Oil and Gas Industry in Kazakhastan

Kazakhstan is one of Central Asia’s most successful and dynamic economies. More than hundred U.S. companies are operating in this country, through subsidiaries, JVs, liasion offices or as contractors. While most of them are found in the energy sector, many of them are service sector firms (e.g. international law firms, accounting firms, Banks like Citibank, American Express bank etc.). There are companies in telecom, sector, consumer goods and others. Kazakhastan provides excellent business opportunities in the fields of Oil and Gas, Power, Telecom, Medical instruments, Controlling Pollution, Agro-Machinery, Food, Construction and Mining.

Kazakhstan has implemented important structural reforms during the past few years with an objective to transform its economy into a robust, market-driven business environment. However, some of the issues concering the development are- corruption, inconsistent customs regulations, inconsistency in interpretation of law, red tapism, work permit limitations for managerial and technical staff, amendments in laws increasing government interference etc. Many of these concerns are on legal innovations, which are aimed at creating changes in prevailing contracts e.g. “the Government has recently adopted legislation giving it preemptive rights in both existing and future contracts in the event that shareholders in oil field consortia want to sell shares, even if other partners have a contractual right of first offer”. Similarly, the Government adopted a telecom regulation that limited foreign equity in telecom companies to forty-nine percent.  (http://www.buyusa.gov/kazakhstan/en/doing_business_kazakhstan.html)

Kazakhstan is perceived as an evolving economy surmounting the heritage of the Soviet economy through constant dedication to economic liberalization and upholding a striking investment climate through practical policy choices and support with the West. The IMF called Kazakhstan’s firm macroeconomic stabilization actions “appropriate and far-sighted.” Of all the ex-Soviet economies, Kazakhstan is rated first in FDI as a percentage of gross domestic produce and next only to Hungary in per capita foreign direct investment. Because of its thriving reforms, liberal trade practices, and capability to draw external financing, the economy is booming. Kazakhstan is a signatory to the World Trade Organization.

(http://www.kazakhembus.com/Stable_Free_Market_Economy.html)

Kazakhstan’s economy registered a growth rate of 8.5% in 2006. GDP grew by 9.4 percent in 2005, by 9.1 percent in 2004, by 9.2 percent in 2003 and by 9.5 percent in 2002. Kazakhstan’s financial policy has been well administered. Since 2001, the inflation has been under check and well controlled. In 2006, it was 8.6 percent, 7.5 percent in 2005 and during 2001-2003 it was 6.4 percent, 6.6 percent and 6.8 percent respectively. Due to strong macroeconomic show and financial strength, Kazakhstan became the first former Soviet country to settle all of its debt to IMF in 2000, seven years before schedule. The U.S. Department of Commerce has recognized Kazakhstan as a market economy under U.S. trade law since 2002. This is the result of effective market economy reforms in the domains of “currency convertibility, wage rate determination, openness to foreign investment, and government control over the means of production and allocation of resources”.

Kazakhstan became the first economy from the ex- Soviet Union to get an “investment-grade” credit rating from a leading global credit rating agency in 2002. Projected external borrowings in 2005 were $41.66 billion. In 2004, Kazakhstan’s gross foreign borrowings were approximately $26.03 billion. Kazakhstan has been able to check the ratio of borrowings to Gross Domestic Produce in recent years. In 2005, total governmental debt was 8.9 percent of GDP whereas this ratio in 2000 stood at 21.7 percent of GDP.

Kazakhstan has copious natural wealth with a whole prospective value projected at $8.7 trillion. Specially, Kazakhstan’s hydrocarbon reserves are enormous and are expected to be next only to Saudi Arabia and Iraq. Oil and gas is the most important economic sector. Oil exports have pushed the economic development and have already drawn considerable international investment of over US$ 8 billion since 1993. The Tengiz oil field, was promoted by the TengizChevrOil a joint venture company established by the Kazak government and Chevron in 1993. Exxon Mobil and LukArco have also joined the venture to further develop the said project. TegizChevrOil is the major foreign venture in Kazakhstan. Though Kazakhstan’s present oil output of nearly 1.2 million barrels/day is comparitively small, oil reserves found offshore in the North Caspian, together with onshore sites currently being developed, put it among major oil exporter over the medium term.

The total output of oil and gas condensate in the country totaled to 61.9 million tons in the year 2005 registering a growth of 4.3 percent over 2004. Total exports of oil and gas condensate were 52.4 million tons per annum in both 2004 and 2005. The total output of natural gas in Kazakhstan in 2005 equaled 14.5 billion cubic meters, registering a growth of 25 percent over the same in 2004. Kazakhstan has reserves of about 4 billion tons of confirmed recoverable oil and 3 trillion cubic meters of gas.

Industry forecaster consider that planned development of oil production, together with the expansion of new fields, will facilitate the country to generate as much as three million barrels per day by the year 2015, elating Kazakhstan into the position among the world’s top ten oil-producing countries. Kazakhstan’s exported oil valued at US$17.4 billion in 2005, which constituted 70% of total exports from the country.

