KAZAKHSTAN WANTS TO ATTRACT FOREIGN INVESTMENTS IN ITS ENERGY SECTOR BUT TO REDUCE THE INFLUENCE OF MOSCOW

Publication: Prism Volume: 3 Issue: 17

Kazakhstan wants to attract foreign investments in its energy sector but to reduce the influence of Moscow

By Sergei Kolchin

Kazakhstan has huge resources of oil and gas and is keen to attract foreign investment to develop its energy industry. Its leaders are also determined to reduce the role played in the republic’s economy by neighboring Russia, on which Kazakhstan presently depends to transport its raw materials to world markets. "[President Nursultan] Nazarbaev is trying with all his might to break the chains which Russia uses to bind him," says a western diplomat in Almaty.

Kazakhstan is hardly unique in this respect. Throughout the post-Soviet space, the newly-independent states regard their former "elder brother" with caution. Having tasted independence, they no longer want to take orders from Moscow. Where Kazakhstan is perhaps unique is that its interests do not coincide with Russia’s on even a purely economic level. The two countries are natural competitors as exporters of raw materials.

Kazakhstan’s largest fields are the Tengiz (some 1 billion tons of predicted oil reserves); Karachaganak (340 million tons in oil reserves, more than 1.2 billion tons in gas condensates, and more than 1.3 trillion cubic meters of natural gas); Uzen (with over 1.5 billion tons of geological hydrocarbon reserves, of which more than 200 million tons are extractable); and Kumkola (with 350 million tons of oil reserves, of which 80 million tons of oil and 75 billion cubic meters of natural gas are proven). Kazakhstan’s portion of the Caspian and Aral Sea shelf also contains significant but so far little-explored resources.

In 1996, Kazakhstan extracted 23 million tons of oil and gas condensates and 4.2 billion cubic meters of natural gas. In the first six months of 1997, 12.7 million tons of oil and 2.9 billion cubic meters of natural gas were extracted. That was 15 and 32 percent higher, respectively, than the same period in 1996. Oil-refining in the republic is carried on at the Pavlodar (with a capacity of 7.5 million tons of oil per year), Shymkent, and Atyrausk oil refineries, though all of these have been working at far from full capacity in recent times.

Becoming Independent from Russia

Kazakhstan is determined to distance itself from Russia by increasing the role of foreign capital in its economy. President Nazarbaev’s reputation as an "Eurasianist" and advocate of integration within the CIS enables him to avoid political confrontation with Moscow. But economic cooperation between the two countries, including in the fuel and energy complex, has ground to a virtual halt. As regards oil extraction on the Caspian Sea shelf, for example, the Kazakh side says it does not rule out participation by Russian companies, but that they may do so only outside the framework of the already-existing consortium, whose foreign participants are unlikely to leave anything substantial for Russian investors. Nazarbaev has criticized the role of Russia’s Gazprom in development of the Karachaganak fields, saying that, in refining Kazakhstan’s gas, Gazprom leaves its owners no more than 17 cents out of every dollar of profit. Kazakhstani officials have also expressed dissatisfaction that Russia, in recent years, has not transported a single cubic meter of Kazakhstan’s natural gas for export to Europe. Add to this the increasingly frequent statements of Kazakhstani oil industry leaders that the Russian route alone is insufficient for the transportation of Kazakhstan’s oil, and their search for alternative routes, and it becomes obvious that Kazakhstan does not intend to orient itself toward Russia in implementing its ambitious plans to develop its oil and gas resources.

One area in which Kazakhstan so far exceeds all of the post-socialist countries is in the scale and speed of industrial privatization. Almost 90 percent of the country’s industry has been sold off in the last two years. In summing up the results of 1996, Kazakhstan’s then prime minister Akezhan Kashegeldin reported that one of the government’s major headaches — the problem of heavy industry — had vanished without trace. The deputy chairman of Kazakhstan’s Privatization Committee, Yu. Duberman, elaborated: "We are accused of selling off our national wealth for pennies. But if we don’t sell off our enterprises cheaply, they will be dumped on the scrap heap."

