Proposed Loan and Partial Risk Guarantee Lukoil Overseas Uzbekistan Kandym Gas Field Development Project (PDF)
Kandym and Khauzak–Shady fields are two large gas fields in the Bukhara–Khiva region in the southwestern part of central Uzbekistan. Lukoil Group (Lukoil), a major international oil and gas operator, is developing the two fields under a production sharing agreement (PSA). Natural gas in these fields has a high sulfur content, which requires a sophisticated drilling and desulfurization process. Lukoil will be bringing in state-of-the-art technology to these fields to realize environment-friendly and economically efficient gas production.
Lukoil first discussed the project with the Asian Development Bank (ADB) in May 2007. Lukoil invited ADB to lead the transaction and mobilize the cofinancing and political risk insurance, as no commercial bank has ever lent money to any major gas project in Uzbekistan. The proposed project is thus seen as trailblazing, with much wider ramifications for energy and infrastructure development and financing in Uzbekistan. To facilitate the participation of ADB and commercial banks, the government committed to allowing the sponsor to publicly disclose payments made by it under the PSA to the government for the life of the ADB loan.

The loan, which has already been approved by Uzbek authorities, will be used to finance development of the Kandym fields and to increase production in the Khauzak-Shady area, a Lukoil statement said. “Such financing is the first large-scale loan to a private company operating in the fuel and energy industry of Uzbekistan,” the statement said.

The banking consortium, which will provide the financing, includes the Asian Development Bank, the Islamic Development Bank, Credit Agricole, BNP Paribas and the Korean Development Bank.

The company estimates the project’s recoverable reserves at 330 billion m³ of gas and is working with an expected production rate of 11 billion m³/year of gas.

In January Lukoil Vice President Leonid Fedun said that the company is aiming for peak gas production at Kandym-Khauzak-Shady of around 47 million barrels of oil equivalent/year in 2018. This would account for over half of the company’s projected gas production in Uzbekistan in 2018, of 80 million boe/year.

Lukoil holds a 90% stake in Khauzak-Shady-Kandym, with the remaining 10% controlled by state-owned Uzbekneftegaz.

The company’s share of proven reserves at Kandym-Khauzak-Shady is around 570 million boe, a spokesman for Lukoil Overseas, the foreign arm of Lukoil, said earlier this year.

The development and production of Kandym and Khauzak–Shady gas fields is governed by a production sharing agreement (PSA) signed in June 2004 between the government and a consortium of investors comprising LOU and Uzbekneftegaz. The PSA defines the rights and obligations of the various parties. LOU is solely responsible for the funding, development, and operation of the two gas fields. The cash flows of the Kandym and Khauzak–Shady gas fields will be segregated.

The proceeds of the ADB loan and the PRG-covered commercial loan will only be used to finance the Kandym gas field, which is in its development stage. The ADB loan and PRG-covered commercial loan will be repaid only from the cash flows of Khauzak-Shady gas field which is a producing field (gas production started in 2007). The cash flows of Khauzak- Shady are considered adequate to service the ADB loan and PRG.

The Kandym field development program will comprise construction of production wells, gas collection clusters, a gas-processing plant, ancillary infrastructure, and other associated facilities. Khauzak-Shady gas production started in November 2007. LOU plans to expand production capacity of Khauzak-Shady field.

The raw gas extracted from the fields is transported through a pipeline to a gas processing plant (GPP) where the gas is treated to remove sulphur and condensates. The gas from Kandym will be processed at a Lukoil-owned GPP that is currently under construction, while Khauzak-Shady gas is processed by a government-owned GPP located in Mubarek. The processed gas is then transported through government-owned trunk pipelines to the Uzbek border with Kazakhstan where the gas is sold to an off-taker (currently Gazprom Export of the Russian Federation).