Central Asia Is A Key Emerging Energy Player

By Dorian, James P

(Author note-As used in this article, the term Central Asia and northwest China includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan andXinjiang, China. While Xinjiang is politically part of the People’s Republic of China, geographically it is part of the region known by social scientists as Central Asia. All opinions and conclusions are solely those of the author and do not necessarily reflect the official position of any international organization or government agency.)

In just 15 years since independence, Central Asia’s energy industry has attracted more attention from the world community and at a quicker pace than did the Middle East when it first developed into a global power during the 1960s when OPEC was established. Central Asia’s location at the crossroads of Asia, Europe, and the Middle East will keep the region’s strategic importance to energy markets elevated for decades to come.

Central Asia represents one of the world’s last great frontiers for geological survey and analysis, offering opportunities for the discovery, production, transportation, and refining of enormous quantities of oil and gas and other energy resources. Central Asia is rich in hydrocarbons, with gas being the predominant energy fuel. Turkmenistan and Uzbekistan, especially, are noted for gas resources, while Kazakhstan is the primary oil producer. Home to more than 75 million people in an area 45% of the size of the U.S., Central Asia’s resources include 10.1 billion barrels of undeveloped proven oil reserves and 6.65 trillion cubic meters (tcm) of natural gas that await investment and development (BP, June 2004).

Neighboring Xinjiang Uygur Autonomous Region, China, also has substantial hydrocarbon potential, although previous projections of reserves were grossly overestimated.

Oil And Natural Gas

Kazakhstan is the main producer of oil in the region, with current output of crude at 1,106,000 barrels per day (b/d). The country has proven oil reserves of 9 billion barrels, or 1.2 billion metric tons. Its surplus has reached 915,000 b/d-a greater than four- fold increase over 1995. Kazakhstan’s hydrocarbon reserves are contained in 153 occurrences, including 80 petroleum, 24 gas- petroleum, 21 petroleum-gas condensate, five gas condensate and 19 gas fields.

Energy Production by Country, Region, 2004 (unless otherwise noted).

Central Asia’s Leading Upstream

Oil Foreign Investment Projects by Country.

The main hydrocarbon reserve base is concentrated in western Kazakhstan’s Guryev, Mangistau, Uralsk and Aktubinsk regions. The hydrocarbon resources of these regions are almost equivalent to those of Western Siberia within Russia in terms of explored and extrapolated petroleum and gas reserves. Substantial oil reserves are also suspected in Kazakhstan’s offshore Kashagan field (Caspian Sea), an 80 km x 25 km field reportedly containing recoverable reserves of 7-9 billion barrels of oil equivalent, with further potential totaling 9-13 billion barrels using secondary recovery technology (Energy Information Administration, November 2004). This makes Kashagan one of the largest confirmed oil fields in the world and the only one among the top five outside the Persian Gulf.

The Tengiz deposit, discovered in 1981, is located in the northwestern Pre-Caspian area (Guryev District). Tengiz is a unique petroleum and gas deposit, unrivaled in the size of its reserves by any other known deposit in the world. Even though the deposit has been explored to a depth of only 5,500 meters, its potential recoverable reserves, estimated at 6-9 billion barrels of petroleum by consortium member ChevronTexaco, suggest cost-efficient exploitation (Zhanseitov and Asanov, 1993). According to ChevronTexaco, Tengiz could produce 700,000 b/d by the end of the decade (Energy Information Administration, November 2004).

Predicted Oil Production and Export in Central Asia to 2015 (barrels per day).

Kazakhstan operates three oil refineries – Pavlodar, Shymkent (formerly Chymkent), and Atyrau – with one each being located in the northern, southern, and western regions of Kazakhstan, respectively. The refineries have a combined total crude oil refining capacity of 427,000 b/d (20 million metric tons per year), and capacity utilization of 95% (Energy Information Administration, November 2004). They are fed mostly by indigenous crudes or oil piped from Russia. More specifically, the Pavlodar refinery is supplied with crude oil from West Siberia by means of the Omsk-Pavlodar pipeline and the Shymkent refinery presently uses oil from Kazakh fields at Kumkol, Aktyubinsk and Makatinsk, but utilization is low because it is unable to process other oils. The Atyrau refinery is fully supplied with local Kazakh crude oil from the northwest.

