Behzot Normatov, chairman of the board of the Uztransgaz state gas supplier company, has detailed development priorities in Uzbekistan's gas transportation system. He emphasised the importance of energy efficiency. Normatov said that because resources were limited, the economy needed to move to market relations: "The need for them is constantly growing with the growth of the population, cars and industries. Therefore, we need market liberalisation, a transition to market relations in the sale and purchase of energy resources." According to him, the country's main gas transportation system and Uztransgaz as a strategic company will remain state-owned. The following is the text of his interview entitled "Fair price and 'social norm'. Big conversation about natural gas with the head of Uztransgaz", published by the Uzbek news website Podrobno.uz on 20 May 2022 with subheadings as published:
Among the main news of the past few days has been the planned introduction of a "social norm" for the consumption of electricity and natural gas in Uzbekistan. Behzot Normatov, chairman of the board of the Uztransgaz company, has told a correspondent of Podrobno.uz about what it will be like and how it will affect ordinary people and whether there will be a fair price for gas for them.
We have also talked with him about where Uzbek gas is exported, why it costs about seven times more abroad, how to make the country's population have a more careful approach to energy resources and what is the state of the country's gas infrastructure today. Export
[Question] Tell me about the export indicators of the company. Where is Uzbek gas mainly going today?
[Answer] Uzbek gas is not being exported. What is being exported is only part of the fuel which is produced by [Uzbekistan's] joint ventures with New Silk Road (China), Gazprom and Lukoil (Russia) and Natural Gas-Stream. JV (Switzerland).
Agreements contain a clause on production sharing with foreign companies. It states that the state assumes the obligation to export a certain part of the gas in order to ensure the profitability of investment projects. At the moment, such enterprises account for about 30 per cent of all the volume of gas extraction.
The "Mustaqillik 25 Yilligi" field in Surkhandarya [Region] with a capacity of 4bn cubic metres of gas a year is being prepared for launch. There will also be an obligation to export part of the produced gas. But there is another option, that is we will buy gas from the joint venture at and export price in order to ensure the profitability of the investment project.
[Q] How is pricing calculated for the gas being supplied for export? Is it true that the price of gas inside the country is 10 times less than that for export?
[A] The price of gas for export is calculated by the difference between the cost of gas at the border and its delivery to it, taking into account all export taxes. For the sake of an example, if the cost of transportation from the field to Uzbekistan's border is $40, and the price of gas at the border is 200 dollars per 1,000 cubic metres, then the price of
the gas itself is $160. This is the so-called netback price for natural gas. Now one cubic metre of gas that we buy for our homes costs 380 soms [about 10,800 soms equal one dollar]. However, its market price actually is six to seven times higher, that is 2,280 - 2,660 soms.
[Q] A lot of questions arise regarding the export price of our gas. You have said that its approximate export cost is $200-$250 per 1,000 cubic metres. But in the news we have all seen gas prices ranging from $2,000 to $3,000 per 1,000 cubic metres on international markets. Why is such a big difference? Where is the catch?
[A] Yes, you are right. This question is also often asked from me, and with strong indignation too. High gas prices are due to their form of sale. That is, gas prices above $1,000 per 1,000 cubic metres are spot prices, that is, for free volumes of gas that are at the point of consumption. And the main prices for gas sold by Russia and other major exporters are set by long-term contracts based on generally accepted norms and formulas that determine a fair price. These formulas usually refer to commodities that are listed on international trading platforms (oil, fuel oil, gas oil). And so, the statement that we sell gas cheaply does not correspond to reality and is because of simple ignorance of the subject. Fair price and 'social norm'
[Q] Is 380 soms a fair price for gas in Uzbekistan?
[A] Everyone looks at it differently. From the point of view of the population, this is correct. However, in order to supply this gas, wells are drilled, people, plants and a gas transportation system work, which eventually becomes obsolete and needs investment. There are inflation, wear and tear, other financial indicators and expenses that must be covered.
The gas transportation system is subsidised by the state so that people can pay for gas 380 soms per cubic metre instead of 2,660 soms. Thus the company sells the product to consumers at a price lower than its production cost, and the rest is covered by state subsidies. Where do the subsidies come from? From the budget, which is formed with people's taxes. There is a need to break this vicious circle.
If people directly pay for gas at a price corresponding to a market economy then the company, in turn, will pay more taxes to the state budget, which the state can spend on social needs such as schools, kindergartens and hospitals, and not on subsidising the system for gas delivery to users. After all, the difference between tax rates from 380 soms and 2,260 soms is significant.
[Q] The main news of recent days is the emergence of a "social norm" for the consumption of electricity and natural gas. In your opinion, what percentage of the country's population will be included in the category of consumers of the "social norm"?
