BACKGROUND: Oil was first discovered in Kyrgyzstan in the early 1900s and by 1913 the first oil-field in the Maili-Suu region was producing 3,000 tons of oil annually for industrial consumption. Oil extraction gradually increased and peaked in 1960 when a total of 464,000 tons were extracted. But in the 1970s and 1980s, Kyrgyzstan considerably reduced oil extraction, switching to imported petroleum despite the fact that the consumption of oil nearly tripled in the 1970s and nearly doubled in the 1980s. During this era, the country imported most of its oil and gasoline from Kazakhstan, Russia and Uzbekistan at heavily subsidized prices. It was considered cheaper and more efficient to produce low-cost hydroelectric power in Kyrgyzstan, due to the abundance of water resources in the republic's mountain rivers. Thus between 1980 and 1990, the production of hydroelectric power nearly doubled, with the surplus being supplied to Kazakhstan and Uzbekistan. The dissolution of the Soviet Union in 1991 dramatically changed the situation. Former Soviet comrades refused to supply oil to Kyrgyzstan at low Soviet prices, which were around one-tenth of world prices, and demanded payment for their oil at prices close to world levels, and in hard currency. The republic was badly hit by the sudden change in its access to oil. Between 1992 and 1994 the Kyrgyz transportation system was practically brought to a full halt, as up to 90 percent of all air flights were cancelled and many cities and towns became inaccessible due to the prohibitively high cost of car and bus travel. According to an IMF report, imports of oil and gas amounted up to 29.2 percent of Kyrgyzstan's total imports (in cash terms) from the CIS members in 1992 and 45.2 percent in 1993. Throughout the 1990s Kyrgyzstan imported between 90 and 95 percent of its oil, or around 7 million barrels a year, from Kazakhstan, Russia and Uzbekistan, but was unable to export its hydroelectric power on a large scale to offset import expenditures. Since the beginning of the economic recovery in the late 1990s the government has actively considered recovering old fields and finding new deposits. In 2000 a team of experts surveyed existing and potential oil reserves and concluded that Kyrgyzstan might become self-sufficient in oil. This would become possible if the republic could fully exploit oil reserves in the southern regions of the republic, estimated at around 700 million barrels, and if further drilling confirmed the existence and commercial viability of 1,500 million barrels of oil reserves in the northern and eastern regions of the republic. A new 70-million-barrel discovery filed in May 2001 encouraged the Kyrgyzstani government to declare that the republic might begin large-scale oil extraction as early as 2006 or 2007.

IMPLICATIONS: Oil and gas imports are important issues for the Kyrgyzstani government to consider, and they have several major implications. Firstly, the imports of oil and related energy products place a heavy burden on the republic's budget. Kyrgyzstan has become one of the poorest republics in the former Soviet Union, with a state budget slightly bigger than the budget of a large American university. At the same time, the country is one of the most heavily indebted countries in the CIS in per capita terms. Any development, therefore, which reduces the trade deficit and increases hard currency reserves may make a large, positive impact on the republic's macroeconomic situation. Secondly, oil and energy issues frequently figure in regional politics, as neighboring Uzbekistan has often cut Kyrgyzstan's energy supply, citing non-payment and Kyrgyzstan's debt for energy supply. Tashkent has never hesitated to use these and other issues as leverage in political and other disputes with Kyrgyzstan as well as with Tajikistan. This makes energy independence, especially oil independence, a very important issue on the agenda of the Kyrgyzstani government. Thirdly, oil extraction and processing is one of the few sectors of the Kyrgyzstani economy that might attract international investors and bring much needed investments into the country. Bishkek was largely unsuccessful in its attempts to attract Foreign Direct Investments (FDIs) at the rate necessary for economic recovery from the transitional recession of 1992-1996, despite all its radical political and economic reforms and considerable support from the IMF and World Bank. There are very few success stories to tell besides the widely publicized Kumtor gold mining project, as many investors found that Kyrgyzstan's business environment is too hostile to foreign investors and corruption is too high. Fourthly, landlocked Kyrgyzstan lacks large pipelines and that makes transportation of imported fuel from other countries or within the republic relatively expensive. Overall this negatively affects the cost efficiency of the local industrial sector. Locally produced and refined oil would save on transportation cost as well. Finally, the development of oil fields might bring much-needed jobs to Southern Kyrgyzstan. Once, Kyrgyzstan's part of the Ferghana Valley was the richest part of the republic, but after independence in 1991 it became one of the poorest parts of the country and in the entire CIS. Nearly 50 percent of industrial enterprises were closed down and large textile and garment factories practically disappeared. Local experts say that only new jobs and investments can halt the desperate poverty that has pushed many young people to join radical political and fundamentalist groups.

CONCLUSION: The oil deposits in Kyrgyzstan are not large by international standards and could never compete with the giant Tengiz or Karachaganak oil fields of Kazakhstan. At a drilling cost of around 3-5 million Kyrgyz soms (approximately US$80,000-$120,000) per well, these oil fields are relatively expensive to develop. Yet if properly managed and developed they might make a major positive impact on Kyrgyzstan's macroeconomic situation, on its social development and on the country's political standing in the region. The current relatively high world oil prices make it viable to extract and refine local Kyrgyzstani oil. The country also may utilize its cheap hydroelectric power from the local power stations for drilling and refining purposes and that may be help revitalizing Kyrgyzstan's struggling energy sector.

AUTHOR'S BIO: Rafis Abazov, PhD, is a visiting scholar at the Harriman Institute at the Columbia University in the city of New York. He is an author of The Formation of Post-Soviet International Politics in Kazakhstan, Kyrgyzstan and Uzbekistan (1999), the Freedom House report on Kyrgyzstan (2002) and co-author of the forthcoming Historical Dictionary of Kyrgyzstan (2003).

Copyright 2001 The Central Asia-Caucasus Analyst. All rights reserved.