Kazakhstan’s natural gas reserves are estimated at 1.90 tcm. Eighty-three deposits contain natural gas, though only 17 of those are exclusive gas reserves and the remaining are oil and associated gas reserves. Natural gas is unevenly distributed throughout the country. More than 40% of Kazakhstan’s gas reserves are located in one field-the huge Karachagank field in the northwest part of the country.

Kazakhstan has two distinct gas distribution networks-one in the west which services the nation’s producing natural gas fields, and one in the south which primarily delivers imported natural gas to the southern consuming regions (Energy Information Administration, November 2004). Natural gas output has risen steadily since 2000, with current output at 12.9 billion cubic meters (bcm) per year. According to the 15-year strategy of the Kazakh Ministry for Energy and Mineral Resources, the country intends on increasing its gas output to 45.3 bcm by 2010, and to 52.1 bcm by 2015, though the country is not yet on a pace to achieve these targets. (Energy Information Administration, November 2004).

Kazakhstan’s primary oil pipelines, with a total length of 3,384 kilometers (km), were constructed at the end of 1960s and have now deteriorated. Kazakh crude is transported mainly to Russian refineries and exported via the Abut Volga and Black Sea pipelines. Two export pipelines transport the oil to refineries and export pipelines in Russia. Transportation of Kazakh oil also occurs by barge and rail to the Baltic, and by ship and rail to the Black Sea. In 2004, Kazakh oil was exported in three directions: northward (via the Russian pipeline system and rail network); westward (via the Caspian Pipeline Consortium, or CPC, project and barge to Azerbaijan); and southward (via swaps with Iran) (Energy Information Administration, November 2004). Since October 2001, the CPC transported roughly 250,000 b/d, or roughly onethird of Kazakhstan’s exports. Most of this oil came from the Tengiz field.

Turkmenistan, an important gas and oil producing republic of Central Asia, will play a critical role in future world energy markets, as it ranks eleventh in world reserves of gas, above Iraq. Some analysts place reserve amounts at much higher levels. Gas production in Turkmenistan has grown more than 25% from 2000. Yet, like its Central Asian neighboring states, transportation bottlenecks may, if not resolved, limit longer-term hydrocarbons development (Dorian, October 7, 2002). The value of Turkmenistan’s gas is determined in large measure by access to markets. For this reason, a number of pipeline projects to carry Turkmenistan’s resources are in planning or have been proposed, with most of them an alternative gas export route outside of Russia.

Uzbekistan is noted for being one of the few former Soviet republics that increased oil output consistently since becoming independent in 1991. State company Uzbekneftegaz boosted oil production to 7.6 million metric tons, or 175,000 b/d in 1996, achieving self-sufficiency that year. Consequently, the country stopped being a net importer that year. Since then, Uzbek output has stabilized at around 166,000 b/d, or 7.1 million metric tons, in 2003.

Uzbekistan has abundant oil and gas resources, with 60% of the country’s land area showing oil and gas potential. Uzbekistan contains modest oil reserves, estimated at 0.6 billion barrels, or 0.1 billion metric tons. The country could reportedly increase output relatively easily if a viable external market were identified. In five of the republic’s proven oil- and gas-bearing areas alone, potential (unexplored) resources are estimated at more than 5 billion metric tons of oil and condensate, and 5.5 tcm of natural gas. By 2000, the Uzbekneftegaz National Oil and Gas Corporation had identified and explored 171 oil and gas fields, 51 of which were already producing oil, 27 producing gas, and 17 producing condensate (Interfax News Agency, May 4, 2000).

Unlike some of their Central Asian neighbors, Kyrgyzstan and Tajikistan produce only small quantities of oil. Tajikistan in particular has insignificant reserves of petroleum and natural gas and relies heavily on imports from other former Soviet republics, notably Uzbekistan and Turkmenistan. Kyrgyzstan contains seven developed oil fields and two oil/gas fields but due to difficult geological conditions, recovery rates are low. Exploration continues in the favorable Naryn oblast area of ea\stern Kyrgyzstan, situated just across the border from China’s Tarim Basin. Current crude oil production levels in Kyrgyzstan are at around 2,000 b/d; consumption is 20,000 b/d (Energy Information Administration, May 2005).