Kazakhstani leaders argue, too, that private owners are more likely than state ones to invest in their enterprises and thereby create new jobs. In this, Kazakhstan’s investment policy differs from the CIS’s other major oil- and gas-producing republics. Turkmenistan and Azerbaijan, by contrast, place a premium on preserving the priority of state ownership in the fuel and energy complex.

Diversification of Investors

Another distinguishing feature of Kazakhstan’s investment policy is the diversity of foreign investors, who come from almost all over the world. In addition to the traditional giants of the oil business, they include Switzerland, China, Canada, Argentina and Indonesia. Kazakhstani officials point out that, as regards per capita foreign investment, Kazakhstan outstrips not only its CIS neighbors but many Eastern European countries. Some 60 percent of foreign investment totaling around $2 billion has so far gone to enterprises in the oil and gas complex.

At first, the field was dominated by leaders of the world oil business. The partners for developing the three biggest hydrocarbon deposits — Tengiz, Karachaganak and the Caspian Sea shelf — fell into this category. The following entities were created:

* The "TengisChevroil" joint venture, set up in April 1993 with the participation of Chevron, to develop the Tengiz and Korolev oil fields;

* An alliance with the participation of British Gas, Italy’s Agip and Russia’s Gazprom, to develop the Karachaganak gas condensate fields; the Anglo-Italian tandem won the international competition for this field in 1992, and an agreement on joint activity between the participants in the project was signed at the end of 1994;

* The Kazakhstan-Kaspiishelf consortium, with the participation of British Gas, Shell, Agip, Total, Mobil, and Statoil, created in December 1993 to develop the oil and gas resources of Kazakhstan’s Caspian Sea shelf.

The past two-three years have seen a regrouping of foreign investors in the Tengiz and Karachaganak projects at the expense of the "big shots" of the oil business. Mobil took a 25 percent share in the "TengisChevroil" joint venture, of which Russia’s LUKoil also acquired a share. Texaco, to which British Gas and Agip both gave 10 percent of their shares, was added as a participant in the Karachaganak enterprise. On the Russian side, LUKoil may replace Gazprom as a participant in the Karachaganak project. Only the composition of Kazakhstankaspiishelf remains unchanged, but there no real extraction has yet been carried out from the offshore deposits, although the consortium members have already invested $300 million in geological exploration. The appearance on the Kazakhstani scene of another leading oil company, Amoco, not previously one of the major players, is also noteworthy. Amoco has set its sights on the Alibekmola and Kenkiakh oil fields, promising that it will finance 100 percent of the project to develop these fields, which will amount to $1.3 billion dollars. The company has also promised to pay Kazakhstan’s share of $150 million in the Caspian pipeline consortium.

A significant tendency in the investment situation in Kazakhstan’s fuel and energy complex at the present time is the active participation in the privatization of Kazakhstan’s oil and gas enterprises of a large number of companies in the second or third echelon of the world’s oil elite.

In summer 1996, tenders were offered for the Yuzhneftegaz and Shymkentnefteorgsintez enterprises. Hurricane Hydrocarbons, a Canadian company which had paid $120 million, became the owner of the first enterprise, in accordance with a contract signed in November 1996. The second enterprise was bought by Vitol, a Swiss company, for $60 million.

The privatization of oil and gas enterprises proceeded at an even more active pace in 1997, again with the participation of "non-traditional" partners. In early 1997, the American company CCL Oil won a tender for a three-year concession of the Pavlodar Oil Refinery. According to Kazakhstan’s State Property Commission, "the state’s packet of shares in the refinery may be sold to this investor, if things work out well."

The Essence Refinery Corporation, registered in the Bahamas, which promised to invest $650 million in developing the enterprise, won a tender for the Atyrausk Oil Refinery. But in April 1997, it lost its exclusive right to conduct negotiations.

