An energy industry restructuring process in Uzbekistan, where the government is being advised by international consultants and banks, has created a new monopoly in Uztransgaz, a former subsidiary of state-owned Uzbekneftegaz that now has ownership and operatorship over the country's domestic and transit gas pipeline network.

The company also has become a major centre of revenues with sole rights to buy all gas from producers in the country and sell it domestically, as well as export purchased gas on its own behalf.

Russia's Lukoil, which operates two major gas projects in the country and is the largest independent gas producer in Uzbekistan, appears to be an exception from the scheme, as it is protected by its production sharing agreement.

As a Uzbekneftegaz subsidiary, Uztransgaz functioned purely as a transportation outfit.

Ageing infrastructure

Years of under-investment during the rule of Uzbekistan's former president Islam Karimov left Uztransgaz with ageing trunklines and compressor stations, according to the company’s executive chairman Ulugbek Sayidov.

The prime post-restructuring task for Uztransgaz is to revamp its gas network, Sayidov said, with the company already starting a project to upgrade about 30% of the country’s gas trunk pipelines and compression stations.

The company said in a tender disclosure notice that following the receipt of a $1 billion loan from Asian Development Bank, it is seeking to hire international consultants to prepare tender documents and EPC contracts, coordinate and supervise civic work, and conduct other assignments to get the upgrade project up and running.

Speaking recently in Tashkent, Sayidov said that the remaining 70% of the domestic gas pipeline network will also require an upgrade at a preliminary estimated cost of $500 million.

Uztransgaz operates about 13,000 kilometres of gas trunklines in Uzbekistan that were built during the Soviet era.

Sayidov said that the network should undergo the major upgrade “as soon as possible” because pressure in some parts of the system has fallen by almost a factor of two due to the age of the pipes. That undermines the security of gas supply to some remote regions of the country during winter, he added.

Additionally, almost all compressors have to be replaced with modern ones that are significantly more efficient and have less environmental footprint.

“We just do not have spare parts to maintain those old compressors,” he said.

Another project to run concurrently with the upgrade is the expansion of underground gas storage facilities at the country’s Gazli field at an estimated total cost of $850 million.

Under the agreement signed with little-known Russian company Forus last year, a joint venture of Uztransgaz and Forus will double Gazli’s storage capacity to 6 billion cubic metres in the first phase.

Storage capacity

In the second phase, storage capacity is set to grow to 10 Bcm.

According to Sayidov, the gas storage will reduce or eliminate the need to impose restrictions on the intake of gas into the system during the summer period of reduced consumption.

Uztransgaz is drilling appraisal wells at the Gazli field to better understand the reservoir geology before gas capacity is expanded, he said. In Tashkent, Sayidov and another key industry official, Energy Minister Alisher Sultanov, have strongly defended the new right of Uztransgaz to act as a monopoly gas offtaker and seller.

Sayidov said that such duty prompts the operator to significantly reduce losses in its system during the transmission of gas from a producer to a customer, as the operator treats gas as a valuable commodity.

He said that with gas purchase and sale prices being regulated by the government, Uztransgaz earns a margin between 3% and 30% on the sale of gas to different types of domestic customers.

However, Sayidov has not disclosed margins for gas exports from Uzbekistan, which account for about 25% of the country’s total gas output.

Fair conditions

Sultanov has said that the emergence of a state-owned gas pipeline operator with a gas purchasing monopoly “has created fair playing conditions for all gas market players” in the country.

“This is an optimal model for our country and the region as a whole, and it is expected to foster the arrival of major international oil companies (to Uzbekistan),” Sultanov said.

Speaking in Tashkent, Uzbekneftegaz executive board chairman Bakhodirzhon Sidikov has acknowledged that authorities will insist that potential international partners agree on selling all their gas output to Uztransgaz.

“We cannot allow our potential foreign partners to export their gas themselves,” Sidikov said, noting that granting them such an option could take the internal rate of return (IRR) of their project in Uzbekistan to the “unacceptable” level of 60%.

Uztransgaz is thus expected to offer a lower price for gas to new foreign operators that will bring down the expected level of IRR of their gas developments to between 11% and 16%, he said.

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Uztransgaz focused on revamp of network