ARTICLE IN PRESS

Energy Policy 34 (2006) 544555 www.elsevier.com/locate/enpol

Central Asia: A major emerging energy player in the 21st century$James P. DorianInternational Energy Economist, 6201 Benalder Drive, Bethesda, Maryland 20816, USA Available online 27 December 2005

Abstract Energy is the most abundant and valuable natural resource of Central Asia and northwest China1 and includes oil, gas, coal, electricity, and renewables. Kazakhstan has large reserves of oil and coal. Turkmenistan and Uzbekistan have signicant reserves of gas. Kyrgyzstan produces signicant amounts of hydroelectric power. Xinjiang, China has signicant coal resources and an uncertain, although generally promising, potential for oil in the Tarim basin. These energy reserves form the basis for future economic growth and development in the region, and energy exports are beginning to generate important foreign exchange revenues. Although Central Asia enjoys vast energy development potential, there are obstacles to exploiting these resources, including limited infrastructure for transporting energynotably oil and gas pipelines and electric transmission linesin the region, political turmoil, payment difculties, and inadequate energy policies. Despite these challenges, however, with appropriate government planning Central Asia is poised to become a signicant world supplier of energy, especially in the oil and gas sectors, and the region is likely to diminish OPECs inuence of the global oil market over the long term. r 2005 Elsevier Ltd. All rights reserved.Keywords: Oil and gas; Foreign investment; Russian inuence

1. Introduction Central Asia today represents one of the worlds last great frontiers for geological survey and analysis, offering opportunities for the discovery, production, transportation, and rening of enormous quantities of oil and gas and other energy resources (Fig. 1). 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 percent of the size of the US (Table 1), Central Asias resources include 10.1 billion barrels of undeveloped proven oil reserves and 6.65 trillion cubic meters (tcm)

$ Paper Prepared For 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. 1 Includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan and Xinjiang, China. While Xinjiang is politically part of the Peoples Republic of China, geographically it is part of the region known by social scientists as Central Asia.

of natural gas that await investment and development (BP, 2004). Neighboring Xinjiang Uygur Autonomous Region, China, also has substantial hydrocarbon potential, although previous projections of reserves were grossly overestimated. Trade has grown rapidly in the past decade between Xinjiang and the neighboring Central Asian nations (Table 2). This paper examines in detail the energy industries in the former Soviet Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan collectively considered to have the largest potential for hydrocarbon development in the Former Soviet Union outside of Russia. Energy resources in neighboring Xinjiang, Chinageographically part of Central Asia are also evaluated, along with opportunities for energy cooperation across the borders in Central Asia. Overall energy investment opportunities in Central Asia are evaluated, along with the numerous obstacles companies are faced with in the region. The paper concludes by assessing the future outlook of the Central Asian oil, gas, and power sectors and their potential impact on global and regional energy markets.

0301-4215/$ - see front matter r 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2005.11.009

ARTICLE IN PRESSJ.P. Dorian / Energy Policy 34 (2006) 544555 545

0 0

300 Kilometers 300 Miles

RUSSIA

AstanaMong.

KAZAKHSTANLake Balkhash

Aral Sea

Caspian SeaAZER.

Almaty Bishkek

UZBEKISTANTashkent

KYRGYZSTAN

CHINATAJIKISTANIndian claim 1972 Line of Control

TURKMENISTANAshgabat Dushanbe

IRAN

Line of Actual Control

AFGHANISTANPAKISTAN

INDIA

NEPAL

Fig. 1. Central Asian republics and neighboring countries.

2. 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 (Table 3). Its surplus has reached 915,000 b/da greater than four-fold increase over 1995. Kazakhstans hydrocarbon reserves are contained in 153 occurrences, including 80 petroleum, 24 gas-petroleum, 21 petroleum-gas condensate, ve gas condensate and 19 gas elds. The main hydrocarbon reserve base is concentrated in western Kazakhstans 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 Kazakhstans offshore Kashagan eld (Caspian Sea), an 80 km 25 km eld reportedly containing recoverable reserves of 79 billion barrels of oil equivalent, with further potential totaling 913 billion barrels using secondary recovery technology (Energy Information Administration, 2004). This makes Kashagan one of the largest conrmed oil elds in the world and the only one among the top ve 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 5500 m, its potential recoverable reserves, estimated at 69 billion barrels of petroleum by consortium member ChevronTexaco, suggest cost-efcient exploitation (Zhanseitov and Asanov, 1993). According to ChevronTexaco,

ARTICLE IN PRESS546 Table 1 Socio-economic conditions of states, regions Populationa (millions) Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Xinjiang, China 15.19 5.15 7.16 4.95 26.85 16.90 Territory (thousand sq. km.) 2717.3 198.5 143.1 488.1 447.4 1600.0 GDPb,c(billions)

J.P. Dorian / Energy Policy 34 (2006) 544555

GDP real growth ratec (%) 9.1 6.0 10.5 21.4d 4.4 10.0f

GDP per capitab,c

Date of independence December 16, 1991 August 31, 1991 September 8, 1991 October 27, 1991 August 31, 1991 g

