IT'S ONLY NATURAL - TAJIKISTAN AND UZBEKISTAN AGREE ON GAS

UNCLAS SECTION 01 OF 02 DUSHANBE 000045

SIPDIS

SIPDIS
STATE FOR SCA/CEN

E.O. 12958: N/A
TAGS: ECON EINV EFIN EAID PGOV TIUZ
SUBJECT: IT'S ONLY NATURAL - TAJIKISTAN AND UZBEKISTAN AGREE ON GAS
TRADE

REF: 06 DUSHANBE 1846

DUSHANBE 00000045 001.2 OF 002



1. (U) Summary. On December 27, 2006, Tajikistan and
Uzbekistan reached lopsided agreements on trade of natural gas
and electricity. While the electricity swapping arrangement
favoring Uzbekistan will continue, the new natural gas agreement
nearly doubles the price of gas paid by Tajikistan. Unable to
measure consumer use and collect payments, Tajik Gas is
installing gas meters around the country. Many Tajiks receive
only two hours of gas a day, and in outlying regions have
received none in over a month. The government intends to
partially subsidize increased energy costs in 2007, but poor
Tajiks await a frosty year. End summary.

--------------
If This is the Good News~
--------------


2. (U) On December 27, 2006, Uzbekistan agreed to deliver 600
million kilowatt-hours of electricity from January to March to
Tajikistan. In payment, Tajikistan will supply 900 million
kilowatt-hours next summer to Uzbekistan. In effect, Uzbekistan
receives $0.015 per kilowatt-hour, while Tajikistan receives
$0.010 per kilowatt-hour for its electricity, the same rates as
in 2006. With its hydropower plants producing surplus energy
during the summer and deficits in the winter, and absent
transmission lines to Afghanistan, Tajikistan has no alternative
to selling its electricity at a lesser price to Uzbekistan.

--------------
The Bad News
--------------


3. (SBU) On the same day, the Uzbek state gas company,
Uztransgaz, agreed to supply 700 million cubic meters of natural
gas to Tajikistan at $100 per 1,000 cubic meters in 2007, a $45
increase over the previous year. This price increase mirrors
new Uzbek agreements with Kyrgyzstan and Kazakhstan. According
to First Deputy Director of Tajik Gas Shavkat Shoimov, Tajik Gas
plans on charging end consumers $130-$140 per 1,000 cubic
meters. This price increase will hit Tajik consumers hard. If
poor consumers in rural areas are unable to pay their increased
bills, Tajik Gas might cut them off from the already-minimal
flow. Response to the increase has been muted, as Tajik
consumers in rural areas have yet to hear about the new prices.


4. (SBU) Shoimov told EmbOffs January 4 that the price increase
will make it even more difficult for Tajik Gas to collect on
bills. In 2006, the overall collection rate in Tajikistan was
70%, while the rate in Dushanbe was 50%, due to the difficulty
in shutting off power to individuals within blocs of non-payers
in the capital. Outside the capital, Tajik Gas takes a blanket
approach and simply cuts off gas to entire rural districts for
non-payment, leaving large portions of the country without gas
but improving Tajik Gas's collection rate.


5. (SBU) Tajikistan's major industrial natural gas consumers
previously received generous pricing and will face hefty rate
hikes, perhaps paying the same rate as other consumers,
according to Shoimov. The Dushanbe Power Heating Station, the
Tajik aluminum plant (TadAZ),VATZ Chemical Plant, and Tajik
Cement in Dushanbe, all rely heavily on gas for their
operations. The VATZ plant near Kurgan-tube is the largest user
of natural gas in Tajikistan, creating fertilizer for domestic
use and export (reftel). With input costs as much as doubling,
the company will struggle to compete with foreign competitors
that receive natural gas more cheaply, including a
soon-to-be-completed fertilizer plant in Turkmenistan.

--------------
The Forecast: Sunny but Cold
--------------


6. (U) The World Bank's Energy Loss Reduction Project is
providing $1.5 million to help reduce the commercial losses in
the gas system and improve the financial viability of the
utility. The project will supply and install gas meters, revamp
the financial and billing systems, and help establish an
industry-standard gas agreement with Uzbekistan. Tajik Gas is
seeking additional loan funds from the World Bank to computerize
its aging gas distribution network. The company has finished
installing gas meters covering 70% of Tajik territory, and plans
on completing nationwide installation by June 2007.


DUSHANBE 00000045 002.2 OF 002



7. (SBU) Until Tajik Gas improves its collection rate, it will
continue to struggle with its finances. In 2006, Tajik Gas
received 620 million cubic meters of gas, paying for 90% of it.
In September 2006, Uztransgaz cut off natural gas to Tajikistan
due to $4.5 million payment arrears. According to Shoimov,
Tajik Gas took out a $1.5 million loan from Orien Bank at 20%
interest to pay their debt in part to the Uzbeks, but has yet to
begin repayment to the bank. (Note: Orien Bank is owned by the
"First Brother-in-Law" of President Rahmonov, Hasan Sadulloev.
This helps explain why a state-owned utility would borrow from a
private bank at such an exorbitant rate. End note.) In 2006,
the Tajik government subsidized vulnerable populations with a 10
million Somoni subsidy ($3.4 million),and the 2007 budget
includes increased energy subsidies. However, with the massive
rate increases, it is likely that rural Tajiks will remain
gasless.
JACOBSON