Belgium’s Tractebel received a 15-year concession for Kazakhstan’s western and southern natural gas transportation network, with the possibility of extension for another five years. The Belgian company paid a $30 million bonus and signed an obligation to invest another $600 million to modernize the gas pipelines. The Argentinean company Bridas was announced as the original winner of this tender.

Finally, there have been competitions for the crown-jewels of Kazakhstan’s oil and gas complex — Mangistaumunatgaz and the Aktyubinsk and Uzen oil fields. Mangistaumunatgaz was bought by Central Asia Petroleum, registered in the Virgin Islands, whose shareholders are the Indonesian company PT Corporation, Japan’s Mitsui, and individual investors from the Philippines. China’s National Oil Company won the tender for the Uzen oil field (second in size after Tengiz) and also purchased 60 percent ownership in the Aktyubinsk oil field for $325 million.

These details underline another feature of privatization in Kazakhstan. Intensive negotiations are often conducted with one investor, right up to the point that it is declared the winner of the competition, but after that there is a change of partners. This pattern was seen in the case of Yuzhneftegaz, where Samson International (USA) was originally declared the winner of the competition, only to be replaced by the Canadian firm Hurricane Hydrocarbons. Similar cases have been observed in other sectors of Kazakhstan’s economy: the "ABB" concern, which won a concession to run the electrical power network, was later deprived of this prize, while Deutsche Telekom had to concede its leading role in the area of mass communication to the South Korean concern Daewoo.

Chevron, a veteran of the oil business in Kazakhstan, has expressed particular concern about the invasion of "outsiders." But there is a logic to Kazakhstan’s policy of diversification, which avoids the perceived danger of excessively close ties to a handful of powerful companies. Kazakhstan’s leaders have no intention of moving away from dependence on Russia only to become dependent on the United States.

Looking Eastward

The importance of exporting energy to Asia is understood in both Kazakhstan and Russia. Gazprom chairman Rem Vyakhirev has frequently stressed the significance of exporting Russian gas to the East. Russian oil companies such as SIDANCO have their own programs in this direction. Turkmenistan and Uzbekistan also intend to orient transportation routes for their energy resources toward Asian consumers. So far, the interests of these two countries in resisting Russian expansion coincide with those of Kazakhstan, but it cannot be ruled out that they will become competitors in the not-too-distant future. Kazakhstan’s desire to beat its competitors to promising Asian energy markets explains its recent attempts to attract investors from China and Southeast Asia.

Following a meeting between President Nazarbaev and the special adviser to the Japanese prime minister, Keizo Obuchi, an announcement was made of Tokyo’s interest in a project to lay gas and oil pipelines from Kazakhstan to China’s Pacific coast. It was stressed that, after a Japanese government statement of support for Kazakhstan’s reforms in 1996, the IMF announced that it would allot Kazakhstan $1.35 billion instead of the planned $200 million.

Recent agreements with China call for investment in a pipeline to the oil fields in western China and on to the Pacific coast. The main condition for the signing of the contract with China’s National Oil Company was the building of a 2,500-kilometer oil pipeline to western China, and a pipeline to Iran going through Turkmenistan. And here, Kazakhstan, following its established tradition, is continuing to talk with the other participants in the tender — Amoco and the American-Malaysian consortium "Unocal-Petronas."

Export pipelines from Central Asia to the Far East are not just an economic issue. The geopolitical factor and Kazakhstan’s determination to free itself from dependence on Russia give them added significance. Following a meeting in June 1997 with President Aliev of Azerbaijan, President Nazarbaev announced that Kazakhstan would need two to three new export pipelines in the next century, in addition that of the Caspian Pipeline Consortium (which goes through Russia). As well as looking for a new eastern route, therefore, Kazakhstan is seeking an alternative western route for its energy exports.

Translated by Mark Eckert

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russian Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.

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