Kazakhstan - 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
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
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,
BG, Statoil, Eni-Agip, Phillips, etc.) into
Kazakhstan's oil sector over
past 11 years has helped the country boost oil
production from 530,000
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,
and Airankol). Three more fields - Alibekmola, Urikhtau, and Kozhasai - are
to begin producing shortly. The Kazakh government hopes to increase
levels to around 3.5 million bbl/d by 2015. This would include
million bbl/d from Kashagan, 700,000 bbl/d from Tengiz, 600,000 bbl/d
Kurmangazy, and 500,000 bbl/d from Karachaganak. The other smaller fields
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
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
striking rate of 10% to 1.3 bn bbl/day. Government forecasts of oil
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
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
285,000 barrels a day or 33% of Kazakhstan's daily output. In the long
exports from Tengiz are expected to increase to 1.3 million barrels per day
Chevron has built a plant in Atyrau to produce polyethylene pipes,
used for water supply and sewage, gas pipeline networks,
Recently, TengizChevroil announced the launch of the first phase of its
expansion of operations at the field. The initial expansion of 90,000 barrels
brings TCO's current capacity total to just over 400,000 bpd. Additional
are due to start up around September 2008 and will increase daily capacity
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
crude oil. Eventually, the project will also give rise to gas products and
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
estimated for 2005. This was later set back to 2008 and then to 2011. In July
this date was pushed back yet again to October 2013. One of the reasons for
delays is the field's unusual complexity and hostile environment – extreme
pressure and low temperatures as well as the need to reinsert poisonous
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
and are thus looking to recoup some of the dividends.
The IOCs (as well as their
governments) have retorted that if Kazakhstan expects to develop the industry
meet output targets, politicians should stop meddling and making "
demands. Rex Tillerson, CEO of ExxonMobil has been particularly vocal in his
criticisms, demanding Astana "Stop delaying the project, be supportive,
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
consortium has already invested $17 billion without seeing any returns at
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
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
is far from a water-tight legal document, suggesting that further wranglings
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
limited exports were sent to the Orenburg processing plant in Russia 130km
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
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
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
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
per year and gas to 7 billion cubic meters annually- providing
significant additional income for Kazakhstan .
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,
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,
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
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
producers. The President of KMG is Uzakbai Karabalin, the former 1st Vice
Energy. Timur Kulibaev, the former Head of KazTransOil (KTO) and the
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
have led some analysts to point to the rapid ascendancy of the state oil
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
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
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
use the legislation to force the sale of 50% the newly available
instead of the planned sale to a Chinese consortium. Furthermore
will go to the state under all new PSAs . The Subsoil Law and
are discussed in greater detail below.
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
and will act as contractor in all new offshore PSA's in Kazakhstan . KMG is
the monopoly operator on Kazakhstan's domestic oil and gas pipeline
Most controversially, KMG is the regulator for the oil sector as well as
state oil company, presenting an obvious potential conflict of interest. The
been accused of exploiting this position and forcing foreign operators to meet
arduously high standards of accountability. In early 2007 TCO received an
high fine for ecological damage which although subsequently reduced, was
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
were obtained in a pretty straightforward fashion. They were either acquired
purchase or by the transfer of a state held license to the company directly
by the consolidation of smaller state-owned companies” says Martha Olcott,
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
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,
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
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
in connection to arms sales contracts with Saudi Arabia. The seemingly
appointment of President Nazarbayev's son to the board of Samruk is
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.
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
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
intended for investment overseas, as a way of diversification and hedging
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
across the economy, for example by providing start up loans for small
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
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
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
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
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
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:
- build a sustainable long-term base for a competitive economy and,
- 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
means to achieve, and not as a deviation from, Kazakhstan 2030 Vision .