$118.4 $8.50 $7.95 $27.60 $47.59 $22.40e

$7800 $1700 $1100 $5700 $1800 $1325e

Sources: (1) Central Intelligence Agency, 2005, The World Fact Book, Washington, D.C.; (2) Gleason, Gregory, 1997, The Central Asian States: Discovering Independence, Westview Press, Boulder, Colorado, 220p and (3) Peoples Daily, December 15, 2003, Xinjiangs Economy Develops Rapidly, Beijing. a July 2005. b Purchasing power parity. c 2004 estimate except for Xinjiang. d Note: International Monetary Fund estimate is 7.5%. While ofcial government statistics show 21.4% for 2004, their estimates are unreliable. e GDP 2003 estimate. Xinjiangs GDP is estimated at 185 billion yuan (22.40 billion US dollars) in 2003, up 10.8% from the prior year. f 2003 estimate. The growth rate of industry was 8.2%, agriculture 12.3%, and tertiary industry was 10.3%. g Known to the Chinese as His-yu (Western Regions) for centuries, the area became Xinjiang (Sinkiang, or, New Borders) upon its annexation under the Ching (Manchu) dynasty in the 18th century. Westerns long called it Chinese Turkistan to distinguish it from Russian Turkistan. In 1877, Muslims in Xinjiang revolted and set up an independent state which became known as Kashgaria. Leaders of the region attempted to maintain relations with Britain and Russia during this time in anticipation of future Chinese efforts to bring the area under the control of the Qing dynasty. Xinjiang ofcially became a part of modern-day China in 1884. Since the establishment of rm Chinese control in 1949, serious efforts have been made to integrate the regional economy into that of the nation.

Tengiz could produce 700,000 b/d by the end of the decade (Energy Information Administration, 2004). Kazakhstan operates three oil reneriesPavlodar, Shymkent (formerly Chymkent), and Atyrauwith one each being located in the northern, southern, and western regions of Kazakhstan, respectively. The reneries have a combined total crude oil rening capacity of 427,000 b/d (20 million metric tons per year), and capacity utilization of 95 percent (Energy Information Administration, 2004). They are fed mostly by indigenous crudes or oil piped from Russia. More specically, the Pavlodar renery is supplied with crude oil from West Siberia by means of the OmskPavlodar pipeline and the Shymkent renery presently uses oil from Kazakh elds at Kumkol, Aktyubinsk and Makatinsk, but utilization is low because it is unable to process other oils. The Atyrau renery is fully supplied with local Kazakh crude oil from the northwest. Kazakhstans 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 percent of Kazakhstans gas reserves are located in one eldthe huge Karachagank eld in the northwest part of the country. Kazakhstan has two distinct gas distribution networks one in the west which services the nations producing natural gas elds, and one in the south which primarily delivers imported natural gas to the southern consuming regions (Energy Information Administration, 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, 2004). Kazakhstans primary oil pipelines, with a total length of 3384 km, were constructed at the end of 1960s and have now deteriorated. Kazakh crude is transported mainly to Russian reneries and exported via the Abut Volga and Black Sea pipelines. Two export pipelines transport the oil to reneries 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 (CPC), project and barge to Azerbaijan); and southward (via swaps with Iran) (Energy Information Administration, 2004). Since October 2001, the CPC transported roughly 250,000 b/d, or roughly one-third of Kazakhstans exports. Most of this oil came from the Tengiz eld. Turkmenistan, an important gas and oil producing republic of Central Asia, will play a critical role in future world energy markets, as it ranks 11th 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 percent from 2000. Yet, like its Central Asian neighboring states, transportation bottlenecks may, if not resolved, limit longer-term hydrocarbons development (Dorian, 2002). The value of Turkmenistans gas is determined in large measure by access to markets.

Table 2 Markets and trading partners of central Asia,a Xinjiang, China Major trading partners Primary farm products and industries Machinery, industrial materials, oil and gas, consumer goods Russia, Ukraine, Kazakhstan, Uzbekistan Russia, Ukraine, Uzbekistan, Kyrgyzstan Major exports Major imports Former soviet union Other

Country/Region

Principal natural resources

Kazakhstan

Oil and gas, chrome, iron ore, coal, gold, copper, leadzinc ore, tungsten

Kyrgyzstan

Hydro-electricity, gold, mercury, uranium, coal, cesium, antimony

United States, Turkey, United Kingdom, Germany, South Korea, Netherlands, China, Italy Germany, Bulgaria, Czech & Slovak Republics, China Iran Turkey, Germany

Tajikistan Cotton

Wheat, barley, meat, wool, metallurgy, textiles, machine building, petrochemical Tobacco, livestock, wool, metallurgy, agroprocessing, electronics, textiles, sugar Cotton, fruits Russia, Uzbekistan Russia, Ukraine, Azerbaijan, Kazakhstan Russia, Ukraine, Kazakhstan, Kyrgyzstan

Oil and gas, nonferrous metallurgy, chemicals, grain, garments, meat, coal Cotton, wool, agromachinery, wool, tobacco products, gold, mercury, uranium, hydropower Cotton, aluminum, fruits

Turkmenistan

Cotton, bauxite (aluminum), fruits Natural gas, cotton, electricity

Uzbekistan

Oil and gas, gold, coal, silver, copper, lead-zinc ore, tungsten

Grain, lumber, light industrial products, ferrous metals, fuel, machinery, textiles Fuel, chemicals, machinery Machinery, food, plastics and rubber, consumer goods, textiles Grain, machinery, consumer durables, other foods Steel products, chemical raw materials, fertilizers, building materials

