Caspian Energy Outlook

Caspian Strategy Institute Center on Energy and Economy MAY 2014

CASPIAN ENERGY OUTLOOK ASSOC. PROF. FatIh MacIt

www.hazar.org

Fatih Macit was born in Samsun, Çarşamba in 1982. Between the years 2000-2004, he received his Bachelor's degree from Boğaziçi University, Department of Economics.

Currently he continues to serve as the Head of the Department of Economics and Director of the Center of Economic Studies at Süleyman Şah University.

Publisher: Caspian Strategy Institute

Caspian Energy Outlook

Between the years 2004-2009, he received his Ph.D. degree in Economics from Georgetown University with a full scholarship in the United States. He worked as a lecturer in the Economics Department at Beykent University for two years. His areas of expertise are labor market, monetary policy, applied econometrics, international finance and the Turkish banking sector. He has several articles published in international journals on these areas.

Mailing Address: Veko Giz Plaza, Maslak Meydan Sok., No:3 Kat:4 Daire:11-12 Maslak, 34298 Şişli-İstanbul-TÜRKİYE Telephone: +90 212 999 66 00 Fax: +90 212 999 66 01 Web: www.hazar.org Printing: İstanbul Form Matbaacılık Esentepe Mah.İnönü Cad Verim Sanayi Sitesi B Blok Kat 2 Kartal-İstanbul-TÜRKİYE Tel: +90 216 387 60 30 Copyright © 2014 All rights reserved. This publication may not be published, reproduced, or distributed in full or in part by electronic or mechanic means (photocopy, recording, data storage, etc.) without acknowledging the source and securing prior permission from Caspian Strategy Institute.

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Caspian Energy Outlook

Introduction Hydrocarbon resources, namely oil, natural gas, and coal, account for the majority of the world’s total primary energy consumption. By the end of 2012, about 87% of total primary energy consumption in the world was met by hydrocarbon resources. In some regions of the world, the dependence on oil, natural gas, and coal is greater. For instance, in the Asia Pacific region, which accounts for 95% of the increase in global energy consumption, the dependence on hydrocarbon resources has reached 91.4%. These numbers show that secure and reliable energy supplies are very important for longterm sustainable global economic growth. Although alternative energy sources - such as renewable energy have become increasingly important, projections show that hydrocarbon resources will remain the world’s main source of energy for the next three decades at least. The dramatic increase in oil and natural gas prices over the last dec-

ade has placed increased focus on the existing sources of imported oil and gas and the dynamics of those markets. In addition, meeting future energy demand and ensuring energy security has become a priority for many countries in the world. Discussions about energy security and supply of oil and natural gas focus mainly on the Middle East, which holds a significant part of global oil and gas reserves are located in. However, there are other parts of the world that play significant roles in the production of oil and gas, including Russia, North America, Venezuela, and others. The Caspian region has significant oil and natural gas reserves, and has the potential to become an important energy supplier for European and global markets. Due to high energy prices, countries in the Caspian region, namely Azerbaijan, Kazakhstan, and Turkmenistan, have experienced rapid economic growth over the last ten years. Oil and natural gas revenues already are an important source of economic growth and

Share of Fuel Types in Total Primary Energy Consumption Hydro Electric 7% Nuclear Energy 4%

Renewables 2%

Oil 33%

Coal 30% Natural Gas 24%

Source: BP Stascal Review 4

Brent Oil Price 120,00 100,00

111,26

80,00

97,26

60,00 54,52

40,00 20,00

25,02

0,00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: BP Stascal Review

exports in these countries, and there is the potential for further growth in the coming years.

