Central Asia's new, pivotal role
Central Asia is increasingly being recognised by the global oil and gas community as a prospective producer of energy and fuels, and as an important transportation link between different parts of Eurasia
The Central Asia region (CAR) includes six republics of the former Soviet Union: Kazakhstan, Turkmenistan, Azerbaijan, Uzbekistan, Kyrgyzstan and Tajikistan. It is sometimes referred to as Middle Asia.
The region stretches from the Caspian Sea in the west to China in the east, and from Afghanistan in the south to Russia in the north.
It has become recognised in global oil and gas circles as a prospective producer of energy and fuels, and as an important transportation link between different parts of Eurasia.
Many countries in the CAR have turned eastwards when considering investment, joint projects execution, trading, and other business activities, in recognition of the importance of these growth markets. This hasn’t always been the case, however. Until recently, Central Asia had been overshadowed by larger countries in the region, such as India and China, and by emerging economies in Africa.
The CAR is rich in natural resources, with estimated reserves of between 110 billion and 240 billion barrels of crude oil, at around $4tn in value.
The largest oil producer in Central Asia is Kazakhstan and, together with one of the biggest oil suppliers in Western Asia, Azerbaijan, may be home to reserves as much as three times greater than those of the US. These countries have a strategic location, but geopolitical risks, lack of industrial and civil infrastructure, and demographic problems have all held back the development of their oil and gas sectors.
Presently, almost all European consumers have close long-term supply relations with partners from Russia and the Middle East and, as such, it is unlikely that they will become a final point of trade for Central Asian countries in the foreseeable future. However, due to the location of the region, the most important clients will likely be India and China, the highest-growth countries when it comes to energy demand.
This fact could ensure that the CAR receives more financing for projects, and will be a further incentive to develop the required infrastructure in these countries.
China has been participating in different projects in Central Asia for some time now, particularly in Kazakhstan, investing in construction works and supplying technology and equipment, with a focus mainly on the upstream sector. The key reason for this is China’s motivation to expand and diversify the sources of its energy imports.
The Chinese strategy is to feed its growing refining and petrochemicals industry in order to first meet domestic demand, and then to export high-value products to other regions. Another goal is to stabilise the internal energy balance by having long-term contracts with reliable oil producers in the Middle East, Africa and, now, the CAR.
For Central Asia, the first step in looking to provide crude oil to external markets is to further develop its oil and gas fields, and to implement thorough geological surveys in order to confirm and sustain levels of proven oil reserves and production. There are already many joint ventures (JV) with oil majors such as ExxonMobil, Shell, Chevron, Conoco, Eni, and others. These companies bring to the table the latest techniques and know-how, which result in a rapid increase in oil and gas field development.
This strategy has been in place for several years, and there has been a surge of oil crude and condensate production volumes, but the CAR has been particularly vulnerable to the uncertainties caused by the low crude price environment and global stagnation. In 2014-15, the oil extraction rates fell to a very low level, making it even more difficult for local companies to survive and overcome the present market situation.
Infrastructure expansion has been significant in the last decade; the existing pipeline network supports only two routes (northern and western), but as soon as all expected oil pipelines are constructed and commissioned, the CAR will become an important hub that connects many regions and directions, including Europe, China, Russia, India, and the Caspian and Caucasus regions. In terms of gas transportation networks, there needs to be more agreements made in order to allow the implementation of a similar kind of pipeline network.
For the downstream sector in the CAR, gas processing, refining, and petrochemicals production upgrade projects are included in the medium- to long-term plans for the region. In order to implement such plans, it will be necessary to get support from local oil and gas producers, as well as local, Western or Chinese investors, possible JV partners, main customers and governments. Of course, the required infrastructure and feed production facilities also need to be in place.
Nevertheless, some actions have been taken to achieve these goals. China, for example, has financed the construction of two small refineries in Kyrgyzstan, supplied by Kazakhstan, to produce 1.35 million tpa of products. Chinese companies are also involved in the development of a large petrochemicals project for the production of polyolefins at Atirau. This project is still in the development stage and is a JV between China, Kazmunaygas, and private investors.
Kazakhstan is the second largest oil producer in the Asian region, and the 14th largest oil producer, twice as high as Azerbaijan, India or Indonesia. As a result, Kazakhstan has become a key energy partner for China, thanks to the shared border between the two countries, China’s role in oil and gas development in Kazakhstan, and a long-lasting partnership with Russia. Chinese companies have taken control of around 20% of the country’s oil production and part of its gas production, as well as of the longest existing pipeline between China and the Caspian Sea, which runs through Kazakhstan territory.
Turkmenistan is a major gas exporter in the region. Its two main consumers are Russia (via an agreement in 2009), and China (thanks to a 30-year agreement that started in 2009 for 30bcm of gas through the Central Asia-China Gas Pipeline). Its oil production rates are quite moderate (235,000bpd in 2016), but are comparable to countries such as Australia and Thailand.
An increase in investments in Turkmenistan is expected in the next five years because of its reserves and economic potential. The country is also implementing an interesting methanol to gasoline project, as a route to monetising its natural gas. Rather than exporting natural gas or methanol, this option allows the production of gasoline for local and regional markets.
Uzbekistan’s volume of oil production is quite modest compared to its neighbours, but its geopolitical advantages include its central location between all the other countries that constitute the CAR, and the fact that it has the largest population. As a result, the country represents a good partner for CAR market players, as a possible coordinator and integrator of infrastructure projects in the area. In 2013, Uzbekistan acquired an energy contract worth $15bn from China, mainly in gas supply to the country.
Azerbaijan has large gas reserves and also produces relatively sweet crude oil. Ambitious plans for developing a large oil, gas, and petrochemicals project (OGPC) have had to be scaled back due to the present low crude oil price environment. Nevertheless, the project is expected to proceed in stages over the next decade.
The CAR has been monitoring the recent developments in Iran and Turkey, and this will reinforce its plans for closer cooperation with countries to the east and south.
Next month, the focus will turn to recently implemented and future oil, gas, and pipeline infrastructure projects in the region, and to trends in the development of Central Asia’s major energy suppliers.