Uzbekistan’s hydrocarbon potential is indisputably substantial. It is the second largest gas producer within the Commonwealth of Independent States after Russia’s Gazprom, and the eighth largest gas exporter in the world. Vying for energy security, major powers are keen on getting access to Central Asia’s rich natural gas reserves, but Gazprom’s control over pipelines can undermine any such attempt to tap these resources.

However, China now seems destined to be another market for Uzbek gas. Following the signature of the agreement on the principles of the construction and exploitation of a gas pipeline in April 2008, actual construction was launched on the July 1. The government’s statement noted that the capacity of the pipeline will amount to 30 billion cubic meters (bcm) of gas, almost half of the country’s total production. It is also worth noting that Kyrgyzstan and Tajikistan are largely dependent on their neighbor in terms of energy supplies. Still, Uzbekistan has export commitments to Gazprom. And finally, from an entirely technical perspective, gas will also be required to maintain pressure in the pipeline.

Yet, a review of opportunities for creating alternative routes for petroleum products, more particularly for gas, has been determined to be one of the most important policy directions for the energy sector of Uzbekistan in its Welfare Improvement Strategy. The latter was prepared by major stakeholders as well as development partners, including the UNDP and the World Bank, and earmarked as a medium-term national development document of the Government of Uzbekistan to decide on actions which will accelerate economic growth.

A specter of effects resulting from this decision ranges from political to pure economic implications. While the political rationale is not questioned, due to the fact that diversification of export routes is imperative for a government seeking to decrease its dependence on other pipeline monopolies, consequences for the country’s national economy and population are noteworthy. 

It has been a custom for the government to routinely provide huge subsidies and cross-subsidies in the form of excessive accounts receivable in order to maintain sustainability of energy-intensive sectors as well as to supply the local population with low-priced energy. In fact, access to energy is remarkably cheap, with the current gas price at less than US$0.02 per cubic meter. It is a notable pitfall that epitomizes the present oil and gas sector of Uzbekistan and has a rather controversial effect. On the one hand, the population has access to low-priced energy. On the other hand, the competitiveness of the industry is under pervasive pressure.  

The benefits of the fact that energy sector companies serve as quasi-fiscal institutions will soon no longer be available. This is justified by the fact that Uzbekistan will have to produce considerable volumes of gas of up to 30 bcm every year to fill the pipeline throughput capacity. The unavailability of funds to explore for new gas fields, which is inevitable as the policy of subsidization keeps up, leads to depletion of the resource base. And that is why increasing investment to search for, bore for and get new petroleum reserves is indeed crucial. Additionally, it should be noted that utilization of gas by local consumers is still inefficient with instances of using a gas cooker as an additional source of heat during winter.

In light of the foregoing, increasing prices for power and gas seem economically sensible, and again an unavoidable and looming reality, even though the government is considering to broadly use alternative sources of energy, including coal and renewables.  

Finally, the pipeline is planned to run through the Bukhara, Navoi and Kashkadarya regions, which will certainly increase the employment rate in these regions. This issue is particularly acute for Kashkadarya, which has received more attention due to the disparity in economic development as compared to other regions of Uzbekistan.