Czech Republic, Other Eastern Europe, Western Europe Kazakhstan, Uzbekistan, Kyrgyzstan, Russia, Ukraine Hong Kong, Japan, United States, Italy, Netherlands, Germany, Rep. Of Korea, Pakistan, Mongolia

ARTICLE IN PRESS

J.P. Dorian / Energy Policy 34 (2006) 544555

Xinjiang, China

Oil and gas, coal, gold, cotton, grapes

Cotton, fruits and vegetables, textiles, cotton harvesters, textile machinery, metallurgy Cotton, corn, sugar beet, animal husbandry, minerals extraction, petrochemicals, textiles

Natural gas, cotton, petroleum products, electricity, textiles, carpets Cotton, gold, natural gas, fertilizers, light industrial goods, ferrous metals, textiles, food products Sugar, maize, tomato ketchup, pears, hops, cotton, sheeps casings, wool, garments, carpets,

Sources: (1) Dorian, James P., Tojiev Utkur Abbasovich, Mikhail S. Tonkopy, Obozov Alaibek Jumabekovich, and Qiu Daxiong, May 1999, Energy in Central Asia and Northwest China: Major Trends and Opportunities for Regional Cooperation, Energy Policy, Vol. 27, No. 7, Elsevier Science Ltd., pp. 281297; (2) Energy Information Administration, US Department of Energy, 2003, Country Analysis Briefs, Washington, D.C.; (3) Central Intelligence Agency, 2003, CIA World Factbook, Washington, D.C.; (4) Editorial Board, 1997, Almanac of Chinas Foreign Economic Relations and Trade, Hong Kong, pp. 483487; and (5) authors les. a Central Asia includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, and Xinjiang, China.

547

ARTICLE IN PRESS548 J.P. Dorian / Energy Policy 34 (2006) 544555 Table 3 Energy production by country, region, 2004 (unless otherwise noted) Commodity Oil (b/d) Gas (bcm) Coal (mtoe) Electricitye (billion kWh) Primary Energyf (mtoe) Kazakhstan 1,200,000 11.6 43.2c 66.82c 49.6c Kyrgyzstan 2000 .016 0.508d 11.72b 4.2b,g Tajikistan Negl. .05 .0127d 15.08b 3.5b,g Turkmenistan 162,500a 58.57 0 11.41 16.9c Uzbekistan 143,300 63.1 2.0959d 47.7b 51.7c Xinjiang, China 407,000 4.852b 20.37 19.792a,f 49.5b,g

b/d, barrels per day. Negl., Negligible. bcm, billion cubic meters. mtoe, million tons of oil equivalent. kWh, kilowatt-hours. Sources: (1) CIA, The World Factbook, 2005; (2) British Petroleum, BP Statistical Review of World Energy, 2004, London.; (3) National Bureau of Statistics of China, Beijing (Xinjiang data only), February 2004, www.stats.gov.cn (in Chinese); (4) State Statistical Bureau, Beijing (Xinjiang data only), Statistical Yearbook of China 2002; and (5) US Department of Energy, Energy Information Administration, May 2002, Central Asia, Country Analysis Brief, Washington, D.C. a 2001. b 2002. c 2003. d 2000. e Production. f Consumption. g Estimated.

For this reason, a number of pipeline projects to carry Turkmenistans 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-sufciency 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 percent of the countrys 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 identied. In ve of the republicss 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 identied and explored 171 oil and gas elds, 51 of which were already producing oil, 27 producing gas, and 17 producing condensate (Interfax News Agency, 2000). Unlike some of their Central Asian neighbors, Kyrgyzstan and Tajikistan produce only small quantities of oil. Tajikistan in particular has insignicant 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 elds and two oil/gas elds but due to difcult

geological conditions, recovery rates are low. Exploration continues in the favorable Naryn oblast area of eastern Kyrgyzstan, situated just across the border from Chinas Tarim Basin. Current crude oil production levels in Kyrgyzstan are at around 2000 b/d; consumption is 20,000 b/d (Energy Information Administration, 2005). In October 1996 Kyrgyzstans rst and only oil renery, Jalalabad, opened with a capacity of 10,000 b/d. Jalalabad remains mostly underused, however, with domestic output of crude at only 2000 b/d. The Jalalabad renery is now operated by the Kyrgyz Petroleum Company, a joint venture of the British rm 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 renery. Nearly all oil and gas products are imported into Kyrgyzstan from Kazakhstan and Russia. In neighboring China, Xinjiangs oilelds have deposits estimated at 20.86 billion metric tons and natural gas deposits estimated at 10.3 tcm (Peoples Daily, 2000). The region accounts for 30 and 34 percent of the nations onland crude oil and natural gas resources, respectively. The Karamay oileld in the Junggar Basinthe fourth largest in Chinawas established more than 45 years ago. The Tarim Basindiscovered in 1984in southern Xinjiang covers an area of 560,000 km2, with the oil and gas-rich Taklamakan Desert at the center. Over the Tenth Five-Year Period (20012005), 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