In addition to its rich natural gas resources, the Caspian region has also substantial oil reserves. The total proven oil reserves of Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan are estimated at approximately 38.2 billion barrels, or 2.3% of total global reserves. Kazakhstan

Energy Outlook of the Caspian Region The Caspian region has huge oil and natural gas reserves which could help meet future energy demand in global markets. According to BP statistics, the proven natural gas reserves of the region are estimated at around 23 trillion cubic meters (tcm), which is roughly equal to 12.3% of the world’s total natural gas reserves. Although the region holds a significant part of total global natural gas reserves, actual production does not match this level. By the end of 2012, the total natural gas produc-

These numbers demonstrate that the Caspian region has large untapped natural gas reserves that need to be developed. Turkmenistan and Azerbaijan hold the largest gas reserves in the region: the total natural gas reserves of these two countries account for 89% of the region’s total reserves. In fact, Turkmenistan is the fourth largest country in the world in terms of natural gas reserves, after Iran, Russia and Qatar. Turkmenistan has great potential to export natural gas to European and Asia-Pacific markets. This issue will be discussed in greater detail in a later section of this paper.

Caspian Energy Outlook

The aim of this report is to assess the energy potential of the Caspian region countries and evaluate their prospects of becoming important energy suppliers for global markets. The report will first analyse the current energy outlook and energy supply of the region, before turning to a closer examination of individual countries, namely Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan.

tion of Caspian region countries was only 4.7% of net global production; this ratio has remained relatively stable since 2000. On the trade side, the level of natural gas exports from the Caspian region is also very low, and accounts for just 8% of the world’s total natural gas exports.

Share of The Caspian Region in Total Gas Production 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

5

holds the largest oil reserves in the region, about 79% of the region’s proven reserves. Azerbaijan also has significant oil reserves, and those revenues are an important source of its economic growth.

Proved Oil Reserves (Billion Barrels) 30 30 25

Caspian Energy Outlook

20

In terms of production, the region has substantially increased its share in world oil markets over the last decade. In 2000, the four countries in the Caspian region only accounted for 1.8% of the world’s total production. By the end of 2012, this had increased to 3.4%, and the total oil production of the Caspian region had reached 2.9 million barrels per day. Kazakhstan and Azerbaijan appear to be the two main countries in the region in terms of oil production, accounting for about 90% of total regional oil production. Besides natural gas and oil, the region has also rich coal reserves. In this regard Kazakhstan is in the lead, with proven coal reserves of around 33.6 billion tonnes, 3.9% of the world’s total coal reserves in the world. Over the last ten years, Kazakhstan has increased its coal production by 58%, and by the end of 2012, its total production had reached 116.4 million tonnes (1.5% of total global production).

15 7

10

0,6

5 0 Azerbaijan

Kazakhstan

The Caspian region has significant oil and natural gas reserves, and has the potential to become an important energy supplier for European and global markets.

3,7% 3,7%

3,5%

2,5% 2,0% 1,5%

1,8%

1,9%

2,2% 2,3%

2,4%

2,5%

3,2%

3,3%

3,5% 3,4%

1,0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

6

Uzbekistan

AZERBAIJAN’S ENERGY OUTLOOK

4,0%

2,8%

Turkmenistan

Source: BP Stascal Review

Share of The Caspian Region in World's Total Oil Production

3,0%

0,6

Azerbaijan has rich oil and natural gas resources, and the revenues from these sectors are the main driver of the national economy. Despite efforts towards economic diversification, the energy sector still accounts for almost 50% of GDP. Exports of oil and natural gas make up about 93% of Azerbaijan’s total exports. Oil is the number one revenue source for Azerbaijan. In 2012, the country exported 36.8 million tonnes of oil, and the total revenue from oil exports has risen to 29.5 billion dollars. According to BP statistics, Azerbaijan’s total proven oil reserves stand at around 7 billion barrels, 0.4% of the total proven oil reserves in the world. By the end of 2012, the total oil production of the country was 872, 000 barrels per day - 1.1% of total global production. The Baku-Tbilisi-Ceyhan (BTC) pipeline project marked turning point for Azerbaijan’s energy outlook. Although the country has two other oil pipelines, about 80% of its oil exports go through the BTC pipeline. The Baku-Novorossiysk pipeline is another important pipe-

Total Coal Production of Kazakhstan 120,0 110,0 100,0 90,0 80,0 70,0 60,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

Azerbaijan’s average daily oil production between 2000 and 2005 was around 325,000 barrels. Between 2006 and 2012, this number nearly doubled, reaching 889,000 barrels per day. The increase in oil production has coincided with a sharp increase in oil prices, and the value of oil exports has increased from 1.5 billion dollars to almost 30 billion dollars over the last ten years.

