SOUTH BOUND

The gas union between Russia, Kazakhstan and Uzbekistan first suggested by Russian President Vladimir Putin has materialised in less than a year.

On October 7, 2023, the heads of the three states launched the largest trilateral energy project - the supply of Russian gas to Kazakhstan to Uzbekistan.

The project promises obvious benefits to all three countries. Thus, Uzbekistan will receive additional volumes of gas to guarantee uninterrupted supply of heat and electricity to households and socially important facilities. Kazakhstan will be able to gasify the northern and eastern regions of the country. Russia will gain new markets in Central Asia, which is so attractive to all these days.

Gas union

The opening ceremony attended by Vladimir Putin and the leaders of Uzbekistan and Kazakhstan Shavkat Mirziyoyev and Kasym-Jomart Tokayev online through a videoconference took place in Novo-Ogaryovo, Moscow. The command to start supplies was received and executed by a dispatcher at the Alexandrov Gai compressor station on the border between Russia and Kazakhstan.

The Central Asia-Centre gas pipeline constructed back in the 1960s is used for deliveries. During the Soviet period, Uzbekistan used the pipeline to supply about 80 billion cubic metres (bcm) of natural gas annually to eight Soviet republics. Now it will work in reverse mode, pumping the Russian gas to Central Asia for the first time in history.

President Putin said that the project was undoubtedly a great success in terms of economic development and energy security of the three countries and the entire region.

President Tokayev reminded that Kazakhstan hosted more than 20,000 km of main gas pipelines with annual throughput capacity of up to 255bcm. "Kazakhstan is interested to use its transit potential in full and is ready to further increase the volume of Russian gas supplies," Tokayev said.

"The project will contribute to the expansion and modernisation of Kazakhstan's gas transmission infrastructure and will make it possible to meet Uzbekistan's growing demand for natural gas, which is currently almost 3bcm annually. It will also boost the industrial development of our countries, improve the business climate and raise the living standards of citizens," Tokayev added.

The Uzbek leader said that the implementation of this project demonstrated cohesion and ability to effectively respond to the challenges of the global economy, especially in ensuring energy security, and expressed readiness of Uzbekistan to develop a long-term partnership in this area.

Indeed, there are a number of factors, including the rising population and economic indicators in these countries, declining domestic gas production, abnormally cold winters and the need to fulfil export obligations to China that made the supply of additional gas volumes to Kazakhstan and Uzbekistan necessary. In the past, the situation was different, and these countries acted as exporters. For example, Uzbekistan has long been a supplier of gas, even to Russia. However, last year both Kazakhstan and Uzbekistan announced that they would soon turn into importers of natural gas.

Deficit brings us closer together

In Uzbekistan, gas production has been declining recently due to the depletion of reserves, technological losses and the lack of effective system of control over the supply of hydrocarbons. By the end of 2022, gas production dropped by 4% to 51.7bcm compared to 2021. The January 2023 energy crisis amid abnormal cold weather in Uzbekistan demonstrated the vulnerability of the industry. At the peak of the cold weather, gas supplies to Uzbekistan were temporarily cut off due to failures at Galkynysh field in Turkmenistan. That's why Uzbekistan had to temporarily suspend exports to China and was even forced to close (or at least limit) the operation of gas-filling stations in some areas. As a result, Tashkent began negotiations on transporting Russian gas via Kazakhstan.

In June, Gazprom and the Uzbek Ministry of Energy signed a two-year contract for Russian gas supplies and developed a roadmap to prepare the country's gas transmission system (GTS) for this purpose. Under the agreement, the daily throughput capacity of the Uzbek infrastructure will reach 9mcm, or almost 2.8bcm annually.

Also, Russian Gazprom and Kazakh QazaqGaz signed a contract for the delivery of Russian gas through Kazakhstan to Uzbek consumers via the Central Asia-Centre pipeline.

In addition to meeting the demand of consumers in the northern and eastern regions, the project is also economically beneficial to Astana due to additional revenues from transit. In fact, Kazakhstan is a landlocked country and has no maritime access to international logistical routes, urging Astana to consolidate efforts on organising the transit of energy resources to neighbouring countries.

