Pandemic slows Central Asia’s gas exports to China

Natural gas exports from the Central Asian republics began to see major drops as a result of the global economic slowdown in the wake of the coronavirus pandemic. China, the main buyer of natural gas from Kazakhstan, Turkmenistan, and Uzbekistan, issued a force majeure note to its suppliers in March this year to halt supplies, The Diplomat writes in the article Pandemic Slows Central Asia’s Gas Exports to China. A force majeure clause is a common addition to contracts that frees the involved parties of liability if the terms of the contract cannot be fulfilled due to extraordinary circumstances — a pandemic, for example.

The fallout of these developments will have varying effects on the economies of the region depending on the depth of their dependence on the natural gas trade. In addition, in Uzbekistan, there has been talk about leaving commercial natural gas for domestic consumption, which is a positive development for a population that often suffers from a lack of access to the natural resource. 

As a result of China’s force majeure note, the three countries are reportedly making concerted efforts to coordinate reductions in response to the situation. It’s important to note that Central Asian gas is transported to China via a pipeline system that all three countries mentioned above feed into. The director of Uzbekistan’s state oil and natural gas company, Uzbekneftegaz, Mekhriddin Abdullaev said in May that the cuts in exports will be implemented proportionally. However, no joint decision or announcement has been issued; instead news on individual responses are trickling in which paint an overall portrait of the situation. 

The Russian oil and natural gas company, Lukoil, that produces Uzbekistan’s China-bound natural gas recently announced a 14.6 percent drop in natural gas production to 14.8 billion cubic meters (bcm) in the first six months in 2020, down from 17.4 bcm for the same period in 2019. The reported loss of assets from the setback was $476.5 million. Kazakhstan also announced a 20-25 percent reduction back in March as soon as China issued its force majeure note.

News from Turkmenistan is hard to come by, as usual, but when China announced the cuts in March, worries from Ashgabat were apparent in a statement Reuters attributed to a Turkmen government sources: “If this is the case, we hope this measure will be short-term and will not affect long-term, strategic and mutually beneficial Turkmen-Chinese partnership in the gas sector.” 

According to the World Bank’s World Development Indicators, Turkmenistan’s GDP share from natural gas exports has historically been the highest, compared to Uzbekistan and Kazakhstan. In the 2000-2010 period, natural gas rents as a percentage of GDP for Turkmenistan ranged from as high as 67 percent in 2001 to a low of 18.9 percent in 2010. In much of that period, the figure was above 30 percent. The latest measure, for 2018, estimates natural gas rents as 17.6 percent of Turkmen GDP.

According to the latest estimates for Uzbekistan, in 2018, natural gas rents as a percentage of GDP rest at 10.1 percent; meanwhile, Kazakhstan’s figure was 1.7 percent. The numbers for Uzbekistan and Kazakhstan are particularly stark given that the volume of their natural gas exports is almost the same. According to 2019 estimates, China received 7.1 bcm from Kazakhstan and receives around 10 bcm a year from Uzbekistan. Turkmenistan’s share in 2019 was 33.2 bcm. 

Lukoil announced last month that as a result of reduced demand from China, its production in Uzbekistan will be directed toward domestic consumption. Although exports to China are not the majority of the 60 bcm produced annually in the country, this move may offset chronic shortages of natural gas supplies to local population, especially in the winter months. For the population of Uzbekistan, no issue is closer to geopolitics and domestic affairs than natural gas. When cold temperatures deepen discomfort in households, the news fills with reports of deaths from carbon monoxide poisoning as a result of poorly self-constructed heating systems. No other issue is as emotionally charged when a country exports a resource its people suffer shortages of. Last winter individuals took to the streets with their frustrations over the lack of natural gas and electricity in several small protests.

Reductions in natural gas exports will have varying outcomes for the economies of Kazakhstan, Uzbekistan, and Turkmenistan and therefore the severity of the effect will vary as well. The most affected country in the region will invariably be Turkmenistan, given its dependence on gas exports to China, followed by Uzbekistan and Kazakhstan. In the case of Uzbekistan, the silver lining of the fallout, although still to the detriment to the government budget, will be increased access of its own population to natural gas.