[A] There is a certain number of people who constantly use a certain amount of gas, say 300-400 cubic metres per month. On the other hand, there are people who use many times more. At the same time, the state subsidises gas for everyone. Consequently, the second category receives more benefit for public money although this category does not need it [benefit]. Differentiated pricing means that those who use up to 400 cubic metres of gas per month will pay roughly 380 soms for each unit, and an increased price will be set for those who use more than this norm. I think that 70%-80% of the population is the first category of consumers, and they will not be affected in any way by these changes.
The emergence of the "social norm" should encourage people to take a more careful approach to the use of resources that are limited. Even if people can afford to pay for excess, resources must be used rationally. Thus we show civic responsibility for the whole society.
I constantly tell my family: "When you switch off the light at home when it is not needed you give the opportunity to turn on the light in another place where it is needed."
Moreover, these energy sources can be used with greater benefit. I think that burning gas as a fuel is heresy. By processing it, you can get polyethylene and other materials for use in the production of various products with high added value. This means more taxes, more jobs and more exports. This is more profitable than using gas in the pure state.
[Q] Often there is a lot of talk about energy efficiency in the country. What do you think needs to be done to make the population treat energy resources with care?
[A] Energy efficiency is a big and important issue. When we can achieve it depends largely on the population. Do you know how much gas, electricity and other resources you spend per month? This question was asked by a high-ranking official during a meeting, and none of the 30-40 people present raised their hand. I think that most of our fellow citizens know how much they pay but do not know the volume. Many people do not even think about it. When something becomes cheap we stop appreciating it and remember it only when it is gone.
Remember the [electricity] blackout of January. Now imagine what will happen if our gas runs out. We will use exclusively imported resources. And their prices will be very different. We can go back to having to heat our homes with wood and coal.
But there is another side to the issue. Some areas have very poor infrastructure, and most homes there have very low thermo-insulation and improvised heating systems with very low energy efficiency.
A couple of years ago, a study was conducted on what would happen if all households switch to energy-efficient equipment, at least double-circuit boilers. Calculations showed that due to this, more than 1 billion cubic metres of gas can be freed up. It is like you have found a new deposit. This volume can meet the needs of more than 650,000 apartments for the duration of one year, or 138 days of operation of the Tashkent thermal power plant.
However, the question is how to provide all these households with the necessary equipment. Some are very difficult to convince to make such a necessary purchase. They would prefer to buy another phone. Here we must work on how to transform thinking and raise consumer culture. Others simply cannot afford it. I think it would be great if we have some kind of programme that will help socially vulnerable segments of the population in this regard. This should quickly pay off. Limits at filling stations
[Q] Periodically, during peak periods, authorities impose limits on the supply of gas to filling stations and industrial facilities. When will the country come to stop turning off these facilities, and what needs to be done to achieve this?
[A] These limits are necessary so that gas is available to the population first of all. After all, automobile gas-filling compressor stations are points of intensive gas taking from the pipeline system.
To my great regret, the permits for the construction of many stations were issued without taking into account the technological capacities of the pipelines. They were built at convenient locations that enabled high sales. There are points where four gas filling stations work at once, where the population remains almost without gas.
This is one of the causes. There is also the second cause - limited resources. The need for them is constantly growing with the growth of the population, cars and industries. Therefore, we need market liberalisation, a transition to market relations in the sale and purchase of energy resources.
We can buy gas without detriment to the state budget from foreign companies that work in Uzbekistan and have the right to export their share. We should also interest companies from other countries in creating a competitive gas sales market. That is, instead of pumping the entire volume of gas to Turkmenistan or China, it would be more profitable for them to provide guaranteed resources to Uzbekistan. Blackout lessons
[Q] The blackout showed that the gas transportation system is dependent on electricity supplies. Are any measures being taken to diversify supplies and create independent [electricity] generation?
[A] I would not say that we are 100% dependent on electricity. Some gas pumping stations and the electronic control system work on it [consume electricity]. But of course, the blackout was a lesson for us too. We are currently working on several options - the installation of solar panels, batteries and high power generators that would make it possible for our electronic equipment and automation to function smoothly.
However, one should not forget that not only the gas transportation system but also the gas production system need electricity. That is, we need a comprehensive approach to the issue of electricity supply - from production to distribution of gas.
Russian partners and TAPI [Turkmenistan-Afghanistan-Pakistan-India gas pipeline]
[Q] What is the situation regarding projects being implemented with Russian partners? Have they been affected by the sanctions? Gazprombank was to finance a project to modernise the gas transportation system [of Uzbekistan]. What will happen to it now?
