- berger to digitalise this information, he said.
Among other measures to stimulate invest- ment, Uzbekistan also wants to introduce a new subsoil code but is yet to make any defin- itive progress. It has also de-pegged its cur- rency, removed import and export restrictions
and undertaken tax reforms.
Sidikov added that UNG, which produces
42 bcm of gas out of Uzbekistan’s total supply of 63 bcm, aimed to extract an extra 4-5 bcm next year, to ensure domestic demand was covered. He also reiterated the company’s plan to launch a $1bn eurobond sale next year and complete its section of the 30 bcm per year fourth string of the Central Asia-China gas pipeline by 2022- 2023, raising the system’s overall capacity to 85 bcm per year.
“We do have available natural gas to export additional to China,” he said, adding that talks were underway on volumes and pricing. Uzbek- istan sent 7.1 bcm of gas to China last year, while neighbouring Turkmenistan supplied close to 38 bcm and Kazakhstan sent 6.4 bcm. This meant that the Central Asia-China pipeline achieved 93% utilisation for the first time, strengthening the case for its fourth line.
Overstated potential
Investors have welcomed Uzbekistan's pos- itive new direction over the last few years. But while its oil and gas industry did not live up to its potential under Karimov, it is important not to overstate how many opportunities exist for investors.
Uzbekistan’s upstream sector is currently dominated by Chinese and Russian firms with political connections and access to export infra- structure. Since Mirziyoyev opened the doors to greater foreign investment, the definitive upstream deals signed have been with Chinese and Russian companies and not with Western operators.
As demonstrated by Sidikov’s comments, authorities want to see gas produced from pro- jects sold locally, limiting profitability. Instead of simply selling gas to domestic users, inves- tors could potentially look into converting their production into higher-value petrochemicals that can be more readily exported. But the catch here is that Uzbekistan is a double-landlocked country, far removed from any major petro- chemical markets besides Russia and China. And both of these countries, Russia in particu- lar, are advancing their projects to meet domestic consumption.
Western IOCs are taking their time before commiting to projects in Uzbekistan, and for good reason.™
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