- energy industry overview

Central Asia's giant

After Russia, Kazakhstan was the second largest oil-producing republic in the former Soviet Union at the time of its collapse, with production of about half a million barrels per day (bbl/d) in 1991 . Following independence Kazakhstan opened up its oil sector to investment and development from foreign energy companies. International projects have taken the form of joint ventures with the national oil company Kazakhoil (now KazMunaiGas), production-sharing agreements (PSAs), and exploration/field concessions.

Although Kazakhstan's oil production dropped to just 415,000 bbl/d in the first few years after the collapse of the Soviet Union, the massive level of foreign investment by almost all global oil majors (Chevron, Exxon, Mobil, Shell, Total, BG, Statoil, Eni-Agip, Phillips, etc.) into Kazakhstan's oil sector over the past 11 years has helped the country boost oil production from 530,000 bbl/d in 1992 to more than 1.3 million bbl/d in 2007.

The majority of Kazakhstan's hydrocarbon reserves are in three major fields – Kashagan, Tengiz and Kurmangazy. In addition, a number of major oil fields have recently come on-stream (e.g. North Buzachi, Sazankurak, Saztobe, Chinarevskoye and Airankol). Three more fields - Alibekmola, Urikhtau, and Kozhasai - are set to begin producing shortly. The Kazakh government hopes to increase production levels to around 3.5 million bbl/d by 2015. This would include approximately 1 million bbl/d from Kashagan, 700,000 bbl/d from Tengiz, 600,000 bbl/d from Kurmangazy, and 500,000 bbl/d from Karachaganak. The other smaller fields would account for the balance .

Production and Reserves

Western Kazakhstan holds the majority of oil deposits, near and under the Caspian Sea. After independence oil production declined 20%, but between 1999 and 2004, oil production has grown at an annual rate of 15% per annum; nearly doubling total production. In the first 6 months of 2005 oil production grew at a striking rate of 10% to 1.3 bn bbl/day. Government forecasts of oil production predict levels of 3.0–3.4 MMbpd by 2010 .


Located on the north-east shoe of the Caspian Sea, Tengiz is the sixth largest field in the world, and the largest field in production in Kazakhstan. It is also the world's deepest developed super giant oil field.

Recoverable crude oil reserves have been estimated at 6 to 9 billion barrels (0.9 to 1.4 km³). The field is managed by the consortium TengizChevroil and produces 285,000 barrels a day or 33% of Kazakhstan's daily output. In the long term, exports from Tengiz are expected to increase to 1.3 million barrels per day by 2010. Chevron has built a plant in Atyrau to produce polyethylene pipes, which can be used for water supply and sewage, gas pipeline networks, irrigation and telecommunications.

Recently, TengizChevroil announced the launch of the first phase of its expansion of operations at the field. The initial expansion of 90,000 barrels per day brings TCO's current capacity total to just over 400,000 bpd. Additional facilities are due to start up around September 2008 and will increase daily capacity to 540,000 bpd.

The current phase includes a Sour Gas Injection project at the front end and a second generation plant later on. SGI entails forcing gas at high pressure back into the well, in order to boost output, whilst also stabilizing and sweetening the crude oil. Eventually, the project will also give rise to gas products and elemental sulphar.


Also off the coast of the Caspian, is the largest oil field outside the Middle East. The Agip Kazakhstan North Caspian Operating Company-- Agip KCO (formerly known as OKIOC), estimated the field to have recoverable reserves of between 7 and 9 Bbbl of oil equivalent and up to 13 Bbbl, using secondary recovery techniques .

However, Kashagan's development has been plagued by cost over-runs, political interference and severe delays. The original deadline for production to begin was estimated for 2005. This was later set back to 2008 and then to 2011. In July 2008 this date was pushed back yet again to October 2013. One of the reasons for these delays is the field's unusual complexity and hostile environment – extreme pressure and low temperatures as well as the need to reinsert poisonous hydrogen sulphide all make for a difficult management challenge.

However, deteriorating relations between the IOCs and the Kazakh government have accentuated these problems. Astana seem to believe that the consortium of foreign firms received too favourable a deal in 2000 when the contracts were signed, and are thus looking to recoup some of the dividends.

The IOCs (as well as their national governments) have retorted that if Kazakhstan expects to develop the industry and meet output targets, politicians should stop meddling and making " far-fetched" demands. Rex Tillerson, CEO of ExxonMobil has been particularly vocal in his criticisms, demanding Astana "Stop delaying the project, be supportive, work with the consortium and see the project through to a successful start up". Tillerson has also underlined the IOC's commitment to Kashagan pointing out that the consortium has already invested $17 billion without seeing any returns at all.