In Kazakhstan, most important oil and gas fields and their producible oil reserves are: “Tengiz (7 billion barrels); Karachaganak (8 billion barrels and 1,350 billion cubic meters of natural gas); and Kashagan (7-9 billion barrels)”. From 2004, the Government of Kazakhstan augmented its catch of oil deals by rising levy of new oil projects. (http://www.kazakhembus.com/Enormous_Energy_Reserves.html)

It was in 1899, when oil was first revealed in Atyrau. Since then, the affiliation with the West has been essential to energy resource growth in Kazakhstan. The first oil well, “Karachungul well”, had a depth of about forty meter and daily produced approximately 150 barrels. Alfred Nobel had developed it in association with Russian industrial companies. This grew to fifteen operating wells 1912, and each well generated about 306-346 barrels per day usually. The new development also included a transit system for transporting 5,453 barrels of oil to Baku per annum through barge. While the appropriate progress of Kazakhstan’s vast oil reserves has been sporadic due to two world wars, a uprising and the conclusion of the Soviet Union, the reality of deep wells and the growth of shipping solutions have remained fundamental to Kazakhstan’s energy equation.

Apart from the major oil reserves, “Karachaganak also has 500 billion cubic meters of natural gas”. The potentially biggest recent discovery of major hydrocarbon reserves is the offshore “Kashagan” structure. The reserves at this site are expected to be three times more than Tengiz. The group, developing this two thousand square mile block fourteen thousand feet below the Caspian sea bed comprises of nine companies: “BP Amoco, ENI, British Gas, Mobil, Shell, Total Fina Elf, Phillips, Statoil and Inpex”.

The forecasted extractable reserves of oil are projected to be 7.8 billion tons, and those of natural gas 7.1 billions cubic meter. About seventy percent of these resources are gathered in the western parts of Kazakhstan, and the greater part of the reserves are associated with salt fields and have been found at depths of over 5000 meters.

The envisaged reserves of the Kazakhstan part of the Caspian shelf are projected to be around thirteen billion tons of standard fuel but the successful expansion of the Caspian fields necessitates a considerable amount of investment. According to industry experts, the total required investment could be as high as $160 billion, which includes an amount of about $10 billion for the preliminary stage of exploration, including field assessment. As on now, western companies have already pumped in more than US$7 billion.

Some limitations to getting investments for discovering the Caspian shelf had been the need of a clarification to the status of Caspian Sea. With signing of the agreement between Kazakhstan and Russia to partition the seafloor of the Caspian along the midline between the two countries, the issue appears to have been resolved. Similar agreements have been signed between Kazakhstan and Azerbaijan, and Azerbaijan and Russia.

Envisaged reserves of the Aral basin stand for about two billion tons of standard fuel. The high gas and oil prospective and encouraging geographic location in respect of the basic transportation of groundwater routes makes the Aral basin one of the most significant area with respect to the prospective oil discovery operations.

In spite of Kazakhstan’s considerable oil and gas resources, the production and export of hydrocarbons has been inhibited by Kazakhstan’s land-locked position and its considerable reliance on domestic and Russia’s shipping networks for export routes. Kazakhstan is dedicated to the expansion of multiple oil export routes, in order to sustain its impending oil resources of 100-110 billion barrels.  A wide-ranging understanding with the national pipeline operator, Kaztransoil CJSC can be made in order to gain access to the main pipeline system by agreeing to  shipment schedules by the Kazakhstani oil producers.

Due to the inadequate capability of the Kazakhstani pipeline system, right to use to the pipeline is established as per the ratio of a particular oil producer’s contribution in the total quantity of oil to be produced in Kazakhstan in a given year. Presently, there are only two in service pipelines: “the Atyrau-Samara pipeline connects Kazakhstan to the Russian export network, while the CPC pipeline (Tengiz-Novorossiisk) connects the Tengiz field with the Russian port of Novorossiisk on the Black Sea”. Although there are it is largely privately owned pipeline but Russia reserves the right to suspend and enforce limitations on the stream of Kazakhstani oil from the Atyrau-Samara pipeline into Russian transportation network. More importantly, Russian organizations usually have priority access to their export terminals. By becoming a partner to the international BTC (Baku-Tbilisi-Ceyhan) Consortium that have built a 1,730-kilometer export pipeline with an annual capacity of 50 million tones, Kazakhstan can improve the scenario. (http://www.kazakhembus.com/Oil.html)

The services of nationals and foreign nationals in Kazakhstan are monitored by the Labor Laws, labor relations are monitored by individual employment agreements and, if applicable, collective labor contracts. Employment agreements must be in writing and must obey the rules to the minimum standards prescribed by the Labor Law. Companies usually face problems in hiring managerial and technical staff. Further, they even have to obtain permits to get overseas workers.

Kazakhstan has delivered continueous economic development for several years, particularly given the increasing significance of the Caspian Basin as a source for petrochemicals. While the rate of its economic reforms has recently slowed down,  Kazakhstan’s promise to continue and further push the structural transformations aimed at changing its economy into a more market-driven business climate remains of vital importance. Prospective international investors and exporters will prefer to see more repeated and many more success stories in this market in order to invest in the Kazakhstan’s economy. In spite the several issues that still need to be addressed, in this Central Asian country, an increasing number of the U.S. enterprises is of the opinion that Kazakhstan deserves a serious thought by the U.S. exporters. More importantly, considering the strategic significance of the country, it is important for them to be here for being competitive in Central Asia.

Resources

http://www.kazakhembus.com/Oil.html

http://www.allbusiness.com/mining/oil-gas-extraction-crude-petroleum-natural/235547-1.html?yahss=114-2974554-235547

http://www.state.gov/r/pa/ei/bgn/5487.htm

http://www.bakernet.com/NR/rdonlyres/1E007228-ED7E-4475-8ED7-0BDBA7B76FD3/38334/DBIKazakhstanJan2005.pdf

http://www.buyusa.gov/kazakhstan/en/doing_business_kazakhstan.html

http://www.cioc.com/

http://news.bbc.co.uk/1/hi/business/7015361.stm