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It goes without saying that the EurAsEC’s relations with the European Union and the Shanghai Cooperation Organization (SCO) are important factors influencing its development. The EU is one of the main sources of investment for the Community countries, and for Russia, Kazakhstan and Kyrgyzstan it is a major trading partner as well.
The prospects for the creation of a free trade area with the EU are in large part connected with the possible entry of EurAsEC states into the WTO. Partnership agreements (for Russia, the concept of pan-European economic cooperation) are major steps in this direction.
EurAsEC development prospects may also be influenced by relations with the dynamically advancing Shanghai Cooperation Organization, which includes five EurAsEC countries (except Belarus, currently seeking to join the SCO). Apart from combating terrorism, separatism and extremism, the SCO pays much attention to economic interaction. At its jubilee summit in Shanghai (15-17 June, 2006), the SCO set up a Business Council and adopted an action program for the period until 2010 in support of regional economic cooperation between member banks of the SCO interbank association. Joint investment and bank funds will make it possible to finance major transport, energy and telecommunication projects, which will help to eradicate poverty and unemployment and to raise living standards in this large region. The main thing for the EurAsEC in this process is not to “dissolve” within the SCO framework but to pursue its mission and select effective, mutually beneficial and complementary areas of cooperation.
THE OIL AND GAS SECTOR IN KAZAKHSTAN
Dr. Vladimir BABAK
Senior Fellow, Center for Russian and East European Studies, Tel Aviv University (Tel Aviv, Israel)
Since the turn of the century, the economy of Kazakhstan has demonstrated steadily high rates of growth. Throughout this period the country’s gross domestic product (GDP) has kept growing at an annual rate of over 9%. The republic’s economic achievements are particularly impressive when compared to the performance of most other CIS countries, which, along with Kazakhstan, are rebuilding their national economies after the breakup of the
U.S.S.R. Even Russia, the largest CIS state, has not experienced such high rates of GDP growth, although it benefits from the current rise in world energy prices to an even greater extent than Kazakhstan.
Naturally, the latter circumstance generates interest in a study of the role played in the republic’s economy by the oil and gas sector, the main driving force behind its current economic “boom.”
The Oil and Gas Sector and Its Role in the Republic’s Economy
In the first few years of Kazakhstan’s independence, it’s top political leaders and (at their suggestion and possibly at their request) the mass media kept talking about the fabulous hydrocarbon reserves of Kazakhstan and of the Caspian region as a whole. Kazakhstan was most frequently compared to Kuwait (“a second Kuwait”), and the Caspian region, to the Persian Gulf (“a second Persian Gulf’). Today, ten years later, when passions have subsided and geological explorations have made it possible to give a more accurate estimate of hydrocarbon reserves in the region, analysts have come up with more reliable and scientifically valid assessments of the hydrocarbon potential of the Republic of Kazakhstan and the entire region.
As might be expected, hydrocarbon reserves in this area have turned out to be much more modest than was believed in the early and mid-1990s. Nevertheless, these reserves are quite significant even on a global scale, and they will play (and are already playing) an important role in the economy of the Caspian states, including Kazakhstan.
According to the CIA World Factbook 2005, proved oil reserves in Kazakhstan at the beginning of 2005 totaled 26 billion barrels (bbl), and in terms of this indicator the republic ranked 12th in the world. The same source put the reserves of natural gas in Kazakhstan in 2005 at 1,800 billion cubic meters (bcm), and here the country was only 16th in the world. According to the same data, the oil reserves of Kuwait, which is sixth in the global oil reserve rankings, totaled 96.5 billion bbl and were 3.7 times larger than those of Kazakhstan. In terms of proved reserves of natural gas, Kazakhstan today is somewhat ahead of Kuwait.1 Obviously, such a significant difference in the oil reserves of the two countries (in favor of territorially small Kuwait compared to Kazakhstan, whose area is over a hundred times larger) rules out the possibility of defining the latter as “a second Kuwait.”
Data from different sources on hydrocarbon reserves in Kazakhstan and in the Caspian region continue to differ widely, but one thing is clear: the republic has significant reserves of hydrocarbons both in the Kazakhstan sector of the Caspian shelf and deep inside the country. Oil and gas bearing regions occupy more than half of its territory (1.7 million sq km out of 2.7 million sq km). As of mid-2005, the republic had 179 registered hydrocarbon deposits, including 87 oil, 17 gas, 30 oil and gas, 25 oil and gas condensate, and 20 oil condensate fields.2
The Caspian shelf is very promising from the standpoint of hydrocarbon reserves in the country. In its Kazakhstan sector with an area of about 100 thousand sq km, oilmen have discovered 96 oil-bearing structures with probable reserves of about 12 billion tons of oil. There are also significant reserves in other parts of the republic, including the fields of the Aktiubinsk group, and also in central, southern and eastern Kazakhstan.3
Kazakhstan’s main explored oil reserves lie in three largest fields (Tengiz, Karachaganak and Kasha-gan). Two of these (Tengiz and Karachaganak) are already under development, and in 2004 they produced a total of over 20 million tons of crude, or more than a third of all the oil produced in the country.
The combination of Kazakhstan’s vast oil and gas resources with relatively low domestic consumption, and the rapid increase in oil prices in recent years have turned the oil and gas sector of in-
1 See: [http://www.photius.com/rankings/economy/oil_proved_reserves_2005_0.html]; [http://www.photius.com/rank-ings/economy/natural gas_proved_reserves_2005_0.htm].
