KYRGYZ BUNDLE GAS, POWER AND WATER WITH UZBEKISTAN

UNCLAS SECTION 01 OF 02 BISHKEK 001792

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/CEN

E.O. 12958: N/A
TAGS: EPET ENRG ECON PREL KG
SUBJECT: KYRGYZ BUNDLE GAS, POWER AND WATER WITH UZBEKISTAN

BISHKEK 00001792 001.2 OF 002


Sensitive but unclassified. Not for Internet distribution.


1. (SBU) Summary: Kyrgyz-Uzbek negotiators agreed on a $100
per thousand cubic meter rate for Uzbek natural gas for 2007,
nearly doubling the current price. In response, the Kyrgyz
government announced a 44% hike in natural gas rates for
consumers to absorb the price increase. In a related deal,
Kyrgyzstan will export 1.3 billion kilowatt hours of
electricity (plus a lot of water) to Uzbekistan most likely
at a relatively low 1.1 cent per kilowatt hour rate. Thus,
in spite of President Bakiyev's much publicized visit to
Uzbekistan earlier this fall to help facilitate a gas price
deal, Uzbekistan appears to come out the clear winner ) more
natural gas revenue, cheap electricity and a predictable
water supply for next year's agricultural season. End
summary.

The Raw Deal ) More Gas for Much More Money
--------------


2. (U) Following the conclusion of Kyrgyz-Uzbek
negotiations, Kyrgyz Deputy Prime Minister Daniyar Usenov
announced that Uzbekistan will supply Kyrgyzstan 850 million
cubic meters of natural gas at a rate of $100 per thousand
cubic meters (tcm) through the end of 2007. This amounts to
an increase of 100 million cubic meters and a price increase
of $45/tcm over existing 2006 arrangements. As a result of
this deal, the Kyrgyz government has announced a 44% increase
in 2007 natural gas prices for Kyrgyz consumers to 5.3 soms
(13.7 cents) per cubic meter.


3. (SBU) If fully implemented, the revised price structure
would generate sufficient income to cover the natural gas
import costs. Coupled with earnings from electricity
exported to Uzbekistan (discussed below),Kyrgyz officials
must collect payments, at the new 5.3 som rate, for roughly
60% of the total imported volume in order to cover the $85
million natural gas bill. This same 60% ratio, using the
existing 3.67 soms per cubic meter rate, covers the 2006
natural gas bill. Revenues exceeding the 60% rate could
cover operating, infrastructure and other expenses for the
Kyrgyz natural gas network, but would not account for theft,
reduced or subsidized tariffs and system inefficiencies.

Mixing Water and Electricity
--------------


4. (U) Uzbekistan also won agreement to time electricity
supplies with Uzbekistan's main agricultural season.
According to a Kyrgyz electric power station official, this
is the first electricity agreement between the two countries
since 2003. Kyrgyzstan will provide a guaranteed 1.3 billion
kilowatt hours of electricity from May 20 to September 10,

2007. As Kyrgyzstan generates the vast majority of its
electricity from hydroelectric facilities located on
waterways leading into Uzbekistan, the electricity supply
schedule provides an even greater benefit to Uzbekistan ) a
predictable flow of water for use by Uzbek farmers next
summer.


5. (SBU) Although Kyrgyz media quoted Usenov confirming a
1.1 cent per kilowatt hour price for electricity exports to
Uzbekistan for 2007, another source listed a possible 2 cent
per kilowatt hour rate. The same Kyrgyz power station
official told embassy that the actual electricity rate for
Uzbekistan "is still under discussion," but noted that
Uzbekistan paid approximately 3.3 cents per kilowatt hour in

2003. He could not explain the downward pricing trend, but
added that if Kyrgyzstan reaches agreement on electricity
exports to Kazakhstan, Kyrgyzstan would have increased
leverage over Uzbekistan on the electricity price. The
official also claimed that Kyrgyzstan did not officially

BISHKEK 00001792 002.2 OF 002


export any electricity to Uzbekistan in 2006.

The Net Result ) Uzbekistan on Top
--------------


6. (U) Based on available data, Uzbekistan should earn $85
million in 2007 natural gas revenue from Kyrgyzstan, more
than double the estimated $41.2 million it should receive for
2006 deliveries. The electricity agreement should provide,
at the 1.1 cent rate, Kyrgyzstan $14.3 million in revenue
from Uzbekistan. However, it appears the Uzbeks come out
winners all around ) a doubling of natural gas revenue (with
only a 13% increase in supplies),a steady supply of water
for the main agricultural season and a cheap source of
guaranteed electricity.

Comment
--------------


7. (SBU) This agreement should relieve Kyrgyz government
worries over natural gas supplies for the winter, albeit at
the cost of a sharp price increase for consumers. Unless
Kyrgyzstan negotiates to sell electricity at 6.5 cents per
kilowatt hour to Uzbekistan, Uzbekistan will net more income,
and lots of fresh water, from this arrangement. Plus,
Uzbekistan may be able to export an equivalent amount of
power at higher margins further downstream. Despite lots of
bluster, President Bakiyev, Usenov and the rest of the Kyrgyz
team failed to prevent an increase in natural gas costs.
When the price shock hits Kyrgyz consumers early next year,
Bakiyev and Usenov will likely shift the blame elsewhere.
However, others in the super-charged political environment
will point straight back at the Administration. Deputy Chief
of Staff Sadyrkulov has already told us that he is concerned
that the price hike will feed into the strained political
relationship between the President and Parliament.
YOVANOVITCH