Predicted Gas Production and Export in Central Asia to 2015. (billion cubic meters)

In October 1996 Kyrgyzstan’s first and only oil refinery, Jalalabad, opened with a capacity of 10,000 b/d. Jalalabad remains mostly underused, however, with domestic output of crude at only 2,000 b/d. The Jalalabad refinery is now operated by the Kyrgyz Petroleum Company, a joint venture of the British firm Petrofac Resources International, Ltd., and Kyrgyzneftgaz, the state-owned oil company. Negotiations are also under way with Uzbekistan to import gas condensate for processing into gasoline at the refinery. Nearly all oil and gas products are imported into Kyrgyzstan from Kazakhstan and Russia.

In neighboring China, Xinjiang’s oilfields have deposits estimated at 20.86 billion metric tons and natural gas deposits estimated at 10.3 tcm (People’s Daily, December 6, 2000). The region accounts for 30% and 34% of the nation’s on-land crude oil and natural gas resources, respectively. The Karamay oilfield in the Junggar Basin – the fourth largest in China – was established more than 45 years ago. The Tarim Basin – discovered in 1984 – in southern Xinjiang covers an area of 560,000 square kilometers, with the oil and gas-rich Taklamakan Desert at the center.

Over the Tenth Five-Year Period (2001-2005), the autonomous region is expected to verify oil reserves totaling 3.3 billion metric tons and gas reserves reaching 1.16 tcm. It plans to increase its annual crude oil production to 24 million metric tons, and annual gas production to 18 bcm. Although output predictions exceed these figures, national policies require Xinjiang to ship 50% of its crude oil production to other provinces in China, resulting in a deficit in Xinjiang itself. Therefore cooperation with other parts of Central Asia would be an important way for China to alleviate any future energy shortages.

Foreign Investment

Most private foreign-investor interest in Central Asia to date has focused on providing technology and expertise for the development of the region’s potentially huge oil and gas fields. The biggest concerns to companies and international lending agencies considering investing in Central Asia and Xinjiang are unstable or unclear tax, currency, investment, and environmental policies that could jeopardize the investments, particularly as these relate to joint-venture contract terms and conditions. Investors in oil and gas are specifically worried about securing reliable export options. Several multibillion-dollar deals have been established in Kazakhstan and Turkmenistan; some deals have however turned sour or stalled.

Since the 1990s, a number of priority investment areas have been established in Central Asia’s lucrative oil and gas industries:

* Advanced methodologies for hydrocarbon seismic reflection and refraction.

* Development of an integrated system for gas collection and utilization, including compressors for gas separation.

* Pipeline construction and rehabilitation.

* Resuscitation of fields previously considered spent but that still contain hydrocarbons that can be extracted with advanced technologies.

* Construction of product storage terminals and natural gas-fed petrochemical facilities.

* Refinery design, modernization, and construction.

* Surveying equipment and technology for outer continental shelf studies.

In the years ahead, investors will continue to encounter an evolving energy industry in Central Asia, faced with complex issues such as increased competition for capital; environmental constraints; rising wages and labor costs; shifting centers of exploration, development, and processing; and unprecedented political change. Geopolitical posturing in Central Asia by neighboring China, Russia, Iran, and Turkey will continue to be reflected through investments and participation in the oil and gas industry.

Russia’s Remaining Influence

Despite the breakup of the Soviet Union nearly 15 years ago, Russia still exerts economic influence over its “near abroad” neighbors, including Central Asia, with much domination linked to energy and energy products. Oil and gas accounts for about half of Russia’s foreign exchange earnings and contributes significantly to that nation’s economy. Consequently, Russia is determined to maintain its grip on the lucrative Central Asian hydrocarbon resources. For example, Russia wants the 150,000 sq mile Caspian Sea to be designated as a lake, requiring that its resources be cooperatively developed by the states surrounding it. Kazakhstan and Azerbaijan, in contrast, have insisted that the Caspian be treated as a sea under international maritime law, thus providing each coastal state the exclusive right to develop a discrete area. Iran and Turkmenistan generally support Russia’s position. Another area of controversy between Russia and its neighbors is oil and gas transportation. In general, there are three principal export routes out of Central Asia (Dorian, May 2001):

* Through Russia and the port of Novorossiysk;

* Via the Caucasus (Georgia or Azerbaijan); and

* Via Turkey.