ARTICLE IN PRESSJ.P. Dorian / Energy Policy 34 (2006) 544555 549

these gures, national policies require Xinjiang to ship 50 percent of its crude oil production to other provinces in China, resulting in a decit in Xinjiang itself. Therefore, cooperation with other parts of Central Asia would be an important way for China to alleviate any future energy shortages. 3. Coal The two major coal producers in Central Asia are Kazakhstan and Xinjiang, China. Kazakhstan is estimated to contain 120 billion metric tons of coal in Karaganda and other areas, but the quality is generally poor (Zhanseitov and Asanov, 1993), and the deposits are distant from major industrial locations. Limited rail capacity for transporting coal is a structural bottleneck to expanding the exploitation and use of this resource. Xinjiang, China possesses large amounts of high-quality coal resources, with reserves of approximately 3.03 billion metric tons (Qiu Daxiong, 1997). Kyrgyzstan is reported to have substantial coal reserves, but these are located in an inaccessible part of the country, with no railroad to transport the coal to market. Kazakhstan has 37 primary coal deposits. Since coal is inexpensive in the country, government ofcials are considering the possibility of constructing a plant for converting coal into synthetic oil to alleviate energy shortages in southeast Kazakhstan. Coal for this purpose is likely to come from the eastern half of the country. Coal, including high-grade coal, is abundant in Xinjiang, China. Although the region is one of the major coal producing areas of China and is endowed with about 40 percent of the total prospective coal reserves of the nation, only about one-fth of the output of Xinjiang is from the large- and medium-sized state-owned coal mines, while majority of the coal production in Xinjiang is from small local coal mines (China Coal Net, 2003). Xinjiangs coal reserves are concentrated in the north Tianshan mountains area. Coal fuels approximately three-quarters of Xinjiangs electrical power generation. Notwithstanding limited coal reserves in Uzbekistan and Kyrgyzstan, and the low quality of coal in Kazakhstan, coal is an important energy source in Central Asia. Kazakhstan coal is regularly exchanged for Kyrgyz electricity, and the coal industry is a major employer in Kazakhstan. Coal may play an even more critical role in the long-term energy industries of Kazakhstan and Xinjiang, China, providing fuel for electric power generation. Moreover, a dwindling supply of higher price coal from Russia has prompted increased reliance on local coal for power generation. Transportation is the key problem for coal trade in Central Asia, given that great distances separate markets from reserves. Coal is a high-volume, low-value commodity, ideally suited to rail transportation. At present, Kazakhstan transports coal by railroad to its own internal markets, and exports coal by rail to Russia, Ukraine, Kyrgyzstan, and Uzbekistan. However, the infrastructure

is limited and in poor condition. Negotiations are underway to sell coal to Turkey and Iran, but inadequate infrastructure is a stumbling block. In Xinjiang, China, transportation capacity also constrains the use of coal, with output largely dependent on very local demand. The recent completion of a rail line from Korla, in central Xinjiang, China, to Kashgar, in the south, provided the capacity to ship coal from the northern coal elds to the newly industrializing southern part of the province. Kazakhstan faces capacity constraints in shipping coal by rail, and railroads do not currently penetrate to the coal-producing regions of Kyrgyzstan. 4. Electricity The electricity sector of Central Asia faces four major problems:

Due to scal constraints, there has been little or no expansion of electric generating capacity in recent years. Even with a slowdown in economic activity in the ve former Soviet republics, available power supplies are not keeping pace with development needs. The lack of funds for needed renovations and modernization has led to a deterioration of power generation stations (especially combined-cycle thermal power plants) and transmission lines; Problems with payments due to insolvency and disagreements over energy and water prices among the former Soviet republics has led to confrontations and supply cutoffs; and Variability in rainfall has a signicant impact on the stability of electricity in the interconnected Central Asian grid, and on the availability of electricity for export.

Despite these problems, governments in Central Asia understand that electric power is essential for economic development. The different countries of the region generate power by various means, depending on their own natural resource base. Kyrgyzstan, which has large hydro-electric potential, generates most of its electricity through hydroelectric power stations. Thermal power stations fueled by natural gas generate most of Uzbekistans electricity, although hydro-powered electric plants also do exist. The country also draws signicantly on hydropower produced from power stations in neighboring Tajikistan and Kyrgyzstan. Kazakhstan and Xinjiang, China depend primarily on coal to generate electricity. Electricity shortages are a major problem in the region, particularly in Kazakhstan and Xinjiang, China (like other parts of China, where power shortages occurred in twothirds of the countrys provinces in 2004). Kazakhstan depended heavily on Russian coal imports and electricity from Uzbekistan and Kyrgyzstan to supply electric power and heat to its southern region, including the city of Almaty. Following the break-up of the Soviet Union, price

