The Central Asian energy sector is undergoing transformations and uncertainties due to international and regional factors. Internationally, globally low oil prices and the unstable situation in the Persian Gulf and Middle East create tensions over the oil and gas sector. Regionally, in the past two years we have seen the establishment of new presidential administrations in Uzbekistan, Kyrgyzstan and Kazakhstan. The changes in political leadership inevitably have an impact on the overall direction and movement of the economic policies in these countries and in the region in general. So, the question is – what has changed in the energy sector in Central Asia and what to expect from it in the immediate future?
One of the biggest accomplishments of last year was the signing of the Convention on the Legal Status of the Caspian Sea. This document had been negotiated for more than 25 years by all five Caspian littoral states, (Azerbaijan, Iran, Kazakhstan, Turkmenistan and Russia) and has significant implications for the future of energy sector in the region. The Convention demarcates 25 nautical miles from the shore for each country, but leaves the division of the seabed to bilateral negotiations. This means that the most sensitive issues of territorial disputes, mainly between Iran and its neighbours, remain unresolved, which directly affects any future plans for oil exploration and extraction projects. In addition, the construction of any pipelines along the seabed has to be approved by all five states, leaving the question of the coveted Trans-Caspian pipeline open. The pipeline has been a project to connect Caspian oil and gas resources to Europe directly through Caucasus, thus avoiding Russia’s route, which is the main one used currently. It is a project that is supported both by the EU to diversify its energy suppliers and by Caspian states (namely Azerbaijan, Kazakhstan and Turkmenistan) to diversify and expand their export routes. Therefore, the clause on pipeline construction in the Convention practically blocks any possibility, as Russia is opposing it.
The year 2019 has seen the return of Turkmen gas supplies to Russia after a three-year break. The export of natural gas to Moscow is done under the framework agreement signed in 2003, which was put on hold over the dispute in 2014-2015 over gas prices and supplies. Russia’s importation of Turkmen gas is as much a geopolitical move as it is an economic one. The cheaper supplies from Turkmenistan are supposed to supplement domestic consumption in Russia and make more gas available for Russian exports. The pause in the energy relations between these two countries left Turkmenistan with only one customer for its gas – China. Such overreliance on Chinese interest in gas supplies (36 billion cubic meters in 2018), a continuous economic decline and dependence on gas exports as the major commodity in Turkmenistan creates a fragile situation. Geopolitically, the return of Russia is worth paying attention to, as Moscow can try to scale down Turkmen’s desires for alternative pipeline routes for gas exports.
Meanwhile, Kazakhstan, whose oil sector and economy in general, has been hit by the decline in global oil prices, is aiming at increasing oil production and reaching 105 million tons of oil per year. Increased production (370,000 barrels per day) in the Kashagan field supports such claims. Kazakhstan also aims to use surplus gas production for the petrochemical industry.
Petrochemical and refining industries are a new sector for future development in Central Asia. Both Kazakhstan and Uzbekistan are looking closely into using part of their oil and gas production for refining rather than export. For Uzbekistan, processing gas is more profitable and efficient due to the constraints of logistics and limited availability of pipelines. The reforms launched by president Shavkat Mirziyoyev and the opening up of the country to foreign investors is aimed at bringing new agreements, especially in the energy field. The first example of this is a new agreement between Russia and Uzbekistan on the construction of nuclear power plant.
Central Asian states have recently started discussing the introduction and use of alternative sources of energy nationally, especially with the impetus from ‘Future Energy’ themed EXPO-2017 in Astana. This discussion has led to the development of policy documents and national strategies for introducing alternative energy into the sector. There are several big projects underway in this field in the region. Thus, on January 23, 2019 Kazakhstan opened the largest solar power plant in the region in the small former mining town of Saran, which will now supply electricity throughout the country. Kazakhstan and Uzbekistan are working on the installation of wind power, thus utilizing the region’s high potential. Yet, despite these efforts the use of ‘green energy’ is quite stagnant, as the countries still rely on conventional sources of energy.
The Central Asian region in the past couple of years has also seen progress in large-scale energy projects. One of these is the launch of the first two production units at the Roghun hydropower plant in Tajikistan, in 2018 and 2019 respectively. Due to financial, environmental and governance concerns, the long-awaited and controversial project – which for a long time was opposed by Uzbekistan – was expected to unleash the energy potential of the country and boost its economy. Yet the looming financial challenges facing the country might prevent the plant from operating properly, as the installed generating units are only temporary and will need replacement.
Another ambitious project whose future is uncertain is the Turkmenistan-Afghanistan-Pakistan-India pipeline (TAPI). This project has huge potential for the economies of the region and for building interconnectivity between South Asia and Central Asia, not to mention for sustaining the efforts for Afghanistan’s rebuilding process. However, the security of the pipeline and the project as a whole depend on the negotiations between the US and Taliban, which at the moment have been postponed by US president Donald Trump. Progress in construction is unclear as there are contradictory reports of additional pipes being supplied on the Turkmen side, although it was reported that the Turkmen section of the pipeline was completed.
In sum, Central Asia’s energy sector is both dynamic and changing, yet with a plethora of uncertainties and questions. What is more interesting to see is that the region’s energy sector goes beyond great-power competition and balancing, but also hinges on the directions taken by and financial capacity of states to implement such new energy policies and their ensuing trajectories.