Historical Kazakhstan

The oil and gas industry is the major and most rapidly growing industry in Kazakhstan. Oil and gas revenue accounts for a significant part of Kazakhstan's GDP, its Budget and foreign trade receipts. Kazakhstan holds vast hydrocarbon reserves, including potentially the third largest oil reserves in the world, following Saudi Arabia and Iraq. Proven sea and land hydrocarbon reserves of Kazakhstan are estimated at about 30 billion barrels. About 70% of those reserves are located in the west of Kazakhstan and a considerable majority of them are associated with salt deposits at the depth of more than 5000 metres. Potential oil reserves of Kazakhstan (located mainly in the Caspian Sea region) are estimated at 60 billion barrels.

The majority of hydrocarbon reserves are located in the oil- and gas-rich regions of Kashagan, Tengiz and Karachaganak. The discovery of the Kashagan Field in 2000 is considered to be the largest oil field discovery in the last 30 years. The Kashagan Field, located 80 kilometres south-east of the city of Atyrau in the northern part of the Caspian Sea region, is operated by Agip KCO. The field is estimated to hold a maximum of 38 billion barrels of oil, of which 13 billion barrels may be potentially extracted by re-injecting acid gases. The Tengiz Field (located along the north-east coast of the Caspian Sea), whose estimated commercial oil reserves are about 6 billion barrels, is operated by Tengizchevroil whose major shareholders are Chevron, ExxonMobil, KazMunaiGaz and LUKArco. The Karachaganak Field (located about 150 km east of the city of Uralsk in the north-west of Kazakhstan and operated by Karachaganak Petroleum Operating) holds 50 billion cubic feet of gas, 5.2 billion barrels of liquid condensate and 1.4 billion barrels of oil available for commercial extraction.

Proven gas reserves in Kazakhstan amount to 3,000 billion cubic metres and estimated gas reserves amount to 5,000 billion cubic metres. The majority of the gas reserves are located in the west of Kazakhstan, close to the Caspian Sea region. The major gas fields are Amangeldy, in the south, and Zhanazhol about 250 km south of the city of Aktobe in the west of Kazakhstan.

Historical background

Oil reserves were first discovered in the present-day territory of Kazakhstan in 1899, however the oil and gas industry began to grow rapidly only after the rich Zhetybai Field was discovered in 1961. In terms of oil extraction (about half a million barrels a day (1991)), Kazakhstan is ranked the second (following the Russian Federation) among the former Soviet republics.

Since the collapse of the Soviet Union, the focus of the policy of the Republic of Kazakhstan has been to encourage investors to make significant investments in the oil and gas industry. Much emphasis has been put on the creation of a stable legal environment for investors in the Caspian Sea region. In the years 1999 and 2002, Kazakhstan signed a package of agreements with the Russian Federation on defining their sea border in the northern part of the Caspian Sea. A similar agreement on defining the sea border was signed with the Republic of Azerbaijan in 2002 and an agreement with Turkmenistan is currently negotiated. The agreements clearly define property rights to fields located in the sea area and ensure the protection of interests of investors operating in the Caspian Sea region. Kazakhstan has begun talks with the Russian Federation and the Republic of Azerbaijan with a view to signing a comprehensive Caspian Sea convention with all the coast countries (Kazakhstan, Russian Federation, Azerbaijan, Iran, Turkmenistan), which will also address other important issues, including environment and biodiversity protection in the Caspian Sea region.

In 2003, the government of the Republic of Kazakhstan approved the National Sea Area Development Programme for the Caspian Sea. The programme consists of three stages: (i) creation of conditions for comprehensive development of the oil and gas sector (2003-2005); (ii) rapid growth of the extraction level (2006-2010); and (iii) stabilisation of the extraction level (2011-2015). The guiding idea was to make the Caspian Sea region of Kazakhstan an area which is attractive and friendly to investors and to maximise the mutual benefits of the state and investors from operating in the region.

Owing to high foreign investments made by nearly all major international oil companies (Chevron-Texaco, Exxon Mobil, Shell, TotalFinaElf, British Gas, Statoil, Eni-Agip, Philips Petroleum) oil exploitation in Kazakhstan went up from 530,000 barrels a day in 1992 to more than a million barrels a day in 2005. It is assumed that the total value of investments in the sea areas of the Caspian Sea region will increase from US$ 3.8 billion in the years 2003-2005 to US$ 16.8 billion in the years 2011-2015. Foreign investments in the oil and gas industry in Kazakhstan are made on the basis of production output sharing, exploration and production licenses and joint-venture agreements.

KazMunaiGaz: the national operator

After Kazakhstan regained independence in 1991, it opened its market and allowed foreign companies to make investments in its domestic oil and gas industry. A significant proportion of projects carried out in this industrial sector are carried out as joint ventures with KazMunaiGaz, the national oil and gas operator.

