Oil And Gas Sector In Kazakhstan

Kazakhstan is a large, distant, and sparsely populated region that functions as a land bridge linking Europe and Asia. The oil and gas sector is the driving engine of the country’s economy and the government is aware of the need to improve policies and reforms that support sustainable development. Kazakhstan is bestowed with significant oil and gas resources and is expected to become one of the world’s top 10 oil producers within the next decade (Kaiser et al.,2007). Kazakhstan is a landlocked country situated between Russia and China, neighboring Turkmenistan, Uzbekistan and Kyrgyzstan. Virtually, four times the size of Texas, Kazakhstan has a substantial oil and gas reserves and plentiful mineral resources. As of the beginning of 2008, there were more than 200 oil and gas fields registered in Kazakhstan. Though, the most significant of its existing and prospective fields are Tengiz, Kashagan and Karachaganak.

Proven oil and gas reserves are currently 39.8 billion barrels (Bbbl) of oil and 64.4 trillion cubic feet (Tcf) of natural gas-roughly 3.0 percent and 1.0 percent of the world’s total proved reserves (BP Statistical Review of World Energy, June 2010). Kazakhstan currently ranks as the eleventh country by its oil and gas reserves. Oil reserve totals are comparable to Nigeria and Libya, and no other country in Europe or Eurasia, except Russia, has more gas reserves.

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Kazakhstan is essential to world energy markets because it has significant oil and natural gas reserves. With sufficient export opportunities, Kazakhstan could become one of the world’s largest oil producers and exporters. The prospects of the Economy of Kazakhstan is directly linked with further integration into international economic relations, exploitation of unique reserves of energy and mineral resources, immense potentials to export industrial and agricultural products, optimum employment of country’s transit potential.

Since 2000, Kazakhstan has undergone significant economic growth. Two of the main stimulus for this growth have been economic modification and foreign investment, much of which has been concentrated in the energy sector. Exports and production of crude oil have grown drastically and Kazakhstan accomplished to be the second largest oil producer after Russia, among the former Soviet republics. Kazakhstan possesses the Caspian region’s largest recoverable crude oil reserves. According to the BP statistical review its combined onshore and offshore proved reserves were 5.5 billion tonnes (40 billion barrels) as at 31 December 2008.

Kazakhstan’s oil production amounted to 1.4 million barrels per day (bbl/d) in 2008, more than double the level of a decade before, while domestic oil consumption persisted low at 239,000 bbl/d. (Source: U.S. Energy information administration).

The petroleum industry in Kazakhstan maintains an important function in the welfare of the economy and continues to develop rapidly. The oil sector currently accounts for nearly 22 percent of gross domestic product (Figure 1). Based on the World Factbook 2010, 60 percent total annual export revenues comes from exporting the oil and oil products. According to the GDP forecast made by the government of Kazakhstan, average annual growth in 2009-11 will be 2.6%. The oil and gas industry, whose share in total GDP increased from 10.9% in 2001 to 21.8% in 2008, plays a vital role in the Kazakhstan’s GDP structure (Ernst & Young, 2009).

Persistent development of the oil and gas industry would not be achievable without foreign direct investment (FDI). The annual volume of FDI has been increasing gradually since 1998, but investments in the oil and gas industry have diminished. However, its share in total volume of FDI remains high. As of 2008, foreign direct investment has amounted to nearly $21 billion, of which 13 percent was invested in the oil and gas sector (Agency on Statistics of Kazakhstan).

The country is greatly dependent on oil export revenues. Total production in 2008 amounted to 70.6 million tons, of which 62.8 million tons were exported. The government expects total production to rise to 80 million tons by 2010 and 130 million tons by 2015. By 2017, Kazakhstan aiming to join the top 10 oil and gas exporters. These plans will not be real without the start of marketable oil production at the Kashagan field. Its discovery in 2000 is considered to be the largest in the last 30 years. This is expected to be the world’s largest oil field outside of the Middle East. Since it was discovered, interest in the potential of Kazakhstan’s sector of the Caspian has greatly enhanced. State participation in the oil and gas industry has accelerated over the last several years due to the crucial role of this sector in the economy of the republic.

The massive offshore Kashagan field is anticipated to become functional in 2012 or 2013. Besides allowing investors to regain their development costs, Kazakhstan stands to profit financially. According to Visor Capital’s head of research it might probably be the start of a 10- to 15-year “Golden Age” for Kazakhstan.

National Oil Company – KazMunaiGas

KazMunaiGas was formed in February 2002 by the union of KazakhOil and Transport Nefti Gaza to assure a single state policy in the countries mineral resources and to compete with international companies on E&P contracts (Ernst and Young, 2005). KMG presently plays a omnipresent role in the oil/gas sector, as investor and partner on numerous joint ventures; monopoly operator of the domestic oil and gas pipeline network (except CPC); and in a regulatory and administrative role. From the time when KMG took control of the government’s interest in the oil and gas sector, oil companies have been subject to additional supervision, with foreign investors commonly being held to higher standards of liability. In 2004, the government introduced legislation further expanding KMG’s partaking in new ventures. KMG now has the right to take part in all oil/gas projects, either on its own or jointly with companies or on the side of the government. KMG’s escalating power is prone to create additional resistance among investors. The creation of an independent regulatory structure to administer the industry remains an arguable and neglected issue.

KMG has been given the right to first tender on all new blocks with minimum 50 percent ownership. Improvement of oil/gas fields without the full utilization of gas is now prohibited. Disciplinary actions for violation include contract postponement, termination, fines, and legal responsibility. In prior contractual agreements, cost recovery limits were negotiated on an individual basis, whereas under new contracts, cost recovery cannot exceed 75 percent gross production before reimbursement; 50 percent gross production after payback.

The Role of National Fund of Kazakhstan

The Kazakhstan National Fund (NF) was created in 2001 to aid in reducing the impact of volatile market prices on the economy and to smooth the distribution of oil wealth over generations (Tsalik and Ebel, 2003). Its founding documents describe its mission as ”stabilizing the socio-economic development of the country, accumulating savings for future generations, and reducing the country’s vulnerability to external factors” (Kazakhstan National Fund). The NF has both savings and stabilization objectives. The savings objectives are intended to maintain stable income across generations in anticipation of reduced oil production in the future. The stabilization objective is to stabilize the revenue from oil production, compensating bad years with the savings from good years. The NF is an off-budget fund with all assets invested abroad in two portfolios – a savings portfolio that comprises 75 percent of the assets and a stabilization portfolio that comprises the remaining 25 percent. The funding rules have been simpli¬ed since the program was created, and as of June 2005, almost $5.2 billion have accumulated in the fund.