2 See: A. Klimenko, Neftegazovaia otrasl Respubliki Kazakhstan: tsifry i fakty, available at [http://www.zakon. kz/ our/news.asp?id=300118355].
3 Ibidem.
dustry into a true locomotive of national economic development. In his Address to the Nation in February 2005, entitled “Kazakhstan on the Road to Accelerated Economic, Social and Political Modernization,” President Nursultan Nazarbaev frankly admitted that “today the main source of our economic growth is exploitation of the country’s natural resource potential.”4 (italics mine.—V.B.).
It is quite true that since 1995 the republic has constantly increased its oil production (see Table 1). In 1995, Kazakhstan produced 20.6 million tons of oil and gas condensate; in 1998, 26.0 million tons, and in 2005 the figure already exceeded 60 million tons (more precisely, 61.9 million tons). In other words, in ten years (1996-2005) oil and gas condensate production in the republic tripled. Oil production alone (excluding gas condensate) has already exceeded 50 million tons per year (50.6 million tons in 2004). Gas production in 2004 amounted to 20.55 bcm.5
In 2005, oil and gas condensate production continued to grow (by a total of 4.1%). The production of gas (natural and petroleum) in 2005 was 25.2 bcm, up 22.6% from 2004.
At present, the country’s fuel and energy complex is developing in accordance with the Program of the Government of the Republic of Kazakhstan for 2003-2006, which is part of a broader state program—the Strategy of Industrial and Innovation Development of Kazakhstan for 2003-2006—and the State Program for the Development of the Kazakhstan Sector of the Caspian Sea for 2003-2015.6
At the beginning of 2005, Kazakhstan had about 80 producing oil and gas fields. Over 80% of the country’s recoverable reserves of oil and over 70% of its recoverable reserves of free gas (from among the reserves included in the state balance of mineral reserves) were under development.7
Table 1
Oil and Gas Production in Kazakhstan
4 Kazakhstanskaia pravda, 11 March, 2005.
5 See: PETROLEUM, No. 1, February 2005, p. 60.
6 See: Kazakhstanskaia pravda, 11 March, 2005.
7 Ibidem.
It should be emphasized that since the early years of Kazakhstan’s existence as an independent state its leaders have pursued a proactive policy of attracting foreign capital so as to accelerate the country’s economic development. In order to resolve this problem and create a favorable climate for foreign investors, the authorities have adopted a number of special laws, which have already played and continue to play a positive role in the development of the national economy. These include state laws On Foreign Investment, On State Support for Direct Investment and On the Securities Market. In addition, the republic’s president has issued decrees containing a list of priority sectors for the attraction of foreign direct investment (FDI) and establishing a system of benefits and preferences for foreign investors. In 1993-2000, over 80% of total foreign direct investment in the national economy went into the oil and gas sector.
The favorable situation in the world hydrocarbon market coupled with Kazakhstan’s purposeful policy designed to attract foreign investment have yielded impressive results. In his above-mentioned annual Address (2005), the president said that the amount of foreign direct investment attracted into the country’s economy in the years of independence was around $30 billion. This means that in the period from 1993 to 2004 per capita FDI was close to two thousand dollars. In terms of this indicator, Kazakhstan is way ahead of all other CIS countries.
In recent years, the oil and gas sector has continued to get the lion’s share of foreign investment, so that hydrocarbon production has grown faster than production in other industries. As a result, the share of oil production in the republic’s total industrial output has rapidly increased. In only three years (1998-2000), this share rose from 16.3% to 39.9%.8 In other words, even at the end of the last century crude oil production in Kazakhstan accounted for almost two-fifths of its total industrial production.
In the first few years of the 21st century, rising oil prices have stimulated an inflow of investment into the mining industry, spurring a further increase in oil and gas production; this sector has developed faster than industry as a whole. In 2004, for example, investment in the use of mineral resources was up 33.6% from 2003, amounting to $9.15 billion.9 In 2005, fixed capital investment in the mining industry, in which the oil and gas sector constitutes the greater part, increased by another 43.7% (see Table 4 on p. 52).
Every year, new fields are brought on stream and new companies enter the oil production business. The main role in the development of oil fields and oil production in the republic is played by seven companies, which account for almost 86% of oil production in the country. The largest one is Tengizchevroil, which operates in the Tengiz field. In 2004, it produced 13,320 thousand tons of oil, or 23% of all the liquid fuel produced in the republic.10 And Karachaganak Petroleum Operating produced 8,524 thousand tons of oil, or 14.4% of total oil production in the country.11 The largest oil producers also include OJSC MangystauMunayGas and KazMunayGas Exploration and Production. The latter was created in April 2004 through a merger of two large companies: UzenMunayG-as and EmbaMunayGas. All the leading oil producing companies in Kazakhstan, with the exception of KazMunayGas Exploration and Production, have foreign investors.