ARTICLE IN PRESS550 J.P. Dorian / Energy Policy 34 (2006) 544555

increases in coal and transportation, and the nancial crisis in Kazakhstan, these imports declined sharply, causing frequent power shortages. Although Kazakhstan has abundant oil and coal, it has not been able to overcome problems in the electricity sector. While the country technically generates enough power to satisfy its demand, the country has suffered from frequent power outages since the 1990s due to the sectors dilapidated infrastructure, particularly in the south. Kazakhstan incurs very large energy losses during transmission and distribution over its 285,000 miles of distribution lines (Energy Information Administration, 2004). A privatization program aimed at rejuvenating the entire electric power industry was implemented in 1997, but stalled for a variety of reasons. According to the State Power Corporation of China, electric power shortages are serious in Xinjiang, China as well as neighboring provinces. This is partially because rapid industrial expansion in the province means that electricity demand is growing faster than supply. However, structural problems also contribute to the shortages. The northwest power network suffers from a serious lack of water, brought on by recent severe droughts, and coal shortages that resulted from price disputes and transport congestion. The lack of coal and water forced thermal power plants in the northwest to suspend operations in 2003. A regional electricity grid serving Uzbekistan, Kyrgyzstan, Tajikistan, Turkmenistan and ve districts in the southern territory of Kazakhstan,2 was established in 1960. It is headquartered in Tashkent. This interconnected grid consists of 220- and 500-kv power transmission lines, with a primary 500-kv line connecting the ve capital cities, and with an installed capacity of 24,779 MW. It provides power to an area of 2 million km2 and to a population of more than 35 million. Interconnecting the regions power system improved reliability and service quality under Soviet administration. 5. Non-traditional energy resources Some of the countries in Central Asia have made substantial commitments to support development of nontraditional or renewable energy. In Kyrgyzstan, for example, the Kyun government agency is devoted entirely to examining alternative energy supplies, notably solar, wind, geothermal and coalbed methane gas. Kyun is one of four key energy agencies or ministries in Kyrgyzstan, directly under the Cabinet of Ministers and has the same level of authority and prestige as the other energy ministries. In Kazakhstan, government ofcials have mapped alternative energy resources across the country to determine the feasibility of developing these resources. Kazakh2 The northern half of Kazakhstan is part of the Russian regional electricity network.

stans southern and northern tiers receive an abundance of sunshine annually and possess signicant potential for solar energy. Potential wind and biogas resources have been identied in the west. Both southern and northeastern regions of Kazakhstan have the potential for geothermal energy. In neighboring Xinjiang, China, wind and solar resources are abundant. Local government ofcials hope to augment local power plant capacity by attracting investment and joint-venture partners to develop wind and solar energy. By the end of 2000, Xinjiangs installed capacity of wind power generation ranked rst in the country reaching 73 MW, making up 21.1 percent of the national total, according to Xinjiang government ofcials (Peoples Daily, 2001). More than 30 counties are now actively engaged in promoting and developing wind power in Xinjiang. As for solar energy, only Tibet (Xizang) produces more solar-generated electricity than Xinjiang, where more than two-dozen rural counties now use solar-generated power for lighting and televisions, as well as for ber telecommunications relay stations. Despite the promise of non-traditional sources of energy in Central Asia, lack of nancing and the high cost of experimental technologies prohibit serious development of this edgling sector. Installation costs of large-scale wind and solar power facilities can also be prohibitive. Clearly, hydrocarbons and hydroelectric power are the preferred energy sources for baseload capacity. Solar and wind energy have generally been promoted for isolated areas requiring small systems. In the near term, energy conservation and efciency measures in Xinjiang, China and other parts of Central Asia would probably yield the greatest benets with the least costs. Restructuring power administrations can also be an effective means of improving productivity. If these two measures are adopted, governments in Central Asia could develop alternative sources of energy more effectively. 6. Region-wide cooperation: inuenced by history Improvements in political relations among Central Asian countries and historical ties with many neighboring nations have raised considerably the prospects for bilateral and multilateral energy relations within Central Asia. Opportunities exist for region-wide cooperation in development, transportation, and trade. Several specic factors suggest that increased regional cooperation in oil, gas, coal, electricity and renewable energy in Central Asia is both possible and necessary: First, economic growth in the region will generate increased energy demandenergy shortages are already occurring in Xinjiang, China, for example, where strong economic growth is outpacing energy supplies. Second, an uneven geographic distribution of energy resources among the countries leaves each in need of energy forms that can be more efciently supplied by other

ARTICLE IN PRESSJ.P. Dorian / Energy Policy 34 (2006) 544555 Table 4 Central Asiaa oil and gas export and import potentialb by country Commodity Oil Gas Exports to Kazakhstan to Turkmenistanc, Xinjiang, China Uzbekistan to Tajikistan Uzbekistan to Kazakhstan, Kyrgyzstan Turkmenistan to Tajikistan, Kazakhstan, Uzbekistan, Xinjiang, China, and Kyrgyzstane Imports from Tajikistan from Uzbekistan Xinjiang, China from Kazakhstand Kazakhstan from Uzbekistan Kyrgyzstan from Uzbekistan Tajikistan from Uzbekistan, Turkmenistan Xinjiang, China from Turkmenistan Central Asia includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, and Xinjiang, China. Potential implies exports or imports are already occurring or may likely occur in the future. Considers only exports and imports within the region of Central Asia. c Proposed Kazakh oil via Turkmenistan to outlets in Iran and the Persian Gulf. d Owing to excess capacity at the Urumqi General Petrochemical Works plant, Chinese government ofcials are considering importing Kazakh crude to Xinjiang, China if arrangements could be made at a reasonable cost. e The southern part of Kyrgyzstan receives natural gas from Turkmenistan and Uzbekistan.b a