However, a rapprochement does not seem imminent. Sauat Mynbaev, energy minister, threatened the group with confiscation of rights if any further delays arrived. He said that if production was delayed beyond 2013, the Eni group would lose the right to defer royalties payments until after the recovery of development costs.

"They have already invested $17bn [€11bn, £9bn] and this money will be refunded in [future] oil production. But if they continue to spend money beyond October 1 2013, the sum will not be refunded in oil. It will be purely their loss," Mr Mynbaev said.

Kashagan has the potential to propel Kazakhstan into the big league of oil producers but in the near term, over-ground risks look set top overshadow her potential. The latest deadline of 2013 is itself only a memorandum of understanding and is far from a water-tight legal document, suggesting that further wranglings may be yet to come.


In northern Kazakhstan, Karachaganak represents about 18% of total production (1.2 billion tonnes of oil and condensate and more than 1.35 trillion cubic metres of gas). The field was discovered in 1979. Pilot production began in 1984 and limited exports were sent to the Orenburg processing plant in Russia 130km away.

The field is being operated by Karachaganak Petroleum (KPO), a consortium including BG Group and Eni of Italy (each with a 32.5% interest), Chevron (20%), and LUKOIL (15%) under a 40 year PSA. According to KPO, the field holds reserves of around 8-9 billion barrels of oil and gas condensate and 47 Tcf of natural gas, recoverable over the 40-year life of the project. Peak production is expected to increase to 500,000 bpd by 2010 under a significant investment program.

Until 2003 Karachaganak was dependent on Russian pipes for transport to world markets, incurring significant costs from tariffs. Since connecting to the CPC pipeline, the consortium has been able to process the crude oil in Kazakh facilities, reducing dependence on Russia. During 2002, the Karachaganak Field saw production of condensate and gas reach record levels of 5.2 million tones of condensate and 4.7 billion cubic meters of gas.

With the new facilities operational and access to world markets, the oil production from the field is now planned to increase to more than 10 million tonnes per year and gas to 7 billion cubic meters annually- providing significant additional income for Kazakhstan .

Main players

More than 90% of oil production in Kazakhstan comes from seven consortiums. Led by the TengizChevroil Consortium (TCO), the list of foreign firms includes most of the major international companies, including BP, BG, Chevron, ConocoPhillips, ENI-Agip, ExxonMobil, Royal-Dutch Shell, Total.


In 2002, the former national oil company, KazakhOil, and the national oil transportation company, KazTransOil, were combined into one entity, KazMunaiGas, which is overseen by the Kazakhstan Ministry of Energy and Natural Resources. Decrees 707 and 708 outline how KazMunaiGaz is effectively acting as an agent of the Ministry of Energy.

KMG has its own exploration and production assets but also now owns the domestic pipeline system, providing transportation through Kazakhstan for all oil producers. The President of KMG is Uzakbai Karabalin, the former 1st Vice Minister of Energy. Timur Kulibaev, the former Head of KazTransOil (KTO) and the son-in-law of President Nazerbaev is First Vice President.

Over the last few years Kazakhstan has made sweeping changes to its petroleum taxation and ownership legislation, in an attempt to “rebalance” previously signed agreements. The government has taken an aggressive approach, leading to frequent conflicts with industry and growing investor discontent. Indeed, such actions have led some analysts to point to the rapid ascendancy of the state oil and gas company KMG and draw comparisons with Gazprom.

One of the most important pieces of recent legislation has been the Subsoil Law, amended in 2004. The controversial clause in this law concerned transfer of assets. Essentially, the new law provided KMG with the right to acquire any subsoil rights or interests which are being made available for transfer, before other parties.

The law related closely to (or was arguably “tailor made” for ) the sale of 16.6% shares in Kashagan by BG. Following the amendment, the government was able to use the legislation to force the sale of 50% the newly available stock to KMG, instead of the planned sale to a Chinese consortium. Furthermore 80% of oil will go to the state under all new PSAs . The Subsoil Law and amendments itself are discussed in greater detail below.

Strategic Agenda

This can be seen as part of an overall strategy to strengthen KazMunaiGaz and thus ensure government oil revenues. For example, as part of the 2005 Subsoil amendment, KMG must own at least half of any production sharing agreements (PSA's) and will act as contractor in all new offshore PSA's in Kazakhstan . KMG is also the monopoly operator on Kazakhstan's domestic oil and gas pipeline network.