Out of the three largest oil fields, the Kashagan field is the only one where commercial production has not yet started. As officially announced in June 2002, this field holds 7-9 billion bbl of oil, or not less than 1 billion tons.12 It is assumed that Kashagan will be the main source of an increase in oil
8 See: Kontinent, 27 December, 2000-15 January, 2001, p. 19.
9 See: Kazakhstanskaia pravda, 11 March, 2005.
10 See: PETROLEUM, No. 1, February 2005, p. 60.
11 Ibidem.
12 See: S. Tsalik, Natsionalnyi fond Respubliki Kazakhstan, Almaty, 2004, available at [http://www.kazakhstanrevenuewatch.org/ files/chapter_6_(rus).pdf].
production in Kazakhstan when the Tengiz and Karachaganak fields, the current leaders in the amount of oil produced, pass their production peak.
Rising hydrocarbon prices and recently improved transit opportunities tend to boost the production of oil and gas in the republic for the purpose of increasing their exports. As regards the domestic consumption of liquid fuel in the country, it remains relatively constant and makes up only a small share of its total production volume. In 2004, overall exports of oil and gas condensate amounted to 52.4 million tons, or 88.2% of their total production (59.4 million tons). Let us recall for comparison that in 1999 oil and gas condensate exports amounted to 23.7 million tons. In other words, in only five years (1999-2004) the republic increased its exports of natural liquid fuel more than 2.2 times (see Table 2).
Table 2
Oil and Gas Condensate Exports
The increase in export earnings from oil and gas condensate supplied to other countries is even more impressive. In 2003, exports in volume terms increased by 13% compared to the previous year (from 39.3 million tons to 44.3 million tons), whereas in value terms (in view of the rise in world oil prices) export earnings from these products increased by 39% (from $5,037 million to $7,020 million). As a result, the share of oil and gas condensate in the republic’s exports in 2003 was 54.4% in value terms, significantly exceeding the total earnings from all other export items.
This trend continued in subsequent years as well. In 2005, the republic exported 52.4 million tons of oil and gas condensate (just as much as in 2004), but the revenues from the sale of equal amounts of these raw materials differed widely: in 2005, export earnings were 52.4% higher than in 2004 (see Table 2).
In recent years, the share of oil and gas condensate in the country’s total exports has been growing steadily. In other words, there has been a significant change in the export structure in value terms. Given the general and most impressive increase in the volume of Kazakhstan’s foreign trade, its exports in value terms are increasingly dominated by the purely raw material component, so that the republic tends to acquire features peculiar, first and foremost, to the developing countries. Thus, crude oil and gas condensate now account for more than three-fifths of the republic’s total exports (62.5% in 2005).13
13 Calculated by the author from: [http:/www. kki.kz/cgi-bin/index.cgi?nc1390&dbid=null&version=ru].
It should be specially emphasized that the two key factors mentioned above—the increase in the physical volume of hydrocarbon exports and especially their rising prices in the world market—have also ensured an unprecedented increase in Kazakhstan’s total export earnings. In only two years (20042005), Kazakhstan exports more than doubled in value terms from $12.9 billion in 2003 to $27.8 billion in 2005, when the country’s trade surplus reached $10.5 billion.
Apart from oil, the republic has also recently increased its production and exports of gas. In 2004, it produced 20.55 bcm of gas (up 46.4% from 2003). Exports that year amounted to 7 bcm, an increase of 17.1% compared to the previous year.14 And although the republic’s export earnings from gas do not yet run into billions but only into millions of dollars, they further increase the raw material component of Kazakh exports. In the long term, gas exports will amount to tens of billions of cubic meters, and their share in the country’s total exports may increase considerably.
Kazakhstan’s growing export earnings from hydrocarbons have enabled it to set up (in August 2000) a special National Fund, which began functioning in June 2001. It is modeled on Norway’s State Petroleum Fund. Its constituent documents determine the purpose of the Fund as follows: “to stabilize the country’s socioeconomic development, accumulate savings for future generations and reduce the dependence of the economy on negative external factors.” Consequently, the Fund has two main functions: stabilization and saving.
The Fund performs its stabilization function by accumulating tax payments from enterprises of the natural resource sector, excess profits tax, all kinds of bonuses and other receipts. The stabilization component depends on a reference price for oil, which is set for five years. In 2000, this price was established at $19 per barrel. If oil prices exceed this level, the excess earnings from the sale of liquid fuel go into the National Fund. And if world prices fall below this level, the National Fund will have to transfer the difference (a dollar amount equal to the loss in income) into the state budget. Mining companies take part in the creation of the National Fund under comparable guidelines, though naturally based on a separate reference price.
The savings portfolio of the Fund is made up of special transfers from the budget in the amount of 10% of budgeted tax revenues from enterprises in the natural resource sector, and also investment earnings from the operation of the Fund and some other receipts.
The Fund received its first deposit ($660 million) in 2001, after the sale of a 5% government stake in the Tengizchevroil consortium. In October 2003, according to the National Bank, the Fund’s assets already amounted to $2.81 billion. In 2004 and 2005, the rapid rise in oil prices generated a further intensive flow of money into the Fund, so that by 16 December, 2005, it had accumulated over $6.57 billion.15 In other words, only in the past two years or so (from October 2003 to December 2005), the assets of the National Fund, which in effect accumulates excess earnings from hydrocarbon sales, multiplied 2.34 times.