The Baku-TbilisiCeyhan (BTC) pipeline project marked turning point for Azerbaijan’s energy outlook.

Oil and Natural Gas Rents As a Percentage of GDP 80,0 70,0 60,0

50,0 40,0 30,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: BP Stascal Review

Although various institutions have offered differing projections of the country’s future oil production, the general consensus is that by 2020, the level of national oil production will be lower than it is today. Production in the ACG oil field will play an important role in determining the future oil production of the country. Although there is significant public pressure on BP to make the necessary investments and maintain a stable output trend at the ACG field, it is estimated that oil production in this field will gradually fall to 500,000 barrels per day by 2023. This means a 24% decline from the current production levels. A more optimistic forecast regarding the future of national oil production has been made by the World Bank, according to which the oil production of Azerbaijan will reach to 1.3 million barrel per day by 2016, and then decline to 900,000 barrels per day by 2020. The Center for Economic and Social Development, a think-tank in Azerbaijan, has also released projections for the country’s oil output. According to their forecast, annual oil production will drop below 50 million barrels by 2030. This marks an 80% decline compared with the 2012 production levels.

Caspian Energy Outlook

line for Azerbaijan and has been in operation since 1996. It runs from Sangachal Terminal to Novorossiysk, Russia and has a total capacity of 100,000 barrels per day. The third pipeline is the Baku-Supsa pipeline, which has a total capacity of 145,000 barrels per day. The oil transported via this route goes to European markets via the Black Sea.

The Azeri-Chirag-Guneshli (ACG) oil field is the main production resource for Azerbaijan, and provides 80% of the country’s total output. Oil production peaked in 2010 and has been declining since then. In 2010, production reached 1,023,000 barrels per day, and since the end of 2012 the cumulative decline of production has been close to 15%.

Similarly, the oil output forecast from the International Monetary Fund (IMF) is not optimistic. The IMF expects the output level to remain stable until 2020, and then 7

Caspian Energy Outlook

to start declining. These projections indicate that by 2030, Azerbaijan’s oil production will be lower than it is today, and that the remaining oil reserves will substantially decline. This is an important issue for Azerbaijan as the economy is heavily dependent on oil revenues. The decline in oil production will make economic diversification a key priority for the government. There is consensus among these projections, namely that by 2030, the country’s output of will be lower than it is today. Although there is a pessimistic view of the future of oil production, projections for natural gas side are fairly optimistic. Azerbaijan’s total proven natural gas reserves are around 3.2 tcm. About 35% of these reserves are located in the Shah Deniz field. Although the Shah Deniz field is the main 8

production resource at the moment, there are other important natural gas fields on the country’s territory: Umid, Absheron, Zafar- Mashal, Asuman and Shafaq, Babek, and Nakhchivan. Phase I of Shah Deniz field began production in 2007, and this has contributed significantly to Azerbai-

Oil Production of Azerbaijan (Thousand Barrels Daily) 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

Natural Gas Fields of Azerbaijan (bcm) AsumanShafaq; 400

Shah Deniz; 1100

Zafer-Mashal; 300

Umid; 200

Babek; 400 Nakhchivan; 300

Source: OME

Absheron; 350

A significant portion of Azerbaijan’s total gas exports go to Turkey, Georgia, and Greece, through Turkey.

