China to Benefit from Kazakhstan Toughening Stance Against Western Oil Companies

Official statistical data released recently says Kazakhstan, which marks its twentieth year of independence this December, has produced around 900 million tons of oil over the last 20 years. Lyazzat Kiynov, deputy minister of the oil and gas industry, announced the government’s plans to increase oil output by 20 percent by the year 2015.

Ironically, the breath-taking forecasts come at a time when major foreign operators on Kazakhstan’s vast oilfields increasingly begin to question the rationality of doing business under the growing pressure from Kazakh oil authorities. In 2007 and 2008, Kazakhstani authorities launched a legal campaign against the Italian ENI Corporation – the operator of the $57 billion Kashagan project – seeking billions of dollars in compensation for losses to Kazakhstan’s economy, allegedly caused by ENI repeatedly delaying the implementation of the project. Yet, the whole history of the prolonged rows around the Kashagan project points to the Kazakh government’s attempt to place the lucrative oil business under state control. In 2008, the national oil and gas company, KazMunaiGas, using pressure tactics, increased its share in the Kashagan project from 8 percent up to 16.8 percent. KazMunaiGas acquired a stake equal to that of Royal Dutch Shell, Exxon Mobile, ENI and Total, major operators of the North Caspian Operating Company (NCOC), which develops the project. The move is conspicuously reminiscent of Russian tactics, which, in 2007, pressured Shell into ceding its controlling stake in the Sakhalin 2 project to Gazprom. In April this year, the Atyrau (West Kazakhstan) branch of the Shell Company responsible for development of Kashagan announced the suspension of its activities following the disapproval of its plans by the oil and gas ministry of Kazakhstan (www.caspionews.kz, April 8).

In late June, Norwegian Asker Solutions abandoned D Island in the Kashagan oilfield after its term of contract expired. Allegedly the US company ConocoPhillips, which holds an 8.4 percent share in Kashagan, is considering the sale of its assets in Kazakhstan (www.comment-respublika.com, May 27). Paolo Scaroni, the chief executive director of ENI Corporation, announced during his recent visit to Astana that the first oil extraction at Kashagan will take place no earlier than at the end of 2012. The date was earlier postponed from 2008 to 2011. Worried by mounting costs of the project resulting from repeated delays of oil output, Kazakh authorities warned ENI executives that the Kazakh government will not reimburse the costs of oil extraction if it starts after the year 2013 (RIA Novosti, May 18).

Kashagan deposits, with estimated oil reserves of 4.6 billion tons, are considered to be the largest in Kazakhstan. After the second phase of its development is completed, Kashagan will produce more than 1.5 million barrels of crude per day. Kazakhstan’s toughening attitude toward foreign companies can be regarded as part of its policy of regaining state control over its oil sector, currently dominated by western companies. Recently, Astana disclosed its intention to wring out from another foreign consortium – Karachaganak Petroleum Operating B.V., which includes British Gas, ENI, Chevron and the Russian oil giant Lukoil – 10 percent of shares to the Karachaganak fields, estimated to hold 1.2 billion tons of oil and 1.35 trillions of cubic meters of gas. Talks on the deal are under way (Delovaya Nedeli, June 17).

A prelude to this purchase was made by oil and gas minister Sauat Mynbayev who, speaking to journalists on the sidelines of the 24th meeting of the Council of Foreign Investors in Astana, hinted at the possible freezing of the Karachaganak project. The contract, concluded with the Karachaganak Petroleum Operating Consortium, he stated, does not fully correspond to the economic interests of Kazakhstan (Delovaya Nedeli, May 20).

Western companies, lured by the oil bonanza in western Kazakhstan nearly two decades ago, seemingly are increasingly becoming disillusioned in their expectations. The slackening activities of Western investors are only fanning the flame of rivalry for Kazakhstan’s oilfields between Russian and Chinese companies. For example, Lukoil earlier made clear its intention to participate in Kashagan project. Until now, China played a minor role in Kazakhstan’s oil sector. However, the overall annual oil output of Chinese companies in Kazakhstan does not exceed 1 million tons. Yet, the dwindling interest of western oil producers in Kazakhstan is likely to encourage China to position itself for an even greater influence in the Central Asian nation (Delovoy Kazakhstan, June 17).

Last spring, KazMunaiGas and Indian ONGC Videsh Limited signed a package of agreements on the exploration and development of Satpayev oil deposits in Kazakhstan’s sector of the Caspian. It should be taken into consideration, however, that India can rely only on maritime routes for the transportation of its oil, while China has an obvious advantage of a well-developed pipeline infrastructure and the geographical vicinity, which also facilitates the solution to transportation problems. Kazakh oilfields may thus turn into a battlefield where the interests of China, Russia and India will clash. Whatever may be the outcome of this struggle, Kazakhstan is poised to side with the eventual winner.