Kazakhstan was the first CIS country to create such a structure for ensuring the country’s stable socioeconomic development and reducing its dependence on negative external factors. Although the National Fund performs positive functions for the republic’s economic development, its activities have often been criticized by the opposition and some public circles. Their main complaint is the closed nature of its work and lack of proper control over it, primarily on the part of parliament. In the opinion of critics, this creates an opportunity for misappropriation of part of the national wealth by persons who have access to the Fund. They say that the scandal in April 2003 over the arrest of James Giffen, an oil advisor to the Kazakhstan authorities and an American citizen accused of concealing oil revenue and transferring millions of dollars to the bank accounts of high-ranking Kazakhstan officials (so-
14 See: Neftegazovaia vertikal, No. 5, 2005, available at [http://www.ngv.ru/magazin/view.hsql?id=2528&mid=98].
15 See: Statistics Agency of the Republic of Kazakhstan, Kratkie itogi sotsialno-ekonomicheskogo razvitia RK za ianvar’-dekabr’ 2005, available at [http://www. rakhattv.kz/show_news.asp?NewsID=10224].
called Kazakhgate), proves the need for greater transparency in the matter of control over receipts from the sale of products of the republic’s oil and gas industry.16
Serious grounds for criticism of the National Fund’s activities are also provided by the fact that it invests its money abroad, so actually subsidizing, in the opinion of the opposition, the economy of other (mostly Western) countries, including the U.S., instead of serving as a source of finance for the development of sectors of the Kazakhstan economy not connected with the production, processing or transportation of the republic’s oil and gas wealth.
Another circumstance noted by critics is that Western investors mostly put their capital in the highly profitable oil and gas sector of the economy, making big profits. Moreover, they have an opportunity to derive additional benefits from the part of the state’s oil revenue that goes into the national Fund and is then invested in the West.
Successes in Socioeconomic Development
Radical economic reforms and the extremely favorable (for oil and gas exporters) situation that has taken shape in the world hydrocarbon market in recent years have considerably improved the country’s financial position. Back in 2000, Kazakhstan was the first post-Soviet state to repay all its debts to the International Monetary Fund (IMF), doing this seven years ahead of schedule. The public debt as a share of the country’ gross domestic product has been constantly shrinking. In 2000, Kazakhstan’s public debt (excluding intercompany obligations under oil and gas projects) amounted to 21.7% of GDP.17 By the end of December 2004, the figure was down to 13.7%.18 The situation with the state budget has markedly improved as well. Whereas in 1999 the budget deficit amounted to 3.5% of GDP, in 2003 it was down by almost two-thirds to 1.2%.
In 1999-2004, overall GDP growth in the republic came to about 55%. In 2005, Kazakhstan’s gross domestic product was 7,453 billion tenge ($56.8 billion) and exceeded the GDPs of all the other seven post-Soviet countries of Central Asia and the Caucasus (Uzbekistan, Kyrgyzstan, Turkmenistan, Tajikistan, Azerbaijan, Georgia and Armenia) taken together.19 And this despite the fact that the total population of these seven countries is four times larger than the population of Kazakhstan.
In 2005, industrial production in current prices amounted to 5,124.1 billion tenge, with an increase of 4.6% compared to 2004. An important point to note is that for the first time in the past few years production growth rates in the mining industry (3.2%) in 2005 were lower than growth rates in manufacturing (6.0%).20
Good results were also recorded in the agricultural sector. In 2005, agricultural production in current prices amounted to 763.2 billion tenge, up 7.3% from 2004.21
Growing oil revenues make it possible to increase fixed capital investment and so to create favorable conditions for long-term development of the national economy. In 2005, fixed capital investment totaled 2,205 billion tenge, or 22.1% more than in 2004.22
16 See: Natsionalnyi fond Respubliki Kazakhstan, p. 32.
17 Ibidem.
18 See: [http://state.gov/r/pa/ei/bgn/5487.htm].
19 Calculated by the author at the official exchange rate of the national currencies against the U.S. dollar.
20 See: Statistics Agency of the Republic of Kazakhstan, Sotsialno-ekonomicheskoie razvitie Respubliki Kazakhstan v ianvare 2006 goda (operational data), Almaty, 2006, p. 9, available at [http://www.stat.kz].
21 Ibidem.
22 Ibid., p. 10.
Successes in the development of the national economy are also reflected in the social sphere. In particular, there has been a steady increase in household income and wages (real as well as nominal). In his Address to the Nation in February 2005, President Nazarbaev said that household income in Kazakhstan had increased by an average of five times and that average monthly wages had risen almost six times, while the minimum wage had multiplied 25 times. The increase in the average monthly pension was 4.6 times.23
The rapid rise in wages, pensions and household income continued in 2005. Thus, the average monthly nominal wage in the republic in 2005 was 34,066 tenge, or 20.5% higher than in 2004, while the real wage increased that year by 12.0%. In January 2006, the average monthly nominal wage was already 44,956 tenge, or 26.1% higher than in January 2005 (in real terms, the increase was 17.3%).
In January 2006, average nominal household income per capita reached, according to preliminary estimates, 19,589 tenge, going up by 26.2% from January 2005. In real terms, per capita household income in January 2006 was 17.4% higher than in January 2005.24
Table 3
Gross Domestic Product and Wages
1999 2000 2001 2002 2003 2004 2005
GDP (in billions of tenge) 2,016.5 2,599.9 3,250.6 3,776.3 4,449.8 5,542.5 7,453.0
GDP (in billions of dollars at the official exchange rate) 16.85 18.29 22.15 24.64 29.75 42.3 56.8
GDP per capita (in dollars at the official exchange rate) 1,129 1,229 1,491 1,658 1,996 2,801 3,737
Average monthly wage (in dollars at the official exchange rate*) 99 101 118 132 152 211 259
S' * Author's calculations. >
S o u r c e s: Statistics Agency of the Republic of Kazakhstan, available at [http://www.stat. kz/stat/index.aspx?p=10]; [http:// www.historycentral.com/NationbyNation/ Kazakhstan/Economy.html]; [http://www.unsiap.or.jp/participants_work/cos03_ homepages/group4/kazakhstan.htm]; [http://www.infomarket.kz/pavlodar/ index.php?id=1754&a=1].
