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Analysis: Petronas makes Uzbek strides

disclaimer: image is for illustration purposes only
by John C.K. Daly
Washington (UPI) Feb 8, 2008
In the mad Western dash for Central Asian energy resources, investors initially focused on Azerbaijan and Kazakhstan. Following the death of Turkmen President Saparmurat Niyazov in December 2006, Western energy firms fell over themselves courting Turkmenistan's new president, Gurbanguly Berdymukhamedov. Ten years before Niyazov's death, however, Malaysia's Petronas won Turkmenistan's first offshore drilling agreement and began prospecting in the Turkmen sector of the Caspian.

Now Petronas seems set to repeat its success in the one Central Asian country with immense potential that has been largely overlooked in the mad scramble of energy assets -- Uzbekistan. Its success builds on several years of quiet diplomacy. Petronas was set up in 1974 and operates in 30 countries. It has grown steadily over the past three decades; in March 2007, the Financial Times identified Petronas as one of the new "seven sisters," a tribute to its joining the ranks of seven oil companies that dominated mid-20th century oil production, refinement and distribution.

Offering Petronas its opportunity were the tragic events in Andijan, Uzbekistan, on May 13, 2005, when a firefight erupted between Islamic militants who had on the night of May 12 seized weapons and hostages, provoking an armed response by the Uzbek authorities that saw a death toll of less than 200 according to Tashkent, and far higher tolls according to Western human-rights organizations. Relations between Uzbekistan and Western nations went into a deep freeze, producing a situation where Tashkent sought out nonjudgmental governments and investors.

On Oct. 2-4, 2005, Uzbekistan's President Islam Karimov made a state visit to Malaysia on the invitation of King Tuanku Syed Sirajuddin. During the visit, Karimov met with the head of Petronas and discussed relations with Uzbekneftegaz and other corporations. They signed a memorandum on cooperation and an agreement on joint exploitation of oil and gas resources. Petronas subsequently signed a memorandum of cooperation with Uzbekneftegaz National Holding Co. for joint cooperation in the oil and gas sector both in Malaysia and Uzbekistan and wrote a joint study agreement with UNG for a technical study to be jointly undertaken by Petronas subsidiary Petronas Carigali Overseas and UNG in Uzbekistan's Baisun Block. Petronas' press office issued a statement, noting, "The MOC and the JSA signal Petronas' commitment to establish a long-term presence in the Uzbek oil and gas sector. More importantly, they signify the move towards greater, mutually beneficial cooperation between the two national oil companies."

The trip built on the momentum of the previous month, when Petronas Carigali Overseas joined a consortium of UNG, CNPC International Ltd., Korea National Oil Corp. and Lukoil Overseas Holding Ltd. to undertake exploration in the Uzbek territorial waters of the Aral Sea.

"Further negotiations are expected to take place with Uzbekistan on a production sharing agreement for the exploration and development of oil and gas fields in the Uzbek part of the Aral Sea," Uzbekneftegaz said in a statement.

Exploration of the concession over several previous years in the Ustyurt region identified eight gas and condensate fields in the contract area, with development quickly starting in the East Berdakh and Uchsay fields. Petronas Carigali Overseas received 20 percent equity in the Aral concession.

Wasting no time, Petronas President Tan Sri Dato Sri Mohd Hasan Marikana in December 2005 flew to Tashkent, where Karimov received him for discussions on development issues and implementing the new joint projects, conservatively estimated to be worth hundreds of millions of dollars. In a moment of understatement, Marikana told journalists, "The Petronas Corporation is interested in expanding its participation in investment projects in Uzbekistan."

At the time of Marikana's visit, Uzbekneftegaz and foreign companies had already carried out preliminary geological studies, which indicated high hydrocarbon potential of the Aral Sea territory and $50 million had been spent on seismic exploration of the Baysun and Surkhan Aral investment blocks.

Diversifying its partners in a move that was certain to anger Washington, on May 16, 2006, Petronas, evidently unfazed by the threat of sanctions being imposed by Washington under the 1996 Iran-Libya Sanctions Act for trading with Tehran, signed a contract with Iran's Iranian Oil Exploration Operation Co. to conduct Iran's first ever exploration project overseas to take 2-D and 3-D seismological surveys in the Petronas oil concession blocks in Uzbekistan.

On Dec. 12 last year, Petronas' quiet diplomacy was rewarded when its subsidiary PCOSB signed the agreement on activities and main principles for Baisun block PSA and an Exploration Agreement for the Surkhanski block with Tashkent. Both blocks are adjacent in the Surkhandarya region in southern Uzbekistan. Petronas also signed an MOC with Uzbekneftegaz.

The contract is one that Western oil companies can only dream of. Under the PSA, PCOSB will hold a 100 percent equity stake in the 1,216 square-mile Baisun concession and will be the operator for the block, while the exploration agreement for the Surkhanski Block grants PCOSB the rights to carry out exploration work in the 2,780-square-mile block, which will be followed by a PSA upon discovery of hydrocarbons. As Western companies are finding out to their sorrow, oil and Western criticism, like oil and water, don't mix.

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