As mentioned above, Azerbaijan has other rich sources of natural gas besides the Shah Deniz field, and the country plans to more than triple the current output over the next decade. This means that by 2025,

Natural Gas Production of Azerbaijan (bcm) 20,0 15,0 10,0 5,0

0,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

In terms of transporting the natural gas from Phase II of Shah Deniz field to European markets, Azerbaijan signed an agreement with Turkey in December 2011 on the construction of the Trans Anatolian Natural Gas Pipeline (TANAP). The pipeline is scheduled for completion by 2018, and the first volumes will start flowing by 2019. The TANAP project is seen as an important building block and starting point for the Southern Gas Corridor project, an idea that has been on the EU’s agenda for the past two decades. The aim of the project is to transport the natural gas resources of the Caspian region and Middle East to Europe. The initial aim of the project was to transport Turkmen gas to European market, but that has never been realised.

Caspian Energy Outlook

jan’s total gas output. Between 2006 and 2012, the country’s natural gas production has more than doubled, reaching 15.6 bcm annually. As domestic consumption of natural gas remained relatively flat during this period, natural gas exports increased substantially. According to reports released by SOCAR, total gas exports in 2012 reached 6.6 bcm, generating revenues of 1.6 billion dollars. A significant portion of Azerbaijan’s total gas exports go to Turkey, Georgia, and Greece, through Turkey. Russia and Iran are other export markets for Azeri natural gas, although the amounts in question are very small.

its natural gas output is projected to reach to 50bcm annually. The country has recently launched the necessary upstream and midstream projects in order to achieve this ambitious target. In terms of increasing natural gas production capacity, the second phase of Shah Deniz field has been an important starting point. The final investment decision has already been taken for Phase II of Shah Deniz, and by 2019 the total annual output from this field is expected to be 16 bcm. Compared to the numbers in 2012, these amounts will double the country’s natural gas output by 2020.

The Shah Deniz consortium plans to produce 16 bcm annually from the second phase of Shah Deniz field. Of this 16 bcm, 6 bcm will be absorbed by the Turkish market, and the remainder will go to European markets. The Trans Adriatic Pipeline (TAP) has been selected as the pipeline that will transport Azerbaijani gas to European markets. The 9

Caspian Energy Outlook

TAP will start from Greece and run to Italy in Europe, passing through Albania and the Adriatic Sea.

and will be an important supplier for the Southern Gas Corridor project.

When the Azerbaijani gas starts flowing to the Italian market in 2019, the initial amount will be 10 bcm. However, by 2025 this will be increased to 20 bcm. Sale agreements have been concluded for the initial 10 bcm destined for European markets by 2019. Nine companies from Italy, Greece and Bulgaria have been involved in this transaction.

TURKMENISTAN’S ENERGY OUTLOOK

The completion of the first phase of Shah Deniz field in 2007 has substantially increased gas production and gas exports of Azerbaijan. The commencement of gas production in 2018 from the second phase of Shah Deniz field is expected to provide a similar boost for the country’s gas export capacity. The likelihood is that by 2020, total gas exports reach 20 bcm, triple the 2012 volumes. With the operation of the other gas fields as mentioned before, by 2030 the country’s total gas production will reach 50 bcm, approximately 35 bcm of this is earmarked for export. These numbers reveal that by 2030, Azerbaijan will be meeting approximately 5% of Europe’s total gas consumption, 10

With the operation of the other gas fields, by 2030 the country’s total gas production will reach 50 bcm, approximately 35 bcm of this is earmarked for export.

Like Azerbaijan, the Turkmen economy is also highly dependent on oil and gas revenues. By 2012, oil and natural gas revenues as a percentage of GDP had reached to almost 35%, and oil and natural gas make up a significant proportion of total exports. Compared to Azerbaijan and Kazakhstan, Turkmenistan is not very rich in term of oil reserves. According to BP statistics, its proven oil reserves stand at around 600 million barrels. The country’s oil production has been relatively stable over the last couple of years, and has remained around 215,000 thousand barrels per day. Depending on domestic consumption, there has been some fluctuation in oil exports. By the end of 2012, however, exports reached the highest level of the last decade - 122,000 thousand barrels per day. Turkmenistan is particularly rich in natural gas resources, and is expected to become an important player in

the global natural gas market over the next decade and a half. Different forecasts for the country’s natural gas have been offered. According to BP statistics, Turkmenistan is the fourth largest country in the world in terms of natural gas resources, with proven natural gas reserves of around 17.5 tcm. Gaffney Cline & Associates estimates the natural gas reserves of Turkmenistan at around 30 tcm (on a high estimate), and 18 tcm (on the lower estimate). No matter which forecast is taken into account, it is obvious that Turkmenistan’s natural gas resources are significant.