23 See: [http://www.president.kz/page.php?page_id=32&lang=l&article_id=52].
24 See: Statistics Agency of the Republic of Kazakhstan, Sotsialno-ekonomicheskoie razvitie Respubliki Kazakhstan v ianvare 2006 goda, p. 10.
On 1 July, 2005, the state began paying out to all pensioners, irrespective of their work record or the size of their awarded pension, an additional basic pension subsidy in the amount of 3,000 tenge. As a result, the minimum pension rose to 9,200 tenge, and the average pension exceeded 12,000 tenge.
An increase in bank deposits by individuals and in deposits per capita is a reflection of rapidly rising living standards in Kazakhstan. In ten years, they multiplied 35 times and 37 times, respectively. In 2005, household deposits continued to grow rapidly, and at the beginning of 2006 they totaled 587.3 billion tenge, or 33.1% more than a year ago.25
There has also been a significant increase in public outlays on maintaining a guaranteed level of free medical assistance. In 2004 alone, they increased 1.7 times compared to 2003. In 2003, the state began paying out a lumpsum birth grant. Public spending on education and culture has markedly increased as well.
Oil and the National Economic Development Strategy
In view of its high profitability, the oil and gas sector is pivotal to the government’s long-term economic plans for the next 10-15 years. First of all, they provide for a further increase in the production and sale of hydrocarbons. By 2015, the government plans to bring oil production up to the level of 150-170 million tons per year, and gas production, to about 80 bcm per year. With this aim in view, it is planned to ensure active exploitation of the largest new oil and gas fields, which should eventually provide the main increase in the production of these valuable energy resources.
A solution of this problem requires significant capital investment. In 2004, it was decided to allocate $29 billion for the development of the recently discovered (2000) Kashagan field, the largest oil field in Kazakhstan and one of the largest in the world. Production from this field was earlier postponed because of delays in its exploration and is due to begin in 2007-2008. By 2015, oil production from this field alone is to reach 56 million tons per year26 (no less than a third of total projected production).
In 2002, work was started on yet another major project for oil exploration and production at the Kurmangazy field, located at the juncture of the Kazakh and Russian sectors of the Caspian Sea. In July 2005, the two countries signed a production sharing agreement for this field, whose reserves are tentatively estimated at about 980 million tons of oil.27 This 55-year project will require $22-23 billion worth of investment, and the profit from its implementation is estimated at $50 billion.28
The projected increase in oil and gas production and exports calls for an expansion of the oil and gas transportation network, and also for an increase in the capacity of existing pipelines. Another highly important task facing the government of Kazakhstan is to reduce the country’s continued dependence on Russia in matters of oil and gas transportation to world markets.
On 25 May, 2005, President Nazarbaev took part in the opening ceremony for the Azerbaijan section of the Baku-Tbilisi-Ceyhan oil pipeline. During the visit he said, among other things, that “Kazakhstan regards the oil pipeline as one of the major routes for the transportation of its oil to world markets.”29 He noted that Kazakhstan’s participation in this project was due to the republic’s commit-
25 Ibidem.
26 See: [http://www.mirtv.ru/news/5/3222_l.htm].
27 See: [http://www.rg.ru/2005/07/06/rossia-kazakhstan-anons.html].
28 See: [http://www.nr2.ru/center/31682.html].
29 See: [http://ngv.ru/magazin/view.hsql?id=2764&mid=106].
ment to the idea of multivector oil transportation routes. In practice, this idea primarily signifies less dependence on Russia in matters of hydrocarbon exports to other countries. In the long term, when Kazakhstan gets down to full-scale exploitation of its Caspian fields, its oil exports along the Aktau-Baku-Tbilisi-Ceyhan route could reach 20 million tons per year.30
In mid-December 2005, an opening ceremony was held in Kazakhstan for the new Atasu (Ka-zakhstan)-Alashankou (PRC) oil pipeline, which is to become the republic’s first oil export pipeline of its own. Starting from mid-2006, the republic is to export its oil along this route bypassing Russia. At the first stage, this 988 km pipeline will have a capacity of 10 million tons of oil per year, with a subsequent increase to 20 million tons.31
The strategy for enhancing the country’s oil and gas transportation potential includes the creation of a national tanker fleet so as to lay yet another full-fledged route for oil exports. The first three Kazakh oil tankers (Astana, Almaty and Aktau, built in St. Petersburg) were launched in 2005-2006. The Aktau Port was renovated, and its export capacity was increased to 10 million tons of oil per year.32 From this port, oil is transported by tanker to Baku and Makhachkala. In mid-2005, about 80% of Kazakh oil was transported by pipeline, about 12% by rail, and roughly 7% by water.33
In order to ensure the planned increase in gas production to 80 bcm (or even more) per year by 2015, the national company KazMunayGas has begun preparatory work for the development of the large Amangeldy gas field. It is also conducting seismic surveys at other gas fields in southern Kazakhstan. In the long run, the company is planning to explore and develop hydrocarbon reserves in the Kazakhstan sector of the Aral Sea.34 In formulating Kazakhstan’s gas export strategy, the authorities primarily take into account the import requirements of neighboring China. Today they are considering and evaluating various gas pipeline options for the supply of Kazakh gas to the PRC.35
The country’s government has recently given more attention to the problems of oil refining and production of oil products. The aim here is not only to meet the republic’s domestic demand for oil products, but also to increase their exports. Paradoxical as it may seem, a country that has become one of the world’s prominent oil exporters is still obliged to import oil products for its own needs.