Routes through Russia include transport of Tengiz/Korolevskoye oil to the Russian Black Sea (Novorossiysk) by the Caspian Pipeline Consortium (CPC). Delivery of the first CPC oil to Novorossiysk occurred in autumn 2001, after completion of a new 720 km pipeline section. On May 25, 2005, the 1,700 km multi-billion dollar pipeline from Baku, Azerbaijan to Ceyhan, Turkey (BTC) opened up-the only major pipeline in the region that does not cross Russia or Iran- which will eventually carry one million barrels of oil a day from the Caspian Sea to the Mediterranean (BP, May 25, 2005). The BTC pipeline opens up huge new fields in the Caspian region to world markets, enhancing security of supplies while bypassing the sensitive and heavily used Bosporous Straits. The oil-rich republics in Central Asia desire multiple outlets and markets for their exports, and consequently have established significant ties with the West, including memberships in the World Bank, Asian Development Bank, and other regional and international non-governmental bodies.

Conclusions

On an energy equivalent basis, Central Asia is predominantly a gas-producing region. The potential for oil development is vast, however. Uzbekistan and Turkmenistan are the two major gas producers in Central Asia, although Kazakhstan also has significant gas deposits. Xinjiang is self-sufficient in gas production. Gas from most of the region is generally high in sulfur and must be treated before it can be transported through pipelines. Transportation is a major problem facing the gas industries in Central Asia, especially in the Soviet republics. The transportation network was established during Soviet times and reflected the priorities of the Soviet Union. Gas traditionally flowed through Soviet-built pipelines northwest to major processing centers in European Russia.

Oil is the second-most important energy resource with a significant export potential in the region. In addition to Kazakhstan’s 1.2 billion metric tons, Uzbekistan has more-modest oil reserves (up to 730 million barrels), and Kyrgyzstan and Tajikistan produce very small quantities of oil. In Xinjiang, despite earlier predictions of massive oil resources in the Tarim basin, new evidence suggests that actual reserves are more modest and more costly to develop. Although present and projected oil production exceeds current and projected oil consumption in Xinjiang, national policies require the province to ship half of its crude to other provinces within China, resulting in an oil deficit in Xinjiang itself.

Like gas, transportation will remain a key bottleneck or facilitator of future oil development in the region. Importantly, those that control the oil routes out of Central Asia will impact all future direction and quantities of flow and the distribution of revenues from new production. The extent of new pipeline construction or refurbishment will also affect overall levels of foreign investment in the region.

Globally, Central Asia’s impact on regional energy markets will continue to expand to 2020 and beyond, primarily through the adding of new incremental supplies of oil and gas markets and, eventually, development of new transportation routes.

ACKNOWLEDGMENTS:

This article is based on a paper presented at “30 Years of World Energy Policy:

The International Editorial Board Meeting of Energy Policy Journal and Conference” sponsored by Hong Kong Baptist University, Hong Kong, China.

BIBLIOGRAPHY

BP, June 2004, BP Statistical Review of World Energy, London.

BP, May 25, 2005, “New Pipeline Gives Caspian Oil Access to World Markets,” Press release, London.

China Coal Net, 2003, “Xinjiang: Coal-fired Power Sector Faces Increasing Pressure,” via the website www.chinacoalnews.com, Beijing.

Dorian, James P., May 2001, Oil and Gas in Central Asia and Northwest China, The CWC Group, London, 176p.

Dorian, James P., 1999, “Energy Resources in Central Asia,” Chapter 1 in Second Workshop on Economic Cooperation in Central Asia: Challenges and Opportunities in Energy, Published by the Asian Development Bank, Manila, Philippines, 176 p.

Dorian, James P., October 7, 2002, “Turkmenistan’s Future in Oil and Gas Hinges on Certainty for Export Options,” in Oil and Gas Journal, Vol. 100, No. 41, PennWell Publishers, Tulsa, Oklahoma, pp. 20-27.

Energy Information Administration, November 2004, “Kazakhstan,” Country Analysis Brief,” Washington, D.C.

Energy Information Administration, May 2005, “An Energy Overview of The Republic of Kyrgyzstan.”

by James P. Dorian, Ph.D., International Energy Economist, Washington, DC

The author: Dr. James P. Dorian is a Washington, DC-based International Energy Econ\omist specializing in Eurasian oil, gas and coal issues; renewable energy and alternative fuels; and advanced transportation technologies. With more than 20 years of experience in analyzing energy markets and policies, Dorian is an expert on the energy and economic development strategies of China, the former Soviet Union and Asia; oil and gas development and investment trends; and the geopolitical forces affecting the global energy industry.

Copyright Oildom Publishing Company of Texas, Inc. May 2006

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