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The Untapped Energy Riches of Uzbekistan

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What do Chinese, Malaysian, Russian, and South Korean companies know that we don't?

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Editor's Note: This article was written by energy journalist and government energy adviser John C.K. Daly of OilPrice.com, which offers free information and analysis on energy and commodities. The site has sections devoted to fossil fuels, alternative energy, metals, oil prices, and geopolitics.


While many Western investors remain fixated on somehow acquiring a slice of Turkmenistan's natural gas riches -- despite a recent scandal over the country's actual reserves – there's another country further east whose energy and mineralogical reserves have been overlooked: Uzbekistan.

While a number of factors are responsible for this oversight, including relative geographical isolation (Uzbekistan, along with Liechtenstein, is one of the world's doubly landlocked nations, requiring crossing two other nations to gain access to the oceans), which currently limits energy exports available for the global market, there are a number of pluses that the country has for investors willing to "think outside the box."

With a population of 27 million, Uzbekistan is Central Asia's most populous and dominant power. A conservative fiscal policy since 1991, including inconvertibility of the national currency, the som, has shielded its citizens from the hyperinflation that ravaged other former Soviet republics, but the policy previously diminished potential foreign investment.

However, since the global recession that began a year ago, Uzbekistan's fiscal conservatism, previously dismissed by the foreign investment community, has looked more and more like a pragmatic policy that isolated the country from the worst aspects of the recession (in stark contrast to other post-Soviet states that fervently embraced free market capitalism -- like Lithuania, whose economy contracted 18.1% this year and is expected to shrink further by 3.9% in 2010).

In a move certain to be welcomed by foreign investors, Uzbekistan is slowly moving toward making its currency convertible but until that happens, the country presently offers a fiscal stability unmatched by many of its more free-market neighbors.

And now, the good news about the country's resources: In 2006, Uzbekistan's natural gas reserves were estimated at 1.798 trillion cubic meters. During the Soviet era, Uzbekistan was the USSR's third-largest producer of natural gas, accounting for more than 10% of the Soviet Union's production, trailing only Russia and Turkmenistan.

In 1992, the country's first year of independence, Uzbekistan produced 42.8 billion cubic meters of natural gas.

Uzbekistan currently produces 60 billion cubic meters of natural gas annually, an amount nearly equal to Turkmenistan's production.

Uzbekistan's reserves are primarily concentrated in Qashqadaryo province and near Bukhara in the country's south-central region. During the 1970s, Uzbekistan's largest natural gas deposit at Boyangora-Gadzhak was discovered in Surkhandaryia province north of the Afghan border.

Unlike its energy-rich neighbors to the west, Kazakhstan and Turkmenistan, nearly 80% of Uzbekistan's production, about 48.4 billion cubic meters, is currently reserved for domestic use at heavily subsidized rates. Of the remaining 12 billion cubic meters of natural gas that Uzbekistan exports, more than half currently goes to Russia and the remainder goes to neighboring Central Asian states.

Under Uzbekistan's fiercely patriotic President Islam Karimov, relations Russia's state-owned gas firm Gazprom have been subject to fierce negotiations to win an equitable price for the country's exports.

Like other former Soviet republics, the Uzbek government chafed under Gazprom's "buy cheap, sell dear" policies and, in December 2008, scored a significant negotiating success by getting an agreement that in 2009, Gazprom would pay $305 per thousand cubic meters.
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