The total capacity of all three oil refineries in Kazakhstan adds up to only 18.5 million tons of crude oil per year, with annual oil production in the republic already exceeding 60 million tons. Nevertheless, even these refineries would be able not only to meet the country’s domestic demand, but also to produce for export, but until recently they operated at less than half of their capacity. In 2004, the situation somewhat improved, but even the refinery with the highest capacity utilization rate (Atyrau) operated at only 61.1% of its capacity, whereas the Pavlodar Refinery, for example, had a utilization rate of only 38.7%.36 And this at a time when up to 40% of the republic’s domestic demand for fuel and lubricants (especially in its northern and central regions) is covered by imports.37
The “underutilization” of oil refineries is due, among other things, to the fact that control over the oil produced in the country is in effect exercised by foreign companies, which produce 84% of all the oil in Kazakhstan. The latter are not interested in selling their oil within the country in view of low
30 See: [http://www.centrasia.ru/newsA.php4?st=1115552760].
31 See: [http://www.agroline.ru/news/gazeta/2005/12/15/32.html].
32 See: PETROLEUM, No. 1, 2005, p. 20.
33 See: [http://www.centrasia.ru/newsA.php4?st=1115552760].
34 See: [http://www.promgaztorg.ru/print.php?sid=391].
35 Ibidem.
36 See: [http://www.zakon.kz/our/news/news.asp?id=30024385].
37 See: Almaty INFO, 25 December, 2004, available at [http://Eurasia.org.ru/cgi-bin/datacgi/database.cgi?file= New&report=SingleArticleRu&ArticleID=0008550].
domestic prices. After paying their taxes, they prefer to export crude oil mostly to offshore zones and so to make a big profit.
In spring and fall, at the height of agricultural works, the republic experiences a shortage of oil products. The government has repeatedly been obliged to restrict the export of liquid fuel in an attempt to provide the agricultural sector with relatively low-priced fuels and lubricants, but such measures cannot bring about a radical solution of this problem. The republic continues to import oil products from abroad, and their prices in the domestic market continue to grow. In 2004 alone, gasoline imports increased from 500 thousand tons (2003) to 802 thousand tons38 (by 60%).
On the other hand, it is common knowledge that exports of oil products are more economical than exports of crude oil. In recent years, the country has increased its crude oil refining volumes and exports of oil products. In 2004, for example, Kazakhstan exported 321.4 thousand tons of gasoline, or 70% more than in 2003.39 Nevertheless, the republic remains a net importer of gasoline. The trend toward an increase in the production of oil products and their exports continued in 2005, when the country produced 11.17 million tons of oil products (18.7% more than in 2004),40 of which 3,484.4 thousand tons were exported. This is 50.6% more than in 2004. However, overall crude oil exports still far exceed (about 15 times)41 the exports of oil products, and in this respect the republic lags behind Russia, where this indicator is much lower (2.8 times in 2004).42
The significant successes achieved at macro level in Kazakhstan’s national economy in recent years cannot veil the serious problems connected with the oil and gas “bias” in its development. As noted above, the extremely high profitability of the mining industries and especially of oil and gas production makes this sector particularly attractive to domestic and foreign investors, whereas less profitable manufacturing does not receive sufficient investment, with numerous negative consequences.
In fact, in terms of profitability the oil and gas sector far surpasses all other sectors. Thus, cost per tenge of sales in crude oil and natural gas production in recent years has been about 1.5 times lower than in the national economy as a whole. And compared to the situation in some branches of the economy this difference is really glaring. In 2002, according to the Statistics Agency of the Republic of Kazakhstan, cost per tenge of sales in crude oil and natural gas production was 0.39 tenge. At the same time, in manufacturing the figure was 0.68 tenge, in the production of machinery and equipment, 0.81 tenge, in construction, 0.85 tenge, and in agriculture and forestry, even 0.91 tenge.43
Simple calculations show that in 2002 one tenge invested in oil and gas production generated a profit of 1.564 tenge, whereas in agriculture or forestry the profit was only 0.099 tenge. In other words, one tenge invested in oil and gas production generated 16 times more profit than one tenge invested, say, in the development of agriculture and almost 9 times more than one tenge invested in construction. In 2005, this effect was even more pronounced in view of the significant rise in oil prices.
This circumstance creates unequal conditions for operation in different sectors of the economy, putting a brake on investment in sectors with a low rate of return. This stimulates the uneven development of different sectors of the economy, with an obvious skew toward the oil production sector.