"I cannot announce yet the amount (of Kazakhstan's revenues from transit, R+). It will depend on the volume of transit. We will know how much QazaqGaz will receive as soon as the indicative balance is ready. But we will have revenues already this year," Kazakh Minister of Energy, Almasadam Satkaliev, said.

He added that the Kazakh authorities plan to channel revenues from transit to Uzbekistan to upgrade the country's gas transportation system.

"We have a chance to upgrade our gas pipeline system. So these additional revenues from transit will minimise the burden on QazaqGaz and provide relatively stable cash income for the implementation of the repairs and investment programmes," Satkaliyev explained.

He noted that by the end of this year Kazakhstan will supply about 800mcm of gas from Russia to Uzbekistan.

As for Russia, gas supplies to Kazakhstan and Uzbekistan will make it possible to compensate to some extent the decreasing volumes of exports to the EU. The Central Asian direction is new and volumes are still small. But amid the unprecedented reduction of Russian supplies to Europe, it would be an unacceptable luxury to neglect new buyers.

According to analysts, the goal of supplies through the Central Asia-Centre pipeline is an opportunity for Russia to increase its gas exports to China rather than to Uzbek and Kazakh markets. But this is unlikely in the near future, as both Kazakhstan and Uzbekistan are competing with Russia in the Chinese gas market. Most likely the project will become viable when these two Central Asian states turn from exporters into net importers of gas.

By the way, neither party reports on the cost of Russian gas. In fact, this information is usually a commercial secret not disclosed publicly. Nevertheless, the Uzbek Energy Minister Zhurabek Mirzamakhmudov said that the price of gas was based "on national interests and market conditions". The parties "agreed on a competitive price taking into account national interests of each other".

Apparently, the price of Russian gas for Uzbekistan will be lower than European prices. Indeed, without Moscow's attractive commercial offer, the so-called gas union would hardly be possible. Obviously, ensuring Russian gas supplies to Kazakhstan and Uzbekistan to effectively protect them against the bitter winter conditions is clearly not the only reason of the new deal. It is certainly necessary, but hardly at any price.

Meanwhile, Uzbekistan is considering a long-term co-operation with Russia. "During the Uzbek president's official visit to Russia, we started negotiations with Gazprom on the conclusion of medium- and long-term contracts on gas supplies," Mirzamakhmudov said.

Thus, a common gas market is being developed in Central Asia together with the Russian Federation, which is of great geopolitical significance for all countries participating in this market.

All roads lead through Azerbaijan

Central Asia is the most important region for the development and implementation of energy diversification projects for the global economy. Its vast natural resources and geographical location create prerequisites for serious investments and implementation of large-scale projects. Therefore, the growing attention to the region by the world's leading countries and international organisations is not surprising.

Since Azerbaijan understands these factors very well, Baku has deepened its strategic relations with most Central Asian countries in recent years. Trade and transport operations are expanding, joint investment funds have been established with Uzbekistan and Kyrgyzstan, while Azerbaijan's trade turnover with Central Asian states tripled in 2022.

Through the development of transport routes, Azerbaijan has become a reliable bridge connecting Central Asia with Turkish and European markets.

Energy plays a special role in Baku's relations with Central Asia. There are agreements with Uzbekistan to expand bilateral cooperation in this area, to participate in oil and gas projects of the two countries and to implement the road map for 2023-2025 in the energy sector.

A successful partnership has been established between Baku and Astana on the transit of Kazakh oil through the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. The volume of transit in April-September 2023 reached 609,000 tonnes, and will increase to 1.1m tonnes by the end of this year.

Azerbaijan and Tajikistan have an agreement to strengthen trade and economic co-operation. Thus, there are plans to supply Azerbaijani oil to Tajikistan for processing at the Dangara FEZ plant, discuss the export of aluminium, cryolite and aluminium fluoride to Azerbaijan, increase bilateral trade turnover, etc.

The developing cooperation with Turkmenistan is based on the transit of oil via BTC and swap deliveries of Turkmen gas via Iran to Azerbaijan. This opens up opportunities for exporting Turkmen gas to European markets, albeit not directly. There are prospects for expanding co-operation through joint development of the Dostyk oil and gas field in the Caspian Sea.

In general, we can predict the expansion and deepening of Azerbaijan's relations with Central Asia in the short term and the successful implementation of significant international projects in the medium term. Because there is a keen and mutual interest on both sides.