551

countries in the region. Kyrgyzstan has few proven gas and oil reserves and depends heavily on imports from Kazakhstan and Uzbekistan. Despite being well endowed with oil and gas resources, Kazakhstan depends on Kyrgyzstan and Uzbekistan for 60 percent of its electricity, and Kazakhstan purchases gas from Uzbekistan. Uzbekistan depends on electricity supplied by Kyrgyz hydroelectric power stations to meet seasonal electric needs. Xinjiang, China is actively seeking to import electricity and oil to meet chronic shortages. Third, periodic energy shortages occur in the ve former Soviet republics as a result of inadequate infrastructure, poor maintenance of facilities and management problems resulting from the breakdown of the former region-wide energy network of the Soviet period. Sustaining economic growth and development requires that these shortages be met by importing energy from neighboring countries. Fourth, the large distances between energy-producing locations and the markets for that energy means that developing local markets within the region can lower transportation costs and increase the returns from energy development. These interdependencies highlight the potential, and perhaps even the imperative, for regional economic cooperation in the energy sector. Cooperation in the energy eld already occurs within Central Asia, although unevenly across the region (Table 4). Uzbekistan exports gas to Kazakhstan and Kyrgyzstan. Kazakhstan exports coal to Uzbekistan and Kyrgyzstan. Kyrgyzstan exports electricity to Uzbekistan and Kazakhstan. There are other opportunities for increasing trade and cooperation among the countries of the region for Kyrgyzstan to export electricity to Xinjiang, China, for Kazakhstan to export oil to Xinjiang, for Uzbekistan to export gas to and through China, for Xinjiang to export electricity to southern Kazakhstan, and for Xinjiang and Kazakhstan to develop and export electricity generated by solar and possibly even wind

sources (Dorian, 2001; Dorian, 1999). Centuries-old cultural and ethnic ties are strongly inuencing all cooperation in this area. Outside of Central Asia, growing demand for energy resources and their products in China, combined with the substantial resources and a need for capital in Russia, suggest a favorable climate for joint development activities with these two countries. To the east, China has a 3700 km common border with Kazakhstan, Kyrgyzstan, and Tajikistan. Beijing claims that the country has invested nearly half a billion dollars to date into the ve Central Asian republics. Russia reached a major 25-year agreement with Turkmenistan in 2003 to import and then re-export signicant volumes of Turkmen gas through the Russian pipeline system. With China and Russia, however, energy megaprojects, such as the proposed KazakhstanXinjiang oil pipeline, have encountered some obstacles for a number of reasons: an apparent slowing of Japanese investment in resource development projects within the area, conicting and competing strategies, inadequate infrastructure, and differences in political ideologies throughout Central Asia, the Middle East, and the US. Nonetheless, China continues to actively promote cooperation in oil with Kazakhstan and gas with Turkmenistan while, simultaneously, Russian companies including the state-owned monopolies Gazprom and United Energy Systems (UES) have actively participated in a majority of energy joint ventures in former Soviet Central Asia. To the north and west, cooperation in energy between Central Asian countries and Europe may eventually be guided in part by the European-based Energy Charter Treaty, signed and ratied by Uzbekistan, Kazakhstan, and Kyrgyzstan, and more recently by Tajikistan and Turkmenistan. Europe, a major gas-consuming region, prompted Russia to reach a long-term agreement with Turkmenistan for exporting the countrys gas.

ARTICLE IN PRESS552 J.P. Dorian / Energy Policy 34 (2006) 544555 Table 5 Central Asias leading upstream oil foreign investment projects by country Country Kazakhstan Project Tengiz (ChevronTexaco et al.) Karachaganak (BG, Agip, et al.) Kashagan (ENI-Agip, BG et al.) Turkmenistan Uzbekistan Cheleken (Dragon Oil) Nebit Dag (Burren Energy) Central Ustyurt And Southwest Gissar (Trinity Energy) Proven reserves 69 billion barrels 2.4 billion barrels 7-9 billion barrels 0.6 billion barrels 0.1 billion barrels Being Developed 2004 Production 290,000 b/d 210,000 b/d Not Producing 10,000 b/d 10,000 b/d 2006: 2600 b/d 71 bcf Projection 2006: 450,000 b/d 2010;700,000 b/d 2008: 240,000 b/d 2008: 75,000 b/d 2003: 11,000 b/d 2003: 12,000 b/d

b/d, barrels per day. bcm, billion cubic meters. Source: US Department of Energy, Energy Information Administration, December 2004, Caspian Sea Region, Country Analysis Brief, Washington, DC., 12p.

7. Foreign investment: strong focus on oil and gas Most private foreign-investor interest in Central Asia to date has focused on providing technology and expertise for the development of the regions potentially huge oil and gas elds (Table 5). 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 specically 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 Asias lucrative oil and gas industries:

sing; and unprecedented political change. Geopolitical posturing in Central Asia by neighboring China, Russia, Iran, and Turkey will continue to be reected through investments and participation in the oil and gas industry. 8. Russias remaining inuence and grip Despite the breakup of the Soviet Union nearly 15 years ago, Russia still exerts economic inuence 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 Russias foreign exchange earnings and contributes signicantly to that nations 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 Russias 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, 2001):

Advanced methodologies for hydrocarbon seismic reection and refraction. Development of an integrated system for gas collection and utilization, including compressors for gas separation. Pipeline construction and rehabilitation. Resuscitation of elds 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. Renery design, modernization, and construction. Surveying equipment and technology for outer continental shelf studies.

Through Russia and the port of Novorossiysk; Via the Caucasus (Georgia or Azerbaijan); and Via Turkey.