38 See: [http://www.zakon.kz/our/news/news.asp?id=30024385].
39 Ibidem.
40 See: [http: // www.interfax.com/3/121730/news/aspx].
41 Calculated by the author, available at [http: //www.kki.kz/cgi-bin/index.cgi?nc1390&dbid=null&version=ru].
42 See: [http://vneshmarket.ru/NewsAM/NewsAMShow.asp?ID=218303].
43 See: [http://www.kazakhconsulting.kz/pageid85.html].
Table 4
Fixed Capital Investment by Economic Sector in 2005
Table 4 shows that the mining industry, in which the leading role today is played by the oil and gas sector, is clearly a privileged branch of the economy, taking more than a third of total fixed capital investment in the country. No wonder that in recent years there has been a steady decline in the share of manufacturing in the country’s total GDP. Whereas in 1995 this share was 58.7%, in 2004 it was only 40.4%. In recent years (up to 2005), production growth rates in manufacturing were lower than in mining. In 2004, for example, the figures were 8.9% and 12.7% (compared to 2003), respectively.44 And only in 2005 this trend was reversed.
A point to note is that metallurgy and manufacture of metal products have a significant share in the structure of manufacturing (41.6% in 2004), whereas the share of the textile industry is insignificant (about 2%). Incidentally, Kazakhstan now produces 16 times less fabrics than in the Soviet period (1990). As regards engineering, it accounts for only 8% of total production in manufacturing. Oil refining has the same share despite very high oil production figures.45
The production of livestock products traditional for Kazakhstan and in great demand among its population has dropped sharply (many times). According to state statistics, the production of “meat and edible offal of cattle, pigs, goats, horses and poultry meat” in 2004 was down to only 7.7% of the 1990 level, and the production of processed milk and cream, to 10.5% (this applies to livestock products recorded by government statistics). The production of some other important goods
44 See: Delovaia nedelia, 20 May, 2005.
45 Ibidem.
has declined as well. For example, the amount of cement produced in 2004 was over 2.2 times lower than in 1990.
High prices for crude oil in the world market do not promote the development even of such industries of key importance to the republic as oil refining or the petrochemical industry. In technological terms, these branches of national industry lag far behind their current development level in other countries. For example, one ton of crude oil in Kazakhstan yields only about 150 liters of motor fuel, or almost three times less than in Western countries, where a ton of crude is processed into 430 liters of such fuel.46
The rise in world oil prices and imports of oil products push up the prices of fuels and lubricants in the republic’s domestic market as well, where the prices of some of them have doubled in recent years. This has a negative effect on the development of many sectors of the national economy, especially those requiring substantial amounts of energy. As a result, the share of fuel in the cost of many products has increased. Transport fares have gone up, as well as the prices of many foodstuffs. A particularly difficult situation in the domestic oil product market arose in Kazakhstan in the fall of 2005; some observers even called it a “fuel crisis.”
Today the republic’s authorities are faced with the need to address a sufficiently complicated problem: to formulate an optimal strategy for its oil policy. On the one hand, given the rapid rise in hydrocarbon prices one is naturally tempted to make the most of the favorable situation in global oil and gas markets by boosting the production and exports of crude oil and gas over the short term. On the other hand, there are many factors that strengthen the case for a reasonable, measured increase in hydrocarbon production.
The main difficulty is that the development of the situation in the hydrocarbon market cannot be predicted for the long term. It is quite possible that energy prices may either go down or continue to rise: after all, the current speculative demand for oil and gas is connected not only with economic factors, such as rapid economic growth in the PRC and India, which consume increasing amounts of energy resources.
An important role is also played by political factors, such as the situation in Iraq or the events around Iran in the context of the latter’s implementation of its nuclear program. The possible cessation of oil supplies from that country or even their significant reduction could spur the increase in world liquid fuel prices still further. But as soon as the political situation in this region with the world’s richest oil and gas resources is normalized and oil begins to stream into the world market in a steady flow, we can expect a significant decline in oil and gas prices.
Besides, even today high oil prices create an incentive to accelerate the development of new energy efficient technologies, especially in the area of car engines, which currently consume more than half of all the oil produced in the world. A breakthrough in this area will inevitably bring down prices in oil markets. And the faster the increase in oil prices today, the sooner will the “oil era” come to an end. In such a case, world prices will be dictated not by sellers of oil but by its buyers.
At the same time, the development of an oil strategy for Kazakhstan has yet another highly important aspect. Large-scale exports of nonrenewable natural resources despite the republic’s obviously limited resource endowment, especially compared to such major oil and gas producers as Saudi Arabia, Russia, Iran, Iraq, Kuwait and other countries, is fraught with their rapid depletion (in the next few decades). If this scenario is realized, the republic could be in danger of losing its huge oil revenues even before it completes its economic reforms.
According to OPEC forecasts, if Kazakhstan continues to increase oil production at the projected pace, by 2030 its reserves of liquid fuel will be virtually depleted.47 Estimates made by Kazakhstan
46 See: Almaty INFO, 25 December, 2004.
47 See: Roundtable on the Prospects for the Development of the Oil Industry in Kazakhstan, 25 August, 2005, available at [http://www.iimp.kz/index.php?action=show&art_id=329&from=0].
specialists are much more optimistic in this respect. It is obvious, however, that a rapid buildup of oil and gas production cannot augment the country’s mineral wealth.
