Gazprom's $1 buys bag of Kyrgyz woes

Russian energy behemoth Gazprom has taken over Kyrgyz National Gas Distribution Company - or Kyrgyzgaz - for a mere US$1 based on the agreement signed between the two sides at the end of July this year. The cash-strapped Kyrgyz government saw it fit to sell off the heavily indebted Kyrgyzgaz rather than continue to throw money at a company that was effectively bankrupt.

Kyrgyzgaz for years struggled to pay its bills for gas supplied from neighboring Kazakhstan and Uzbekistan, often having to ask the government to grant emergency bailouts. The reason for being permanently insolvent was Kyrgyzgaz's difficulty in collecting payment for the delivered gas from Kyrgyz customers, especially state-owned enterprises.

Fearful of popular anger, especially in harsh winter seasons, Kyrgyz government would grumble but would still lend the company every time gas suppliers threatened to cut supplies due to outstanding debts. Sometimes it would take several millions of dollars, but often several hundred thousand US dollars would suffice to settle the accumulated debts to the suppliers and keep the company running.

By selling Kyrgyzgaz to Gazprom, Kyrgyz authorities hope that chronic winter energy shortages will come to an end as Gazprom, with its deep pockets, promises stable supplies and more than $600 million in investment to upgrade the country's collapsing gas infrastructure, which was built during the former Soviet times.

To convince himself and fellow Kyrgyz citizens that his government did the right thing by getting rid of Kyrgyzgaz, Kyrgyz President Almazbek Atambaev summarized his government's thinking on the issue by stating that ''Kyrgyz people need stable gas not Kyrgyzgas''. Kyrgyz officials also think that Uzbekistan and Kazakhstan, the two main suppliers of gas to the country, would not now be able to use gas supplies as a powerful leverage against Kyrgyz government and that Gazprom will take care of this matter and ensure stable and uninterrupted supplies.

If Kyrgyz officials are to be believed, the deal with the Gazprom was so sweet that they could not turn it down. According to Kyrgyz officials, Gazprom took onto itself a number of obligations but strangely did not come up with any counter-demand of its own. These obligations include a promise of uninterrupted gas supplies at government-set rates both to the population and to industry, paying off more than $30 million of Kyrgyzgaz's outstanding debts to Kazakh and Uzbek energy companies, and a promise to invest more than half a billion dollars to upgrade infrastructure.

Even so, any normal developing country government would think twice before selling off such a strategic energy company like a national gas distribution company to a foreign owner. Apart from sovereignty issues, there is also a risk that the would-be owner might refuse or somehow fail to live up to its contractual obligations or promises.

On the other hand, it is also clear that the Kyrgyz deal is not about commercial profit for Gazprom. Gazprom, which supplies natural gas to pretty much all European Union member countries, can easily meet the relatively small additional demand (less than 1 billion cubic meters - or 1 bn m3 - per year) for gas in Kyrgyzstan, which has a population of 5 million people and few functioning industrial enterprises. The important question is how it is going to ensure stable supplies when there is no gas pipeline connecting its own grid with that of Kyrgyzstan.

At least for another few years, Gazprom will have to rely on Kazakhstan and Uzbekistan, Kyrgyzstan's traditional suppliers, to meet its main obligation of ensuring uninterrupted supplies, as the necessary pipeline infrastructure is not yet in place to export Russian gas to Kyrgyzstan through Kazakh territory. Gazprom is also exploring for gas in Kyrgyzstan itself, but it would require even more time for local gas to be available in the event that Gazprom discovers any in a country which until now was not known for its fossil fuel reserves.

At present, Kazakhstan supplies gas to industrially developed northern Kyrgyzstan, including the capital, Bishkek, at $240 per 1,000 m3, while Uzbek gas at $290 per m3 keeps warm the more populous and restive agricultural south of the country. Since both countries have limited gas volumes for export given their own domestic needs and other contractual obligations to bigger customers like China, Gazprom would have to court both of these countries to ensure stable gas supplies to Kyrgyzstan.

However, recent developments in Central Asia indicate that Uzbekistan might cease to supply gas to Kyrgyzstan altogether starting from next year, thus leaving Gazprom struggling to meet its main promise. The reason for that is Uzbekistan's increasing domestic demand, especially in winter, and its substantial export obligations to China. Gazprom itself, once the main customer for Uzbek gas, has seen its own purchases of Uzbek gas decrease year by year recently.

Uzbekistan, which usually signs supply contracts only for one year with its two smaller neighbors, ie Kyrgyzstan and Tajikistan, starting from January 1 this year completely stopped gas supplies to Tajikistan. Tajik authorities say that their repeated attempts to resume Uzbek gas supplies ended in vain.

A similar eventuality might be awaiting Kyrgyzstan come January 2014, when the current supply agreement is due to expire. According to regional observers, long-standing water disputes between the Uzbek and Kyrgyz governments might also lead to a hardening of Uzbekistan's position towards Kyrgyzstan next year.

Kyrgyzstan is building a number of controversial hydroelectric power stations in its territory with the help of two Russian energy giants - RusHydro and Inter Rao. These project threaten water supplies to the Uzbek agricultural sector by diverting substantial water volumes in the Syrdarya river.

Gazprom's purchase of Kyrgyzgaz might have further consolidated Kremlin's control over a small but strategically important Central Asian country. But it seems that by taking over trouble-ridden Kyrgyzgaz, Gazprom has bought only multiple headaches for itself, not only with regard Kyrgyz customers who are notorious for their lack of discipline in making payments but also with Kyrgyzstan's neighbors, who demand prompt cash for their supplies and who might not be interested in continuing gas supplies to Kyrgyzstan from next year.

Some observers are not surprised though that Gazprom is quietly willing to subsidize Kyrgyzstan even if that means incurring tens of millions of dollars in losses in dealing with the country. It is well known that Russian state companies usually have to do Kremlin's bidding, especially in helping to project Russia's geopolitical clout abroad by making overseas takeovers, even if those deals are not commercially attractive proposition.

If recent reports are true, RusHydro and Inter Rao are said to be unhappy at the way Russian Government forces them to commit large investments in Kyrgyz hydroelectric power projects that will require decades to bear any profit.