Turkmenistan’s natural gas fields are mainly located in the eastern part of the country. The Galkynysh field is the country’s main field. Gaffney Cline & Associates estimate the reserves of this field at around 16.4 tcm. Yashlar gas field is another important field in the eastern part of the country. The estimated reserves of Yashlar field are around 3 tcm, making it another important source of natural gas production source for Turkmenistan. The Dauletabad, Shatlyk, Gazli, and Kokdumalak fields are other natural gas fields located across the country. Although Turkmenistan’s natural gas production has increased

Caspian Energy Outlook

Although Turkmenistan has huge natural gas reserves, actual production is not in line with reserves. According to BP statistics, while Turkmenistan’s share of total proven global reserves is 9.3%, in terms of actual production, it supplies only 1.9% of the world’s total. These numbers reveal that Turkmenistan has large untapped natural gas reserves, and has the potential to become a significant supplier for different regions of the world.

by more than 30% over the last decade, the country’s proven gas reserves indicate that there is still great potential for growth in terms of becoming an important global supplier. According to BP statistics, Turkmenistan’s natural gas exports are around 41.1 bcm. China, Russia, and Iran are its main gas export partners. China is the largest market for Turkmenistan, and about 52% of

Oil Production and Exports of Turkmenistan (thousand barrels daily) 250 225 200 175 150 125 100 75 50 25 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Producon

Exports Source: BP Stascal Review

11

China and India as two important gas export markets. The Central Asian Gas Pipeline to China has been operational since 2009, and has been meeting an important part of China’s natural gas demand. The pipeline’s current annual capacity is 30 bcm and there are plans both on the Turkmen and Chinese side to increase this capacity up to 60 bcm by 2015. China is one of the fastest growing countries in the world in terms of natural gas demand; its gas consumption has increased five-fold over the last decade. Therefore, it is entirely understandable that Turkmenistan is targeting China as an important export market.

Natural Gas Production of Turkmenistan (annual, bcm) 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

Caspian Energy Outlook

the country’s gas exports go there. The shares of Russia and Iran in the total gas exports of Turkmenistan are at very similar levels. There are different projections for the future gas production of Turkmenistan, and on which markets it will be sold. The country’s annual gas production was 64.4 bcm in 2012, and the Turkmen government expects this number to increase nearly four-fold, reaching 250 bcm by 2030. Some institutions believe that this projection is very optimistic, but in any case, by 2030, Turkmenistan’s natural gas production will at least have doubled, reaching 130 bcm. A more important question in this regard is where the gas is going to be sold. It seems likely that Asian markets will be the primary markets for Turkmen gas over the next decade and a half. The gas demand in the Asia- Pacific area has been increasing very rapidly over the last couple of years, and by 2012, this region accounted for about 38% of the increase in total world gas consumption. China, India, Japan, and South Korea are important natural gas consumers and importers in the region. Taking into account the future growth prospects of the region, Turkmenistan has targeted 12

Another important target market is the Indian market. In order to transport Turkmen gas to India and also Pakistan, Turkmenistan is working on the Trans-Afghanistan Pipeline, also known as TurkmenistanAfghanistan-Pakistan-India Pipeline (TAPI). The project was developed by the Asian Development Bank and is scheduled to be completed by 2015. The initial annual capacity of the pipeline will be 27 bcm, later to be increased to 33 bcm. India and Pakistan will be the main beneficiaries of the gas flowing through TAPI pipeline, but Afghanistan will also buy a small amount from this source. If the project is successful, Turkmen-

The country’s annual gas production was 64.4 bcm in 2012, and the Turkmen government expects this number to increase nearly four-fold, reaching 250 bcm by 2030.