Most controversially, KMG is the regulator for the oil sector as well as state oil company, presenting an obvious potential conflict of interest. The company has been accused of exploiting this position and forcing foreign operators to meet arduously high standards of accountability. In early 2007 TCO received an unusually high fine for ecological damage which although subsequently reduced, was still enough to draw comparisons with Sakhalin II.

Nonetheless KMG's actions had until recently been perceived as above board, at least when compared to those of neighbouring NOCs. “Virtually all of NC KMG's assets were obtained in a pretty straightforward fashion. They were either acquired by purchase or by the transfer of a state held license to the company directly or by the consolidation of smaller state-owned companies” says Martha Olcott, Senior Associate at the Carnegie Endowment for International Peace.

KMG claims to be seeking to introduce western management practices as well, with a view to boosting international investor confidence. The company is intended to evolve into a publicly held corporation; and 40% of the shares of KMG Exploration and Production, which owns most of the company's oil and gas wells, are already available for public trading.

Still, the government hopes to ensure the protection of state interests through the transferring its shares to a larger holding company Samruk, created in 2006. Samruk is now chaired by former BAE chairman Sir Richard Evans.

Although intended to mollify investors' fears of illegitimate practice, Sir Richard Evans' legacy from BAE is somewhat opaque and tinged by allegations of corruption in connection to arms sales contracts with Saudi Arabia. The seemingly nepotistic appointment of President Nazarbayev's son to the board of Samruk is also unlikely to allay fears.

More positively, Kazakhstan has signed up to the Extractive Industry Transparency Initiative (EITI)– a coalition of governments, companies, civil society groups and investors to encourage accountability in the oil industry – which does at least imply a rhetorical commitment to independent audit.

Relevant Authorities

The National Oil Fund of Kazakhstan, created in 2000 is modelled on Norway's Government Petroleum Fund. The fund is derived primarily from corporate income tax, excess profit tax, royalties, VAT and PSA charges and bonuses levied against 11 oil firms and 3 mining and metallurgy firms. The money is theoretically available to make up government budget deficits or reduce taxes but is primarily intended for investment overseas, as a way of diversification and hedging against oil price instability.

The money is controlled by the Managing Council of The Fund. This is chaired by the President, who also selects the board and thus effectively rules where the money goes, by decree. The fund currently stands at $15.1 billion in late 2006.

Other relevant state organs include Samruk (discussed above) and Kazyna – a fund for sustainable development similar to the NOFK. Kazyna is a joint stock company worth some $1bn and is intended to encourage good governance and innovation across the economy, for example by providing start up loans for small companies as part of the EITI.

Kazakhstan Contracting Agency

The Kazakhstan Contract Agency is part of the Ministry of Industry and Trade of the Republic of Kazakhstan and the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. The agency was set up in line with the November 2002 Resolution of the Government of the Republic of Kazakhstan “On Measures to Increase State Support to Domestic Producers”.

The Agency is intended to help international firms find Kazakh producers of goods and services with a view to expanding local content of projects. The KCA is set to expand into The Centre for Support to Domestic Producers and to create a register entitled “The Unified Register of Domestics Producers and Foreign Investors”. This has been in the pipeline for sometime and whilst it may prove valuable in achieving regional integration into international projects the register may also simply become an elaborate phone book.


KazEnergyis the short-hand name for Kazakhstan's Association of Oil, Gas and Energy Complex, formed in early 2006 and represents a lobby group of contractors and firms involved in the energy sector, both national and international. The group was established with two goals in mind: “Strategy - 2030” and “Import Substitution & Local Content”

The government first systematically articulated its development goals and strategies in 1997 through Kazakhstan Long-Term Development Strategy 2030 or “2030 Vision”, which aims to create a modern market economy in Kazakhstan, with the state playing only a catalytic role. In 2001 the government announced the 2010 strategic development plan to achieve two goals:

  1. build a sustainable long-term base for a competitive economy and,
  2. double the 2000 GDP by 2010.

The strategy called for an interventionist state to act as the locomotive of growth until the private sector was able to make “large-scale and long-term investments in new and complex technological industries.” This strategy was seen as a means to achieve, and not as a deviation from, Kazakhstan 2030 Vision .

Local Content - industry
  • Kazakhstan has made sweeping changes to its petroleum taxation and ownership legislation, in an attempt to “rebalance” previously signed agreements. The government has taken an assertive approach, leading to frequent conflicts with industry and growing investor discontent. Indeed, such actions have led some analysts to point to the rapid ascendancy of the state oil and gas company KMG and draw comparisons with Gazprom.