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. Last Updated: 07/27/2016

LUKoil, Itera in $750M Uzbek Deal

Partnering up with Itera, LUKoil expanded its natural gas operations abroad Monday when it signed a production-sharing agreement with the government of Uzbekistan.

Under the agreement, LUKoil, Itera and Uzbekistan's national oil company Uzbekneftegaz are to funnel $750 million into the development of Bukharo-Khivinskoye and Gissarskoye oil and gas fields in the south of the country.

Exploratory work is scheduled to be completed by the end of this year, and if successful, a new production-sharing agreement covering commercial production could be signed by the first quarter of next year, said LUKoil president Vagit Alekperov.

LUKoil, Russia's No. 1 oil company, and Itera both have a 45-percent stake in the project; Uzbekneftegaz has 10 percent.

"These proportions will likely change in the next agreement, once real extractable resources are found," said Uzbekneftegaz vice chairman Asror Abidov.

The fields are estimated to hold 250 billion cubic meters of natural gas reserves and 10 million tons (73 million barrels) of crude. Peak gas production is expected to reach 8 billion to 10 billion cubic meters of gas a year, worth about $1 billion at current international prices.

"We will get access to gas markets that Itera has already developed," Alekperov said. Founded in Turkmenistan, Itera began as a gas transit company that took on the responsibility of supplying former Soviet states. Gazprom gave up this sphere of business after a long, unsuccessful battle for payments. In the past couple of years, Itera has been accused of being the beneficiary of valuable Gazprom assets sold on the cheap.

Uzbekistan itself is the third-largest producer of natural gas in the Commonwealth of Independent States and the eighth largest in the world, according to the U.S. Department of Energy. But like many other countries in Central Asia, it has difficulties getting its gas to the market. Uzbekistan is one of only two landlocked countries in the world that is surrounded by countries with no ocean access.

This is where Itera steps in, said one LUKoil official, who wished to remain anonymous. Itera has so many customers in the region that it can "swap" gas instead of having to transport it thousands of kilometers.In a "swap," the title to gas in one location is transferred to gas of equivalent value elsewhere.

Since last year, Uzbek president Islam Karimov has been aggressively courting foreign capital in the country's energy sector.

Uzbekneftegaz and its subsidiaries are up for privatization this year, and an international consortium headed by French bank BNP Paribas has already expressed interest.