[A] The project did not stop. We will continue to pay interest on the loan from Gazprombank. The loan was issued earlier. The implementation of the second part of the modernisation project, however, will be financed by the National Bank of Uzbekistan. We soberly assessed the risk and decided that it is more rational at this stage.
[Q] Is Uzbekistan currently considering any projects to build new gas export pipelines, for example, through Afghanistan? Is the country interested in the TAPI project?
[A] TAPI is a very interesting and promising project from an economic point of view in which any company would like to participate. However, at this stage of our company's development, we are focusing exclusively on the gas transportation system of Uzbekistan. Modernisation of the gas transportation system
[Q] Tell me how worn out is the main gas pipeline system of Uzbekistan today? How much gas is lost during transportation?
[A] The technological loss is estimated at about 1%-1.2% of the total volume of transported gas. It is 450m-500m cubic metres per year. But is it is within certain limits. There are opportunities to reduce the loss, but intensive investment is required. The system is large and outdated.
There are many reasons for [saying] this. For example, more than 61% of the 13,250 kilometres of pipes have been in operation for more than 30 years. In addition, for a long time, its use was not carried out at the proper level.
Another point is that there is no protection against corrosion on large sections of pipelines. This is because there was a time when metal was actively stolen. People stole entire sections of electrochemical protection of gas pipelines. The company restored them but not in the required parameters due to the financial situation, the lack of attention of officials and the criminal indifference of managers working in the system, factors of corruption.
In addition, the security zone regulations were not observed. On the territory of 300 metres on both sides of pipelines, perennials should not be planted, and major construction should not be carried out. However, unfortunately, more than 2,500 facilities - houses, industrial and other facilities - have been built in the protected zones of the gas transportation system, in particular, the main pipelines of Uzbekistan. This leads to the appearance of stray currents, which accelerates corrosion processes in pipelines.
[Q] How is the process of modernisation of the gas transportation system going? What are your plans for the coming years?
[A] As part of modernisation, this year we built a new 147-km Gazli-Kagan line. Over the past 10 years, this is the only major construction in the gas transportation system. In addition, large parts (42 and 30 km) of old gas pipelines were replaced.
Every year, we must replace at least 5% of worn-out pipeline sections. However, financial possibilities allow us to carry out work on only 0.68%. But it is not just pipelines. There are also compressor stations that pump gas through them. For example, the station in Kagan was built in 1965.
I think we will reach these standards on achieving financial stability and independence from the state. For this, it is necessary to complete all the initiated reforms.
In particular, measures are now been taken to separate the function of buying and selling gas and its transportation. It is proposed that Uztransgaz will be exclusively a transportation company with its own tariff rates, which will cover operating and capital expenses in accordance with the established work plan. That is, if we have to start work on modernisation on 1 January, then we will start it [work] on that day, and not when we have funds.
[Q] Much has been said about a SCADA [supervisory control and data acquisition] project on the gas transportation system to reduce [gas] leaks and losses. How are things with it?
[A] They already tried to implement a similar project, but for some reason it was suspended. About $20m-$30m was spent on it. Overall this project requires at least $500m.
Now we are restoring it piece by piece, Existing equipment is being tested for the possibility of further use. In addition, work is under way with the Uzbektelecom company, which helps to create fibre-optic communication lines separately for Uztransgaz. At the first stage, it is planned to establish feedback with every unit and to equip them with electronic pressure and temperature sensors.
At the next stage, all mechanical valves will be replaced with electric and electro-hydraulic ones, which will make it possible to monitor the current situation and implement operational remote control, excluding the human factor.
SCADA will make it possible to properly operate the gas transportation system, to detect anomalies in pipeline in time online and to narrow down the areas of troubleshooting that we should focus on. Yes, this project requires a lot of money and time, but it is necessary. I think we will complete it within two to three years. Private hands
[Q] When will Uztransgaz be transferred to private hands? How is the IPO preparation going?
[A] The main gas transportation system and Uztransgaz as a strategic company will remain state-owned. A presidential decree contains this point. Yes, there is a plan to sell shares of Uzbekneftegaz through an IPO and to attract investment on the basis of public-private partnership for the development of the company.
This decree provides for pilot projects in 14 constituent parts of Uzbekistan, that is, one in each region and Karakalpakstan [constituent republic in north-west Uzbekistan]. To begin with, locations for the pilot projects will be selected and technical tasks and conditions under which they will be carried out will be defined. Operators will be selected on a competitive basis.
We need to find out if private companies can optimise costs and minimise the increase in the cost of gas for the population, while ensuring investment in infrastructure development on the ground without attracting budgetary funds. Based on experience gained, the government will make a decision.
Source: Podrobno.uz website, Tashkent, in Russian 1100 gmt 20 May 22