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 proces-

Routes through Russia include transport of Tengiz/ Korolevskoye oil to the Russian Black Sea (Novorossiysk) by the CPC. Delivery of the rst CPC oil to Novorossiysk occurred in autumn 2001, after completion of a new 720 km pipeline section. On May 25, 2005, the 1700 km multibillion dollar pipeline from Baku, Azerbaijan to Ceyhan, Turkey (BTC) opened upthe only major pipeline in the

ARTICLE IN PRESSJ.P. Dorian / Energy Policy 34 (2006) 544555 Table 6 Predicted oil production and export in central Asia to 2015 (barrels per day) 2005 Kazahkstan Production Export Turkmenistan Production Export Xinjiang, China Production Export 2010 2015 Kazahkstan Production Export Turkmenistan Production Export Uzbekistan Production Export Xinjiang, China Production Export 553 Table 7 Predicted gas production and export in central Asia to 2015 (billion cubic meters) 2005 2010 2015

1.2 million 1.0 million

2.0 million 1.6 million

3.4 million 2.9 million 1.3 million 960,000 NA NA

15 13 100 70 67 15 NA NA

22.7 24 120 100 70 20 30 20

NA 35 180 115 NA 25 NA NA

560,000 320,000 NA NA

960,000 660,000 600,000 NA

NA, Not available. Note: Forecasts are generally from published documents of the local governments. Sources: (1) Russian Petroleum Investor, March 2005, Equal Split of Imashevskoye Gas Field, Vol. XIV, Issue 3, p. 63.; (2) Russian Petroleum Investor, November/December 2004, Kazakhstan to Create its Own Tanker Fleet and Expand Transportation Routes for Kashagan Oil, Vol. XIII, Issue 10, p. 59; (3) Russian Petroleum Investor, October 2004, Gazprom Takes Full Control of Turkmenistans Gas Exports to Ukranian and European Markets, Vol. XIII, Issue 9, p. 66; (4) Russian Petroleum Investor, January 2004, Turkmen Gas is Transforming FSU Gas Markets; Ukraine, Gazprom Deals Illustrate Trend, Vol. XIII, Issue 1, p. 65; (5) Russian Petroleum Investor, November/December 2003, Expanded Cooperation with Foreign Companies Hikes Turkmen Output and Exports, Vol. XII, Issue 10, p. 51; (6) Russian Petroleum Investor, October 2003, Caspian Gas Exporters Find Inuential Ally in Struggle for European Markets, Vol. XII, Issue 9, p. 69; (7) Russian Petroleum Investor, March 2003, Caspian: $1-Billion Conict, Vol. XII, Issue 2, pp. 8184; and (8) www.uyghuramerican.org, October 6, 2000, Xinjiang Strives To Be Top Oil Producer in Country.

NA, Not available. Note: Forecasts are generally from published documents of the local governments. Sources: (1) Russian Petroleum Investor, March 2005, Equal Split of Imashevskoye Gas Field, Vol. XIV, Issue 3, p. 63; (2) Russian Petroleum Investor, November/December 2004, Kazakhstan to Create its Own Tanker Fleet and Expand Transportation Routes for Kashagan Oil, Vol. XIII, Issue 10, p. 59; (3) Russian Petroleum Investor, October 2004, Gazprom Takes Full Control of Turkmenistans Gas Exports to Ukranian and European Markets, Vol. XIII, Issue 9, p. 66; (4) Russian Petroleum Investor, January 2004, Turkmen Gas is Transforming FSU Gas Markets; Ukraine, Gazprom Deals Illustrate Trend, Vol. XIII, Issue 1, p. 65; (5) Russian Petroleum Investor, November/December 2003, Expanded Cooperation with Foreign Companies Hikes Turkmen Output and Exports, Vol. XII, Issue 10, p. 51; (6) Russian Petroleum Investor, October 2003, Caspian Gas Exporters Find Inuential Ally in Struggle for European Markets, Vol. XII, Issue 9, p. 69; (7) Russian Petroleum Investor, March 2003, Follow the Leader, Vol. XII, Issue 2, pp. 7680; (8) Russian Petroleum Investor, February 2002, The Russia Factor, Vol. IX, Issue 4, pp. 3134, and (9) www.uyghuramerican.org, October 6, 2000, Xinjiang Strives To Be Top Oil Producer in Country.

region that does not cross Russia or Iranwhich will eventually carry 1 million barrels of oil a day from the Caspian Sea to the Mediterranean (BP, 2005). The BTC pipeline opens up huge new elds 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 signicant ties with the West, including memberships in the World Bank, Asian Development Bank, and other regional and international non-governmental bodies. 9. Looking ahead: impact on the world In the immediate years ahead, oil and gas companies around the world will continue to encounter an evolving industry in Central Asia, faced with complex issues such as increased competition for capital, environmental constraints, rising wage and labor costs, shifting centers of exploration, development and processing, and political change. Some countries, including Kazakhstan, Turkmeni-

stan, and Uzbekistan, are presenting unique and lucrative opportunities for investment and cooperation in hydrocarbons. Numerous rms are also considering projects in Xinjiang. Clearly, the hydrocarbon reserves of Central Asia are signicantwith proven oil reserves estimated at 10.1 billion barrels, representing just under 1 percent of the world total, and proven gas reserves pegged at 6.65 tcm, or 3.8 percent of the world total (gures exclude Xinjiang, China). However, while these reserve amounts are large, they do not come close to the oil and gas-rich Middle East, which accounts for approximately 63.3 percent of the global total in oil, and 35.4 percent in gas (BP, 2004). In geologic terms, Central Asias oil and gas resources are roughly equivalent to those found in the North Sea, though the exact size of the reserves, and specically those in the Caspian Basin, remain open to considerable debate. Given the many obstacles of developing Central Asias oil and gas resourcesincluding technical, logistical, political, and nancial challengesit is unlikely that