Natural Gas Export Partners of Turkmenistan (unit, bcm) Other; 0,9 Iran; 9,0

China; 21,3 Russia; 9,9

Source: BP Stascal Review

Caspian Energy Outlook

istan will become a significant gas supplier both for India and Pakistan. The last potential market for Turkmen gas is the European market. The Trans-Caspian Gas Pipeline project plans to transport Turkmen gas to European markets. As mentioned before, Turkmen gas could be an important source for the Southern Gas Corridor, which hopes to meet Europe’s additional gas demand by 2030 contribute to the region’s supply diversification. The Trans Caspian Gas Pipeline project is also important for Turkmenistan in terms of diversifying its export markets. All these possibilities for future gas export routes indicate that Turkmenistan could serve as an important gas supplier for different parts of the world. Due to its small population, Turkmenistan’s domestic gas consumption is very low and 13

The Tengiz and Karachaganak oil fields are the main production points for Kazakhstan’s oil output, providing around 40% of total oil output. Production in Kashagan oil fields started in September 2013 and will be an important production field for Kazakhstan over the next decade and a half. According to some estimates, the Kashagan field holds around 13 billion barrels.

Caspian Energy Outlook

therefore any increase in production will generate additional export capacity. KAZAKHSTAN’S ENERGY OUTLOOK Kazakhstan is another regional country that is heavily dependent on oil and gas revenues. Although the degree of dependence is not as high as in Azerbaijan and Turkmenistan, it remains the case oil and gas revenues generate an important part of GDP and total exports. Kazakhstan is especially rich in terms of oil reserves. According to BP statistics, its proven oil reserves are around 30 billion barrels, which represent 79% of the total reserves in the Caspian region and 1.8% of the world’s total reserves. Over the last ten years, Kazakh oil production has steadily increased, reaching 1.7 million barrels per day by the end of 2012.

Over the last ten years, Kazakh oil production has steadily increased, reaching 1.7 million barrels per day by the end of 2012.

Although Kazakhstan has increased its oil output by 69% over the last ten years, there is still a great deal of room for potential growth and for the country to become an important world oil producer. The Kashagan field in particular will play an important role in future growth prospects. According to estimates from the U.S. Energy Information Administration, the oil production of Kazakhstan may double by 2030, reaching 3.5 million barrels daily. The Kashagan field is expected to supply 1.5 million barrels of this. This rapid growth in production will also increase the country’s oil exports. Kazakhstan is also rich in terms of natural gas reserves. According to BP statistics, the proven natural gas reserves of the country are around 1.3 tcm. Other estimates

Oil Production of Kazakhstan (thousand barrels, daily) 2000 1728

Kashagan, Tengiz, Karachaganak, Uzen, and Aktobe are Kazakhstan’s main oil fields. About 85% of the country’s total oil reserves are located in these fields. Taken together, the Kashagan and Tengiz fields represent the world’s largest oil discovery over the last 30 years. 14

1500 1000

1021

500

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

Natural Gas Production of Kazakhstan (bcm, annual) 25,0 20,0

19,7

15,0

10,0

9,1

5,0 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BP Stascal Review

ing areas. Because of this, southern Kazakhstan meets its natural gas demand via imports from Uzbekistan, while the north western region exports natural gas to Russia. Kazakhstan also acts as an important transit country for Turkmen and Uzbek gas exports to Russia.

