Dentons

Uzbekistan is continuing to reform its fuel and energy industry to develop its energy resources. On July 9, 2019, the President of Uzbekistan signed the Resolution that provides for measures to improve the oil and gas sector (PP-4388).

The Resolution states that the current outdated and non-transparent management system, which combines regulatory functions and commercial activities, hampers development of the oil and gas industry. As a result, despite the 8% growth in natural gas production during the last 20 years, the volume of its production by local enterprises decreased to 29%. Moreover, the average rate of natural gas reserves replacement for the past five years is only about 70%. Therefore, PP-4388 provides for a range of measures to resolve the current issues in the country’s energy sector.

Concept for the development of the oil and gas sector of the Republic of Uzbekistan up to 2030

PP-4388 states that Uzbekistan, in cooperation with international consulting firms and financial institutions, has elaborated a concept for the development of the oil and gas sector of the Republic of Uzbekistan up to 2030 (the Concept). A special Republican Working Committee has been established to implement the Concept. The committee, chaired by Prime Minister Abdulla Aripov, aims to fulfill the following functions:

  • approve road maps to implement the Сoncept, including raising hydrocarbon production volumes and modernizing the gas transmission system;
  • adopt measures to attract international financial institutions, foreign state financial organizations and consulting firms for the practical implementation of the Сoncept;
  • establish a project office under the Ministry of Energy to coordinate reforms of the oil and gas sector.

The current gas transmission system of Uzbekistan includes more than 13,000 km of main gas pipelines, more than half of which is already more than 30 years old.. Moreover, 145 gas compressor units are fully depreciated. Thus, the country needs to implement measures to modernize the gas transmission system.

Reorganization of Uzbekneftegaz

PP-4388 introduces a number of changes in the structure and management system of Uzbekneftegaz, including:

  • abolition of intermediate units in the management system of Uzbekneftegaz by merging the following joint stock companies into it: (1) JSC Uzburneftgaz (drilling company), (2) JSC Uzneftegazdobycha (oil and gas production company), (3) JSC Uznefteprodukt (petroleum and petroleum products refining company), (4) JSC Uzneftegazmash (company manufacturing oil and gas machinery and equipment). Uzbekneftegaz is recognized as the legal successor of these companies;
  • withdrawal of the JSC Uztransgaz (gas transmission and distribution company) from Uzbekneftegaz by transferring its share to the Agency for Management of State Assets of the Republic of Uzbekistan (the Agency);
  • transformation of six oil and gas producing and gas processing entities – Mubarekneftegaz LLC, “Shurtanneft” LLC, “Ustyurtgaz” LLC, “Gazlineftegazdobycha” LLC, JSC “Andijanneft” and “Mubarek Gas Processing Plant” LLC -into structural units of Uzbekneftegaz. The purpose of such a transformation is to establish direct management of manufacturing units;
  • establishment of the JSC Hududgaztaminot (regional gas supply company) on the basis ofregional gas supply branches of Uztransgaz;
  • transfer of shares of Uzbekneftegaz in charter capitals of a number of trade and livestock breeding complexes, service organizations and markets to the Agency and local executive authorities.

Furthermore, the responsibilities to accelerate development and replace the crude hydrocarbon reserves of the country and to increase the efficiency of exploration works are transferred to the State Committee for Geology and Mineral Resources of the Republic of Uzbekistan.

PP-4388 also sets a goal of raising hydrocarbon production volumes to 42.3 billion cubic meters and of raising liquefied gas to 1.5 million tons by 2024.

Functions of Uztransgaz and Hududgaztaminot

As a result of the structural changes, Uztransgaz is assigned the functions of:

  • purchasing natural gas from gas extraction and processing organizations, including joint ventures and foreign companies operating on the basis of production sharing agreements, for its transmission as a single operator;
  • selling natural gas under direct contracts − to consumers connected to main gas pipelines and under commission agreements with Hududgaztaminot – and to consumers connected to gas distribution networks.

Meanwhile, Hududgaztaminot is assigned with the functions to:

  • operate gas distribution networks and the related equipment in compliance with safe operation rules;
  • purchase, supply, store and sell liquified gas to the population and social facilities.

International standards and reporting

The Resolution mandates Uzbekneftegaz and Uztransgaz to:

  1. starting with the results of 2019, ensure financial reporting in compliance with international standards of financial reporting and to order independent external audits involving international audit firms;
  2. ensure, starting with the results of 2020:
    • the implementation of corporate disclosure standards in accordance with the requirements of International Standards of Accounting and Reporting (ISAR);
    • the application of International Financial Reporting Standards (IFRS);
    • the publication of reporting in accordance with the Global Reporting Initiative (GRI);
    • they obtain a corporate credit rating in cooperation with international rating agencies, financial and legal consultants;
    • the implementation of minimum requirements for profitability of sales, assets turnover and other indicators in accordance with international practice;
  3. take measures to attract, not later than 2024, investors to Uzbekneftegaz and Uztransgaz by way of an IPO and SPO on local and international stock markets while maintaining not less than 51% of  the state’s share in their charter capitals.

Legislative changes

The Resolution also provides for development of the following documents:

  • before December 1, 2019 – draft new versions of laws “On Production Sharing Agreements” and “On Subsoil” outlining transparent mechanisms for competitive bidding to allocate subsoil areas to foreign investors, and including the requirement to supply a share of extracted crude hydrocarbons owed to Uzbekistan to the domestic market;
  • within 2 months – draft a legal act defining the legal basis for crude hydrocarbon extraction based on contracts with undistributed risks involving international specialists and experts;
  • before September 1, 2019 – orders requiring a constant monitoring of implemented and developed investment projects, as well as attracting international engineering and consulting companies to supervise existing fields and wells.

Public procurement

PP-4388 states that from October 1, 2019:

  • requirements for monitoring, control, transparency and efficiency analysis apply to all types of public procurement performed by business entities and strategic enterprises that fall under a special procurement procedure;
  • the state customer should publish the results of public procurement in detail on its website;
  • information on procurement of goods, works and services by selecting the best offers and through direct contracts should be published on a special portal before the procurement contracts are signed in order to ensure large-scale involvement of suppliers.

The Resolution also provides for enhancement of transparency requirements in the Law of the Republic of Uzbekistan “On Public Procurement”.

Enhancement of efficiency and transparency in the fuel and energy sector

PP-4388 also envisages the following measures:

  • to transfer hard-to-recover hydrocarbon fields under development to companies with the relevant experience based on contracts with undistributed risks;
  • within 3 months – adoption of the Program of energy efficiency enhancement of the Republic of Uzbekistan for 2020–2022;
  • large-scale implementation of modern information and communication technologies, including the “Digital Field” concept, to the activities of “Uzbekneftegaz”.

The Resolution was published and entered into force on July 10, 2019.

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