UZBEKISTAN - LUKoil Operations.

On Nov. 8, 2007, LUKoil and UNG began supplying natural gas from the Khauzak field, in the Bukhara-Khiva region of south-western Uzbekistan, developed under the Kandym-Khauzak-Shady-Kungrad-Dengizkul programme. These five fields are eventually to be among the main gas producers in Uzbekistan. Production is coming from a gas treatment plant built to process the gas out of five wells in Khauzak. In turn, the gas goes to a refining facility at the Mubarek gas plant and from there it is exported via the Central Asia-Centre Pipeline, tied in from a spur line linking Mubarek to Dengizkul. The whole system was inaugurated officially in late November. Since then, LUKoil has been drilling additional exploration and appraisal wells in the area with the aim of boosting production continuously, to reach 210 BCF/y (6 BCM/y) in 2009 and 10 BCM/y by 2011, while cumulative production under the PSA could reach 207 BCM of gas.

A joint company, LUKoil Uzbekistan Operating Co. (LUOC), has been established for project management purposes. LUKoil and UNG are creating a gas marketing company for joint sales of production (including UNG's share of the output).

It was on June 16, 2004, that LUKoil signed with UNG a 35-year PSA for the Kandym, Khauzak, Shady, Kungrad and Dengizkul fields. Now LUKoil owns 90% and UNG holds the remaining 10% of an operating company developing the complex. This PSA was ratified on Nov. 24, 2004, as LUKoil said it was investing US$3 bn in the fields. The ratifying document was signed in Tashkent by Deputy PM Rustam Azimov, UNG's CEO Azizov and LUKoil CEO Vagit Alekperov. The fields' gas reserves then were estimated at 283 BCM. Alekperov said that, in return for UNG's agreement to raise LUKoil's stake from 70 to 90%, LUKoil took on responsibility for all investment. He said the share of production was to depend on the profitability of the venture and was to fluctuate "from 50% to 80%". LUKoil has drilled development wells at the Dengizkul field.

The JV's share in profit production is 50%. The volume of approved original gas in place in the contract area totals 329 BCM. LUKoil has an LPG plant built at Kandym, where the 150 BCM field is being developed as a fast-track project.

In early March 2007, LUOC completed the construction of a temporary storage and waste management facility for drilling cuttings on Khauzak and Shady fields. The facility, the first of its kind in Uzbekistan, handles 12,000 t/y of drilling cuttings. Capacity of its base disposal unit is 10 t/y. (LUKoil then said the "most modern technology as well as the best global manufacturers' equipment" were used at the site. This provides for separate collection, transport and disposal of drilling waste, as well as regeneration and re-circulation of used drilling mud.

(A stabilisation and solidification method was selected to mix the cuttings with an absorbent and cement as result of which the components turn into low soluble hydroxides. The processed mix of used drilling mud with drilling cuttings is used at the facility to produce material for construction, repair of field roads and build drilling rig foundations. Part of processed cuttings is used to produce cinder blocks, a popular decorating and wall building material. Thus, a modern concept of waste-free production is in place at Khauzak and Shady).

Khauzak is producing condensate. In early 2008, LUOC introduced a multi-modal transport system from the condensate to reach Bukhara's Jarkurgan refinery. This first goes to the North Urtabulak rail-loading terminal, loading into tank trucks. The system includes piping to the Mubarek gas processing plant, trans-shipment into rail tank cars and shipment to the refinery. The volume of condensate averages 25,000 t/y. The systems natural gas, sulphur and condensate are taken by Lukoil Overseas Supply & Trading Ltd.

The Chinese company TUHA is LUOC's drilling contractor. The horizontal wells' depths average about 3,000 metres, with the drilling time for each well having been four to seven months. Under the PSA, a total of 37 development wells at to be drilled on Khauzak. In total, the programme for the five fields will require more than 180 development wells and construction of over 1,500 km of pipelines.

The programme has called for two main compressor stations, gathering points, shift camps, high-voltage power lines, a 40-km railway line, motor roads and access roads. The project has involved construction of a modern gas processing plant in the Kandym area with a capacity of 8 BCM/year of gas.

The five fields' natural gas and oil and condensate were found at a depth of around 2,500 metres in reefoidal carbonates of the Callovian-Oxfordian age.

For the time being, the gas is being mostly used for the domestic market and partly sold to Gazprom. The production centre is linked to Gazprom's pipeline system by a spur line built for LUOC. In 2004, Alekperov said that, under the PSA, Gazprom will purchase LUOC's entire output from 2009, and the gas is to be resold either on the Russian market or abroad.

UNG's subsidiary UzLitiNefteGaz had made the feasibility study for the gas E&P venture. The US law firm Baker & McKenzie assisted UNG in the drafting of the PSA. The PSA was signed during the visit to Tashkent of Russia's then President Putin (who since May 7, 2008, has become Russia's PM).

Russia has sought to reassert its influence across Central Asia through deals with the former Soviet republics. Uzbekistan and Russia in December 2002 had signed a long-term Strategic Co-operation Agreement which, among many things, was to raise Russian investments in the country.

Putin earlier in 2004 had signed another strategic partnership agreement with Uzbekistan, which has since strengthened Uzbek ties to Moscow further, after more than a decade during which the former Soviet republic staked out its sovereignty. President Karimov then said deals with LUKoil and Gazprom would bring the total of Russian investments in Uzbekistan's energy sector to more than $7 bn.

LUKoil/UNG JV: Another interesting venture is a LUKoil partnership with UNG in a PSA producing 8 BCM/year of gas and 100,000 b/d of liquids from 2007 (see down10RusOverseas-Sep4-06). This JV continues to explore and develope gas and condensate reserves in the Bukhara-Khiva and Gissar blocks in the south of Uzbekistan. This JV was originally intended to include Itera, a private Russian gas marketing company registered in Florida. But Itera withdrew from this JV in 2004.

The JV is exploring for oil and gas in other prospective parts of the country. The explored reserves in Bukhara-Khiva and Gissar are estimated at 250 BCM of gas and 10m tons of condensates. LUKoil is also part of a major consortium exploring other areas and involving Gazprom as well as Malaysian and South Korean companies.