KazMunaiGaz was established in February 2002 under a decree of the President of the Republic of Kazakhstan through a business combination of two state-owned enterprises: Kazakhoil and Oil and Gas Transportation. KazMunaiGaz represents Kazakhstan's economic interests in local and international projects and the law requires that it should hold an interest of not less than 50% in any projects carried out with regard to new fields in the sea areas.

KazMunaiGaz exercises control over Kazakhstan's oil and gas management, including control over compliance with oil extraction and trade contracts. Moreover, KazMunaiGaz is actively involved in developing the strategy for the use of hydrocarbon reserves, pursuit of the national policy for the oil and gas sector and holding tender proceedings related to operating in the oil sector. In addition to that, the Ministry of Energy and Natural Resources may use the services of KazMunaiGaz in preparing expert's opinions on oil projects, maintenance of oil wells, monitoring extraction, transport and processing activities in respect of hydrocarbons, and other issues involved in operating in the oil and gas sector.

The major subsidiaries of KazMunaiGaz are: KazMunaiGaz Exploration & Production, KazTransOil, KazTransGas, Atyrau Refinery, Kazmortransflot, Atyrau International Airport, Eurasia-Air Helicopter Company and KazTransCom Telecommunications Company.

Oil and gas production

In the years 1999 to 2004, oil production in Kazakhstan grew at the rate of about 15% annually, i.e. it doubled in that period. Oil production in Kazakhstan went up from 61.9 million tonnes in 2005 to 65 million tonnes in 2006, i.e. by 5%.

The government of Kazakhstan forecasts that the domestic oil production will reach 90 million tonnes annually by 2010 (1.8 million barrels a day) and 150 million tonnes annually (3 million barrels a day) by 2015. The majority of oil is expected to be produced in the Tengiz, Karachaganak, Kashagan and Kurmangazy Fields (the Kurmangazy Field is located on the sea border between the Russian Federation and Kazakhstan).

Gas production in Kazakhstan has significantly grown since 1999, following the enactment of a law whereby users of mineral deposits were obliged to take gas utilization projects into account in their business development plans. In consequence, gas production doubled between the years 1999 and 2000. Gas production has been growing ever since, reaching 27,015 billion cubic metres in 2006, 2.6% more than in 2005.

Gas production in Kazakhstan is expected to reach about 52 billion cubic metres in 2010 and about 79 billion cubic metres in 2015.

Oil and gas exports

Given the limited absorptive capacity of the domestic market, Kazakhstan focuses on exports. Oil exports from Kazakhstan are growing rapidly and the existing infrastructure makes it possible to supply oil to the world markets across the Black Sea (through the Russian Federation), the Persian Gulf (under swap transactions with Iran) and using oil pipelines and rail transport to northern Russia.

The combined volume of oil and gas exports from Kazakhstan for the first 11 months of 2006 was 38.2% higher than in the year 2005.

Every effort is made to expand the Kazakh export infrastructure (in the first instance to the east) over the next 10 years as oil production grows in Kazakhstan. In selecting its export destinations, Kazakhstan is guided by opportunities in the area of hydrocarbon export diversification and ensuring the most effective operation of its pipeline system.

 

Transport

The development of the transport infrastructure was an important growth factor for hydrocarbon production in Kazakhstan. Oil and refinery products are transported in Kazakhstan using the following three modes of transport: oil pipelines, sea and rail transport.

Kazakhstan has an oil pipeline network of more than 6,400 kilometres and 39 pumping stations. KazTransOil, a subsidiary of KazMunaiGaz, is the monopolist in the market for pipeline transport services and delivers about 80% of oil produced in Kazakhstan.

Now, a lot of emphasis is put on the throughput capacity project carried out by CPC, an oil pipeline consortium. CPC's oil pipeline accounts for the largest proportion of oil exported from Kazakhstan and the volume of oil flowing through the pipeline is gradually growing. The CPC oil pipeline became operational in 2001 and is an important export route. The pipeline is 1,510 km long and links the Tengiz Oil Field, through the Russian Federation, with the CPC sea terminal on the Black Sea, near the Russian port of Novorossiysk.

Oil from the oil fields in the Atyrau and Mangistau regions is pumped through the Uzen-Atyrau-Samara (UAS) pipeline to the Russian Federation. The UAS pipeline system is about 1,500 km long and links Uzen in the south-west of Kazakhstan, the city of Atyrau and (across the Russian border) the Russian Transneft system in Samara. Given the intended increase in oil production in western Kazakhstan, it is necessary to increase the capacity of this pipeline to 20-25 million tonnes annually.

Yet another export destination is to be created on completion of the Kuryk-Baku-Tbilisi-Ceyhan transport system using which oil would be transported from the Kazakh coast of the Caspian Sea to Baku and further on through the Baku-Tbilisi-Ceyhan (BTC) pipeline. The BTC pipeline of 1,767 kilometres transports crude oil from Baku in Azerbaijan to a new sea terminal in the Turkish port of Ceyhan on the Mediterranean coast and is the first direct pipeline between the Caspian Sea and the Mediterranean. The BTC pipeline is intended to transport about 50 million tonnes of oil annually (1 million barrels a day) by 2010.