Statements by the country’s president and other top officials, just as the practical steps being taken to develop the national economy, show that these problems are a major focus of attention. In July 2005, the Economic Policy Council under the republic’s government took a decision to investigate the influence of growing oil production volumes on the macroeconomic equilibrium and to draw up the most acceptable schedule for oil and gas production in the long term.48
In his 2006 Address to the Nation, the president said that Kazakhstan would “open up new niches in the domestic and global markets ... by developing downstream processing in the oil, gas and other sectors of the mining industry.”49 Special attention in the coming years is to be paid to the implementation of the comprehensive ten-year General Plan for the Development of Petrochemical Production. The latter was drawn up under the direction of Prime Minister Danial Akhmetov, who has repeatedly emphasized that the development of the petrochemical industry is a key element of the plan to diversify the national economy.
Kazakhstan’s National Economic Development Strategy provides for a return of the oil producing industry into the hands of local businessmen. President Nazarbaev has declared that within 30 years the country would be able to produce oil in its territory without foreign participation. Kazakhstan has already started implementing this strategy. Significant amendments and addenda have recently been made to the laws On Oil and On the Use of Mineral Resources. The national company KazMunayGas has been granted the exclusive right to represent Kazakhstan and to have a stake of not less than 50% in all the oil projects to be implemented in its territory. Legislation also establishes the state’s priority in buying out mineral rights. For example, Kazakhstan has already bought out the British Gas stake in the Karachaganak project.
Changes have also been made to the Tax Code: in particular, a rent tax has been introduced on oil exports.50 Nevertheless, foreign companies remain interested in the development of the republic’s oil reserves. Thus, in the opinion of representatives of some foreign oil companies operating in Kazakhstan, such as Shell’s executive director for exploration and production and regional managing director for the CIS and Middle East countries, the provisions of Kazakhstan’s new Tax Code are entirely acceptable for successful work on mutually beneficial terms.51
Kazakhstan’s strategy for bringing the oil and gas sector back under full national control implies, in particular, a gradual replacement of foreign specialists by local ones. In June 2005, President Nazarbaev said that in the long term the proportion of foreign specialists in the republic’s oil industry should not exceed 10%. He said: “We must develop the petrochemical industry and must export not only oil and gas but also their derivatives, including plastics. We must produce machines for the development of the oil industry, build roads and create an infrastructure. That is why one of our requirements in the conclusion of contracts with foreign companies is training of Kazakhstan engineers.”52
* * *
The persistent phenomenon of rapidly rising oil and gas prices observed over the past few years has given independent Kazakhstan a good chance to accelerate the solution of its numerous economic
48 See: Roundtable on the Prospects for the Development of the Oil Industry in Kazakhstan, 25 August, 2005, available at [http://www.iimp.kz/index.php?action=show&art_id=329&from=0].
49 See: [http://www.nomad.su/?a=3-200603020023].
50 See: Roundtable on the Prospects for the Development of the Oil Industry in Kazakhstan, 25 August, 2005.
51 See: Neftegazovaia vertikal, No. 13, 2005, available at [http://ngv.ru/magazin/view.hsql?id=2764&mid=106].
52 Ibidem.
and social problems. The country has got a real opportunity to use the oil and gas sector as a “locomotive” for the development of the whole national economy and is taking certain steps in this direction. The difficulty of working out an oil strategy in the conditions of rising oil and gas prices lies in the need to find an optimal combination of the course toward a further phased buildup of oil and gas production so as to take advantage of the current market situation with the course toward a modernization of manufacturing industries so as to bring them up to a modern development level that would ensure their competitiveness in global markets. As regards an unlimited increase in hydrocarbon production for the sake of maximizing short-term gain without a parallel modernization or accelerated development of other sectors of the national economy, this is fraught not only with a rapid depletion of natural resources, but also with lost time, for which it will hardly be possible to make up in the foreseeable future.
TRANSNATIONAL CORPORATIONS IN KAZAKHSTAN
Sergey SMIRNOV
Independent researcher (Almaty, Kazakhstan)
Obviously, transnational corporations (TNCs) with over 50 percent of world industrial production, over 60 percent of international trade, and nearly 90 percent of foreign direct investments under their control exert considerable influence on the world economy. They have essentially all trade in raw materials under their thumb; Kazakhstan, a country rich in mineral wealth, is also within their range of influence. As an independent state, the republic was not only one of the first in the post-Soviet expanse to attract foreign capital by transferring large enterprises of basic industrial branches to trust management, which allowed subsequent privatization and the setting up of new facilities with 100 percent foreign money, but also relied on intensive mining and extraction as its economic cornerstone.
In 1994-1997, the TNCs began their active invasion of Kazakhstan’s economy: after supporting “director” or “bureaucratic” privatization, the government placed its stakes on large foreign investments for obvious reasons. Involvement of large TNCs not only placed the country on the economic map of the world and guaranteed a flow of investments, but also ensured domestic stability (due to interest in protecting property rights). This explains the unprecedentedly wide-scale (as compared to other countries with “transition” economies) involvement of large TNCs in the republic’s economy.
The government expected that foreign corporations’ involvement in the local economy through shares and long-term contracts on oil and gas production1 would contribute to the country’s eco-
1 For example, under the agreement, the Karachaganak Petroleum Operating B.V. (the shares of the BG Group and ENI are 32.5 percent each; Chevron Texaco, 20 percent, LUKoil, 15 percent) is expected to manage the Karachaganak
