Kazakhstan is in an unusually enviable position. Even if no new contracts are signed, existing commitments will yield another $30bn or so in foreign investment in the oil sector, which will enable production to triple within a decade to three million barrels a day. This will give Kazakhstan’s citizens a ratio of oil income to population similar to that of Saudi Arabia’s.
Production will rise slowly for the next five years because the cost of producing the oil is so high and much of the income from the first oil boom will go to repay loans taken out by the major oil companies.
“The oil boom proper has not yet started,” says Pedro Rodriguez, senior economist at the World Bank in Almaty, Kazakhstan’s economic capital. But he adds: “The future is guaranteed. The cheque is coming and the only question is whether it will be big or bigger.”
Money deposits
The bulk of Kazakhstan’s wealth will spring from three deposits. The Kashagan deposit has become the world’s costliest oil development project, estimated at more than $30bn. Located in the shallows of the northern Caspian Sea, in the world’s most challenging drilling environment, it is expected to start production at the end of the decade and to plateau at more than one million barrels a day (b/d).
The onshore Tengiz field, which produced almost 300,000 b/d last year, is expected to increase that to 450,000 b/d by the end of next year and to eventually level off at 700,000 b/d.
The third field, in Karachaganak, which is near the Russian border, contains mostly gas and high-priced condensate. It produces about 200,000 b/d of condensate, which is more valuable than oil.
The rest of the onshore production is located in the west of the country. Reserves there are much smaller but consist of oil that is much easier to extract. It is the domain of relatively small operators.
Foreign money
The financing from Kazakhstan’s big projects is done from abroad, mostly in the form of capital calls from the shareholders of the giant oil companies working on the big projects. Kazakh banks show 5.8% of the total aggregate portfolio classified as mining and minerals, of which I would assume that oil and gas is probably less than 2%,” says André Küüsvek, director for Kazakhstan of the European Bank for Reconstruction and Development.
The big question has been what the government wants to do with the rest of the northern part of the Caspian Sea. Analysts estimate that it could contain a similar amount to Kashagan in additional reserves. But international oil companies, eager to increase their reserves and to drill into one of the most promising areas in the world, are balking at conditions set up by the government and refusing to sign up.
While Saudi Arabia, Mexico, Iran and even the US are holding back development for widely varying political reasons, in Kazakhstan the issue is simply one of money. An unfavourable tax regime applied on top of a difficult investment climate in a country that Transparency International lists among the most corrupt in the world has oil majors complaining that the low rates of return offered by the government do not justify the risks.
“We are not in a hurry,” replies Mikhail Dorofeyev, the spokesman for Kazmunaigaz, the state oil company and industry regulator. “We are negotiating with many companies for the development of the most attractive blocks.”
Senior Western oilmen say that these talks are not likely to crystallise into investments until the government lowers the bar.
The only Western company to gain a toehold is Royal Dutch/Shell. The deal was signed in December and took 13 years to negotiate. It comes under an older, more favourable tax regime, and will explore an area near the Kashagan field with estimated reserves of about one-10th of Kashagan’s.
Daniel Johnston, a prominent American oil consultant who has advised oil companies and the Kazakh government, says that one reason why president Nursultan Nazarbayev has turned against the oil companies that could ensure a prosperous future for his country is that early deals, notably the one signed in 1997 for the Kashagan field, were unusually tipped in favour of the Kashagan consortium, whose main partners are ExxonMobil, Total, Shell and Agip. The Production Sharing Agreement gives Kazakhstan only 2% of the revenues from the oil in the first five years or so, while the industry average for such contracts at the time it was signed was 20%, says Mr Johnston. “Now it looks like they are tipping in the other direction.”
Nevertheless, while the major Western oil companies are holding off starting new projects in Kazakhstan, state-owned concerns are gobbling up existing ones. China in particular has embarked on a series of acquisitions in Kazakhstan on terms that are far from commercial.
Mr Nazarbayev, brushing aside many Kazakhs’ deep suspicion of China, has welcomed China’s investments on the grounds that land-locked Kazakhstan needs to diversify its export routes to avoid depending too much on any neighbouring country. Last year, he invited China, which operates four small fields in Kazakhstan, to build and finance a 996-kilometre pipeline from Atasu, in eastern Kazakhstan, to Alashenkou, on the Chinese border. The China National Petroleum Company then bought Petrokazakhstan, a Canadian-managed independent producing 150,000 b/d, to help fill the pipeline.
Reliable service
When it reaches its full capacity of 400,000 b/d, the pipeline could meet about 8% of China’s current energy needs. “China doesn’t care about price, it cares about reliability of supply,” says Thierry Kellner, a specialist on Chinese-central Asian relations at the Free University of Brussels. “Kazakh oil has the advantage of being invulnerable to an American blockade of China in case of a conflict over Taiwan.”
A condition of the Petrokazakhstan deal was that Kazmunaigaz, the state oil company and industry regulator, would buy one-third of the company at the same pro-rated price – but would pay for it from future earnings.
“The Chinese are overpaying, but they have a lot of money from exports and they want to spend it on any equity oil they can find,” says Robert Ebel, chairman of the Energy Program at the Center for Strategic and International Studies in Washington, and co-director of the Caspian Sea Oil Study Group.
And China is not stopping there. Press reports say it is considering bidding for a smaller Canadian-owned oil company, Nations Energy, which produces one-third of Petrokazakhstan’s output.
A route to independence
For land-locked Kazakhstan, a Chinese export route would lessen dependence on the four countries through which it already exports its oil – Russia, Azerbaijan, Georgia and Turkey. The pipeline to China ultimately could carry one-sixth of Kazakhstan’s production.
The risks inherent in getting Kazakhstan’s oil to market were highlighted when Russia delayed the expansion of a Western-owned pipeline going from the Tengiz field to Russia’s Black Sea coast that was expected to carry a major portion of Kazakh oil. As a result, Tengizchevroil, the operator, will have to use more costly transportation by rail and ship to Azerbaijan and by pipeline to the Mediterranean until the pipeline’s capacity is increased.