As far as the development of new markets is concerned, the completion of the Atasu-Alashankou pipeline in November 2005 was a major development. This is the first part of the pipeline from Kazakhstan to China. At the moment, its annual throughput capacity is 10 million tonnes of oil, which is intended to grow to 20 million tonnes. In 2006, 2,161 million tonnes of oil were pumped through the pipeline. The second project stage, i.e. the construction of the Kenkiyak-Kumkol-Atasu pipeline, is going to be completed in the years 2011-2035.

 
A pipeline from Kazakhstan to Iran via Turkmenistan is also proposed. Kazakhstan is also interested in transporting oil across the Black Sea to the reversed Odessa-Brody pipeline.

With a view to enhancing its sea transport capabilities, Kazakhstan has begun to create its own tanker fleet. Two 12,000 dwt tankers, 'Astana' and 'Almaty', have already been launched, and the third was delivered to the port of Aktau in September 2006. More tankers are intended to be launched in years 2007 and 2008.

Rail transport used to be the main mode of transport for Kazakh oil before the launch of the UAS and CPC pipelines. The railway infrastructure remains an alternative mode of transport.

 

The domestic market for oil processing

The processing industry in Kazakhstan consists of three major refineries which provide refinery products to the northern region (Pavlodar), the western region (Atyrau) and the south region (Shimkent) and have a combined oil processing capacity of 345,093 barrels a day. The Pavlodar Refinery is mainly supplied with western Siberian oil on the basis of swap transactions, the Atyrau Refinery processes oil only from western Kazakhstan and the Shimkent Refinery processes oil from south-western Kazakhstan at the moment. The production capacity of Kazakh refineries is often underused as local prices for refinery products remain low, therefore oil producers prefer to export oil to international markets. In 2006, Kazakh refineries processed 11.7 million tonnes of oil, up 4.6% compared with 2005.

Kazakhstan's macroeconomic data

	2006		2005		2004		2003
Population ('000)	15.380		15.210		15.080		14.900
GDP (US$ billion)	69,0		55,8		40,8		30,8
Real GDP (%, y/y)	8,8		9,4		9,4		9,1
GDP per capita, PPP (US$)	9.103		8.252		7.418		6.715
GDP per capita (US$)	4.488		3.620		2.704		2.075
Annual average inflation rate (%)	7,1		7,5		6,9		6,8
US$/KZT average exchange rate	127,0		133,7		135,9		149,2

 

Source: National Statistical Agency, National Bank of Kazakhstan, Bloomberg, S&P, IMF World Economic Outlook, EconStats

 

Kazakhstan is one of the few former Soviet Union republics which have a record of rapid economic growth in a stable political environment. Solid export growth rate on high oil prices and growing output have enabled Kazakhstan to achieve a real GDP growth rate of nearly 10% in recent years, which is more than the 6.8% GDP growth rate in the Russian Federation over the same period and equals China's growth rate. The very high GDP growth rate has been attributable to a large extent to growing prices of natural resources in recent years. 
The dependence of Kazakhstan's economy on oil is its major structural weakness. Strong exports result in the appreciation of Kazakhstan's tenge against the US dollar. The challenge is similar to the one faced by the Russian Federation, i.e. how to diversify Kazakhstan's economy by developing non-primary sectors.

Kazakhstan's banking system is also rapidly growing, thanks to well-thought out reforms and effective regulation. However, it is still lagging behind the banking systems of the West, both in terms of its size and involvement in the real economy.

A pension system reform was carried out in 1998 and now there are 18 pension funds in Kazakhstan which mainly invest in debt instruments, including corporate and government bonds (including Kazakhstan government's Eurobonds).

Kazakhstan was the first CIS country to obtain an investment class rating from all the three major rating agencies in the world: Moody's Investors Service, Standard&Poors and Fitch. In June 2006, Moody's upgraded the rating of Kazakhstan government's long-term Eurobonds from Baa3 to Baa2.

The government's fiscal policy act adopted in September 2006 envisaged that the real GDP growth rate would be 8.8% p.a. in the years 2007 to 2009, which would make it possible for the GDP for the year 2008 to be twice as high as in the year 2000. The act emphasises the fact that Kazakhstan's GDP per capita is to rise to USD 6,543 in 2009, i.e. 1.8 times compared with 2005.

The act envisages a rapid growth in services (of 10.7% annually). Production of goods is to grow by 6.7% a year on the average. It is assumed that industrial production will be growing at the average annual rate of 6.1% in the years 2007 to 2009, with the annual growth rate for the processing industry of 6.7%. The growth in services will be mainly attributable to trade, transport, telecommunications and various other services provided to companies.