Epsilon Development is in talks with authorities in Tashkent to bring another foreign investor into a proposed consortium to embrace its upstream assets and a retail distribution network, according to an Epsilon executive.

The proposal comes after a challenging 2020 when the US-based gas producer — which has been exploring and operating several onshore blocks in Uzbekistan since 2019 — was hit by restrictions introduced by the government in response to the Covid-19 pandemic.

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These restrictions, coupled with the state's intervention into the distribution of produced gas, have undermined the company’s ambitious growth plan to become a major independent gas player in the country alongside Russian oil producer Lukoil.

Refocusing on renewables

Meanwhile, efforts from authorities to increase Uzbekistan’s gas production have not led to the desired outcome of solving the perennial winter gas shortages, with Tashkent recently changing focus to explore renewable energy options, such as solar and wind, to reach energy independence.

Speaking to Upstream, Epsilon managing partner Harry Eustace said the company is “engaged with the government in the negotiation of an investment agreement together with an American investor group” to establish a vertically integrated player.

The suggested tie-in will unite five gas and condensate blocks, operated by Epsilon in Uzbekistan, and a network of 263 compressed natural gas and 112 multi-fuel retail posts across the country to be gradually acquired by the proposed consortium from state-run operators over the next 10 years.

Eustace said the tie-in proposal is consistent with the government's pronouncements to foster the emergence of multiple independent players in the energy sector that will ultimately lead to fair and open competition for the benefit of Uzbek consumers.

From their side, Epsilon and the unidentified investor seek authorities to establish “equal conditions for all market participants, including the distribution of the 20% of produced gas at a low price for the needs of the population and putting the remaining 80% in free commercial circulation”.

The company hopes the venture will be capable of producing at a maximum rate of almost 43 million cubic metres per day of gas, selling its output to international and domestic customers.

Solving gas shortage

This course is hoped to permit the Uzbek government “to solve gas shortage issues for the needs of households, abandon the policy of subsidising and providing tax waivers for the country's natural monopolies [such as Uzbekneftegaz], as well as the appearance of new debts to participants in existing production sharing agreements”, according to Eustace.

The lack of gas marketing options in Uzbekistan, where the company has to sell all produced gas to a state operator, have been holding back the Epsilon’s recovery this year.

It is currently producing about 5 MMcmd of gas after falling to 3.4 MMcmd last year.

“Drilling of 17 new wells plus nine workovers is now underway. By the end of the year, I expect production of at least 8 MMcmd, perhaps as much as 9 MMcmd,” Eustace said.

Since 2019, 11 discoveries at its acreage have put proven, probable and possible resources under Epsilon’s control in Uzbekistan at upwards of 570 billion cubic metres, with two exploration wells drilled on the Ayzavat structure this year flowing at the record high daily rate of 1 MMcmd apiece.

The Ayzavat structure is located on the Kultak-Kamashinsky block in the Kashkadarya region of the country.

Four other blocks under Epsilon’s control in Uzbekistan are Surkhansky, Mubareksky, West Fergansky and Koskuduk-Ashiblaksky.