Caspian Energy Outlook

Kazakhstan’s future gas production and exports depend on the development of new pipelines. The first goal of the country will be to develop a domestic pipeline system that connects the producing and consuming areas. This will probably eliminate the need to import gas from Uzbekistan. A second important task is the development gas pipelines to increase the country’s export capacity. The construction of the Beineu-Bozoi-Akbulak Pipeline could help Kazakhstan in terms of exporting more gas to China. The development of the Trans-Caspian Gas Pipeline is also important in this regard. If this project becomes operational, together with Turkmenistan, Kazakhstan could supply European markets via the Southern Gas Corridor. The Trans-Caspian Gas Pipeline is expected to make a significant contribution to Kazakhstan’s natural gas export capacity. UZBEKISTAN’S ENERGY OUTLOOK

put Kazakhstan’s gas reserves at above 2 tcm. Two important oil fields, namely, Karachaganak and Tengiz, are also important natural gas sources. Over the last ten years, Kazakhstan’s natural gas production has more than doubled, reaching 19.3 bcm. About 60% of the total production comes from the Karachaganak and Tengiz fields. An important feature of Kazakhstan’s natural gas system is the absence of internal pipelines to connect the producing and consum-

Uzbekistan is the only country in the region whose economy does not significantly depend on oil and natural gas resources. Oil and natural gas revenues, when combined, account for just 10% of GDP. The country has some oil and gas resources but they do not dominate the national economy. According to BP statistics, Uzbekistan’s proven oil reserves stand at around 600 million barrels. Actual

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Oil Production and Consumption of Uzbekistan (thousand barrels, daily) 200 150 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Producon

Consumpon

Caspian Energy Outlook

Source: BP Stascal Review

production has steadily decreased over the last ten years, dropping to 68,000 thousand barrels daily. The share of oil in total primary energy consumption is 7.8%, which is very low compared to the world average of 33.1%. Although domestic consumption is very low, domestic production barely meets demand, and in 2012, Uzbekistan was actually a net importer of oil. The Bukhara-Khiva region, which accounts for almost 70% of oil output, is the country’s main production point. The future prospects for oil output and exports will be shaped by the inward-oriented energy policy adopted by the Uzbek government, and the level of investment in oil reserves. Despite the case for oil, the share of natural gas in total primary energy consumption is much higher than the world average. Natural gas accounts for 85% of total primary energy consumption in Uzbekistan; the world average is just 24%. Although natural gas is a major source of domestic energy consumption, Uzbekistan is a net exporter of natural gas. Uzbekistan is the third largest country in Eurasia (after Russia and Turkmenistan) in

16

Uzbekistan is the third largest country in Eurasia (after Russia and Turkmenistan) in terms of natural gas production.

terms of natural gas production. According to BP statistics, Uzbekistan produced 56.9 bcm and exported 9.1 bcm of natural gas in 2012. Russia is the main export market for Uzbekistan; small quantities are also sold to Kazakhstan, Tajikistan, and Kyrgyzstan. The country’s future gas prospects depend on future production and domestic demand. Uzbekistan is currently exporting gas at the expense of domestic energy shortages, which have worsened in 2011 and 2012. The Uzbek government is taking some initiatives in regard to domestic energy shortages, and this is expected to increase domestic consumption. Uzbekistan is also trying to increase domestic production, but it seems unlikely that the country’s export potential will increase over the next decade. Uzbekistan started to export gas to China in 2012, and the government is planning to increase sales in the future. If domestic production could be increased, Uzbek gas could also be exported to European markets via the TransCaspian gas pipeline. CONCLUSION Hydrocarbon resources comprise an important share of global primary energy consumption, and in some parts of the world, the

Natural Gas Production and Consumption of Natural Gas (bcm, annual) 80,0 60,0 40,0 20,0

0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Producon

Consumpon

Source: BP Stascal Review

Caspian Energy Outlook

dependence on hydrocarbon resources is increasing. In this context, access to secure and reliable sources is more and more important for long-term sustainable economic growth. For producer countries, the focus on hydrocarbon reserves has dramatically increased due to the rapid increase in oil and gas prices over the last decade. With its large reserves of untapped oil and natural gas, the Caspian

region is expected to become an important supplier for world energy markets. The energy rich countries in the region - namely Azerbaijan, Turkmenistan and Kazakhstan - have benefited from oil and gas revenues over the last couple of years. However, there is still significant potential for these countries to further develop their oil and gas resources, and become secure and reliable suppliers for European and global markets. 17

Caspian Energy Outlook

NOTES:

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Caspian Energy Outlook