ARTICLE IN PRESS554 J.P. Dorian / Energy Policy 34 (2006) 544555

eventual output would reach that of the North Sea (just more than 6 million b/d). Even under very optimistic scenarios, by 2010 Caspian oil production is likely to reach just more than 3.5 million b/d, or 34 percent of anticipated global oil use (James Baker Institute for Public Policy, 1998). Tables 6 and 7 contain forecasts for oil and gas production and exports from Central Asia to 2015. Nonetheless, given that Central Asia is strategically located between China, Russia, Iran, and Turkey, and that Western powers including the European Union, United States and Japan have exhibited intense interest in the regions economic potential, new incremental oil and gas production from Kazakhstan, Turkmenistan, Uzbekistan, as well as Xinjiang, China will be considered extremely important to regional and global markets. If USIranian relations were to improve anytime in the future and economic sanctions against Iran dropped, the importance of Central Asian and Caspian hydrocarbons resources would rise even further as new transportation routes would become available and Central Asia would be in a position to gain better access to the Persian Gulf. As for other key energy resources, Central Asia is well positioned to expand production of electricity given the regions ample coal, gas, and water resources. Central Asia is rich in water power resources, located primarily in the Kyrgyzstan and Tajikistan, with potential hydropower resources also in Xinjiang, China. With yearly electricity production exceeding 14 billion kWh, Kyrgyzstan is capable of meeting its domestic electricity requirements with a surplus for export. Construction of the Kambarata Power Complex, if undertaken, would signicantly expand Kyrygzstans potential for exporting electricity over short distances. The abundance of coal and water resources in Xinjiang, China implies a high potential for growth in electricity output there as well, over the long term. 10. 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 signicant gas deposits. Xinjiang is self-sufcient 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 reected the priorities of the Soviet Union. Gas traditionally owed through Soviet-built pipelines northwest to major processing centers in European Russia. Oil is the second-most important energy resource with a signicant export potential in the region. In addition to Kazakhstans 1.2 billion metric tons, Uzbekistan has moremodest 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 decit 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 ow 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. Other energy resources of note in Central Asia include coal in Kazakhstan and Xinjiang, as well as renewable energy resources including solar and wind power in the same two areas as well as Kyrgyzstan. Over the next two decades Central Asia will play an increasingly more important role in developing renewable energy resources in part with the assistance of the Asian Development Bank, World Bank, European Bank of Reconstruction and Development, and other international lending agencies. Globally, Central Asias 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. In just 15 years since independence, Central Asias energy industry has attracted more attention from the world community and at a quicker pace than did the Middle East when it rst developed into a global power during the 1960s when OPEC was established. Central Asias location at the crossroads of Asia, Europe, and the Middle East will keep the regions strategic importance to energy markets elevated for decades to come. ReferencesBP, 2004. BP Statistical Review of World Energy, London. BP, 2005. New Pipeline Gives Caspian Oil Access to World Markets. Press release, London. China Coal Net, 2003. Xinjiang: Coal-red Power Sector Faces Increasing Pressure. via the website www.chinacoalnews.com, Beijing. Dorian, J.P., 1999. Energy Resources in Central Asia. Chapter 1 in Second Workshop on Economic Cooperation in Central Asia: Challenges and Opportunities in Energy. Asian Development Bank, Manila, Philippines 176p. Dorian, J.P., 2001. Oil and Gas in Central Asia and Northwest China. The CWC Group, London 176p. Dorian, J.P., 2002. Turkmenistans future in oil and gas hinges on certainty for export options. Oil and Gas Journal 100 (41), 2027. Energy Information Administration, 2004.Kazakhstan. Country Analysis Brief, Washington, DC. Energy Information Administration, 2005. An Energy Overview of The Republic of Kyrgyzstan. Washington, DC., 10p. Interfax News Agency, 2000. Oil, Gas Wealth of Uzbekistan Estimated at $1 Trillion. Tashkent, Uzbekistan.

ARTICLE IN PRESSJ.P. Dorian / Energy Policy 34 (2006) 544555 James Baker Institute for Public Policy, 1998. Unlocking the Assets: Energy and the Future of Central Asia and the CaucasusMain Study. Rice University, Houston. Qiu Daxiong, 1997. Central Asia Regional Economic Cooperation: Energy in Xinjiang, China, unpublished draft. Peoples Daily, 2000. Xinjiang to Become Chinas 2nd Largest Oil Production Center, Beijing (in English). 555 Peoples Daily, 2001. Xinjiang Ranks 1st in Chinas Installed Capacity of Wind Force Power Generation. Beijing (in English). Zhanseitov, S.F., Asanov, M.A., 1993. Kazakhstans mineral raw materials industry and its potential. In: Dorian, J.P., Minakir, P.A., Borisovich, V.T. (Eds.), CIS Energy and Minerals Development: Prospects, Problems, and Opportunities for International Cooperation. Kluwer Academic Publishers, Dordrecht, The Netherlands 388p.