Publication: Eurasia Daily Monitor Volume: 2 Issue: 131

On July 6 in Astana, Presidents Vladimir Putin of Russia and Nursultan Nazarbayev of Kazakhstan witnessed the signing of a production-sharing agreement on Kazakhstan’s Kurmangazy offshore oilfield. State oil company Rosneft President Sergei Bogdanchikov signed the agreement for the Russian side; Kazakhstan’s Energy and Mineral Resources Minister Vladimir Shkolnik and KazMunayGaz state company president Uzakbay Karabalin signed on the Kazakh side.

The field is situated at a shallow depth in the northern part of Kazakhstan’s Caspian sector. Kurmangazy’s recoverable reserves are estimated at 900 million to 1 billion tons of oil. The financial investments are a subject of discrepant projections, ranging from $10 billion to $20 billion. The production-sharing agreement is valid for 55 years, including 10 years for exploration and 45 years for extraction. The KazMunayTeniz offshore oil company — a division of KazMunayGaz — holds a 50% stake in the project. Rosneft holds 25%, and the Russian state company ZarubezhNeft (specializing in offshore drilling) holds an option for the remaining 25%.

Kurmangazy is named after a 19th-century Kazakh musician, a monument to whom is now being erected in Russia’s Caspian city of Astrakhan in connection with the agreement just signed. Kurmangazy reverted to Kazakhstan under the terms of the 1998 bilateral agreement on the division of the Caspian seabed between Kazakhstan and Russia. That same agreement left the Khvalinskoye oilfield on the Russian side, and the Tsentralnoye field under shared jurisdiction. Signed by Russia’s then-president Boris Yeltsin and Nazarbayev, the agreement followed a Russian-proposed principle of the “modified median line” to divide the respective sectors. Russia was able to modify the line in its favor by citing earlier investments in the prospection of the area, as well as the sudden emergence of a mud volcano on the Russian side as an argument for drawing the line in a way that extended the Russian sector.

A follow-up, Putin-Nazarbayev agreement in 2002 confirmed Kazakhstan’s ownership of Kurmangazy on two conditions: First, although owned by Kazakhstan, Kurmangazy would be turned into a Kazakhstan-Russia parity venture. Second, its output would have to be exported via Russia (as opposed to a trans-Caspian route), the Caspian Pipeline Consortium (CPC) pipeline from Kazakhstan to Novorossiysk being the option of choice. It was at that point that the Kremlin chose the state-owned Rosneft (a relatively minor player in 2002) as the Russian partner in this project. A surprise decision at the time, it looks in retrospect like an early move by Putin to expand the role of the state sector as against privately owned companies in Russia’s oil industry.

Thus, the decisions of 2002 and 2005 signify yet another success by Russia in tightening its control over the export of oil from Kazakhstan to consumer markets. It is, moreover, the first major production agreement to be signed by Russian companies in their own right in Kazakhstan, without Western involvement. Thus far, Russian companies have only been minor partners in Western-led oil and gas projects in Kazakhstan.

Putin stayed on in Astana specially for the signing of this project, one day after the Shanghai Cooperation Organization’s July 5 summit in that city (see EDM, July 6). On the same occasion, Russia’s Industry and Energy Minister, Viktor Khristenko, professed to reassure Kazakhstan publicly that the choice of transit routes for the country’s oil is for Kazakhstan itself to determine as matter of sovereign right. Irrespective of the degree of sincerity in such reassurances, Kazakhstan ought to take them at face value in deciding, along with its Western partners, to export the oil from the super-giant Kashagan field — due on stream by 2008 — by a trans-Caspian route and on via the South Caucasus, directly to consumer countries.

(Interfax, RTR Russia TV, July 5, 6)