UZBEKISTAN - The Legal System

Although Tashkent has a reputation of being ahead of the rest of the FSU in its laws, the legal system for E&P remains vague and President Karimov is generally suspicious of those Western executives who demand better terms. The legislative framework has been amended and expanded somewhat; but it is yet to become in tune with the functioning of a market economy.

The general law on investment has become clearer on who may invest and what is meant by "investment". But clarifications have both positive and negative aspects. On the positive side, virtually anybody can qualify as an investor, be that a foreigner, local individual or multinational investor. An investor has the right to acquire movable property and leases on land. The land itself cannot be bought. On the negative side, any kind of contract reached between a foreign company and Tashkent amounts to an investment. Hence, in extreme cases, a foreign firm's local assets may be withdrawn without legal redress. However, implementation of the laws tends to be flexible.

It is equally important to have the right contacts, primarily people linked to President Karimov, and to have a good knowledge of the way the Uzbeks do business (see who's who in Part 4). Among other things, it is crucial to find the right local partner. For the short- to medium-term, the closer this partner is to Karimov the better, although it is difficult to determine how close the prospective partner can be. But it is more important to have a relationship of trust.

A good knowledge of the workings of the ministries involved is essential, partly because much of the bureaucratic structure installed during the Soviet era is still in place. Sensitivity to politics within the ruling establishment is important. The time factor must be considered. Things are done at a slow pace and requests can be delayed.

The US E&P Role: Tashkent has been trying hard to attract the biggest US oil companies as E&P partners and as developers of existing fields. These majors have big ventures in Azerbaijan, Kazakhstan and Turkmenistan. They have been reluctant to play a big role in Uzbekistan because of its vague legal system.

During President Karimov's visit to the US in 1996, Uzbekneftegaz offered four major areas for exploration, saying winning companies would enjoy a favourable tax regime and improved working relations with the state company. These areas have infrastructure and operating costs are low.

Uzbekneftegaz explained the nine E&P blocks on offer since 1994, including three in the Bukhara-Khiva region which it described as being the most promising in this country. It offered 12 new gasfields in Bukhara-Khiva, which

it said would produce oil as well, because they contained up to 480m barrels located already.

Uzbekneftegaz also offered two sets of fields for partnership: (a) 30 oil and gasfields yet to be developed, which were shut in for lack of financing; and (b) 18 old oilfields in Bukhara-Khiva requiring EOR investments, with the potential of recovering 800 million barrels of liquids being in place.

Interest in Uzbek oil and gas among American companies has risen since then. Enron is to develop 15 gas fields found by the Soviets in the Surhandarya and Bukhara regions. The fields contain about 20 TCF of gas and 600m barrels of condensates. This is part of a 30-year PSA to be signed in partnership with Gazprom of Russia and Uzbekneftegaz, entailing about $1.3 bn in investments. A preliminary agreement was signed in June 1996 between President Karimov and Enron's CEO.

With Enron as operator, some of the fields were planned to begin production in 1998. But the deal has been delayed. Gazprom is yet to decide on a business plan for the venture and to approve the use of its pipeline network for exports beyond the CIS. Enron has planned to recover 6 TCF of gas and most of the 600m barrels of condensates.

Kokdumalak, the biggest oil/gas field in Uzbekistan and a top priority for the government, is being developed by a joint venture of MW Kellogg of the US, Nissho Iwai Corp. of Japan and Uzbekneftegaz under a PSA signed in late 1994. The field is said officially to have 97.8 million tons of oil, 96.3 million tons of condensates and 143.7 BCM of gas.

Kokdumalak, in the Amu Darya basin close to the border with Turkmenistan, was first discovered by Soviet geologists in 1985 as a gas producer. In July 1997, Nissho Iwai and MW Kellogg completed construction of a $200m gas compressor station at Kokdumalak, with the two companies putting in $163m. This project marked the first time any former Soviet republic had received medium-term funding by the US Export-Import Bank. It was also the first time that a former Soviet republic received joint financing from the Japanese Export-Import (JEXIM) Bank and the Japanese Ministry of International Trade and Industry's Japan National Oil Corp. (JNOC).

Now condensates are being piped from the field's compressor station to the southern town of Bukhara, where Technip of France has built a 50,000 b/d condensate refinery (see below).

Stan Cornelius, a small US company based in Seattle, is developing the main producing oilfield in the Ferghana basin, known as Mingbulak (meaning "a thousand springs"). The operation is a 50-50 JV with Uzbekneftegaz. Full development of the field should be completed before end-1998, according to Uzbekneftegaz. Tashkent is hoping that, in the longer run, the field might be able to produce more than 200,000 b/d.

On the downstream side, Mobil is moving to build up a strong position. The company already imports Turkish lubricants for sale in Uzbekistan. It is working on new JV possibilities and on a plan to exchange oil and refined products between Uzbekistan and Kazakhstan. Texaco has a lube oil venture with Uzbekneftegaz at the Ferghana refinery (see Downstream Trends).

Dow Chemical said in November 1997 that it was positioned to take a leading role in the gas treatment industry in Uzbekistan and other countries in Central Asia. Dow is a major supplier to Uzbekistan of chemicals for removing hydrogen sulphide and carbon dioxide from gas. Uzbekistan is its biggest customer in the region. Dow is also supplying methyldiethanolamine (MDEA) for gas treating towers at a facility owned by the state gas company Mubarek.