Kazaks Unveil Grand Oil Plans

Monday, 21 February, 2005

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Venera Abisheva

Kazak president Nursultan Nazarbaev has pushed through a new strategy to accelerate the oil industry in the Caspian Sea. The haste with which he has acted indicates that officials are concerned about the impact of a revival in Iraqi oil production following the war.

Nazarbaev has also been pressing western firms involved in the giant Kashagan offshore field to make an early start to production.

He issued a decree approving the Caspian programme in mid-May. The plan forecasts that oil production will treble over the next 12 years, making Kazakhstan a major producer in world terms.

Analysts in Kazakstan say the document is strategically vital, and overdue. It will open the way to dividing up Caspian oilfields and putting out tenders for working them. When IWPR approached Kazakstan's Ministry of Energy and Natural Resources, officials refused to comment on the details of the document, saying they were confidential.

From what has been made public, the programme says that within the next 10 to 15 years offshore production will outstrip that of onshore fields, currently the only source of oil. While there is still scope for raising the latter output, most future impetus will come from the Caspian Sea. The prize there is the giant Kashagan field, now under development by a six-member western consortium led by Italy's Agip and also including ExxonMobil and Royal Dutch/Shell.

The programme expects commercial extraction in the Caspian - for which read Kashagan - to start in 2005. Annual production will build up to 40 million metric tons by 2010, while in the five years to 2015, output should reach 100 million tons. For comparison, Kazakstan produced 47 million tons of oil last year, according to the latest edition of British Petroleum's authoritative Statistical Review of World Energy, published in June 2003. Saudi Arabia, the world's largest producer, pumped 418 million tons.

The Kazak government's plan is clearly based on the most optimistic estimates for a start to Caspian production. The consortium members have been saying the date should be pushed back by a year or so, to 2006 or 2007. But according to a June 9 report in the Financial Times, President Nazarbaev has warned them to keep to the 2005 date - or else he will impose hefty fines.

Political scientist Dosym Satpaev says it's clear that the government wants to get the new policy in place as soon as possible because it fears that foreign investors will lose interest in Kazak oil once Iraq - with the world's second largest reserves - starts serious production. Although firms from a number of countries are involved in Kazakstan, the United States - likely to be a major consumer of Iraqi oil - is the most significant in political and commercial terms.

As evidence for their concerns, Kazak analysts cite US plans to invest in increased output and build new pipeline capacity for Iraqi oil industry.

"There have been no fundamental changes so far," said political scientist Berik Barlybaev. "But they may take place if the US alters its policy in the Caspian region and invests money in Iraqi oil. That could reduce the scale of [Caspian] investment."

The Institute for Strategic Research, which works for Nazarbaev, is keen to downplay concerns. "No changes should be expected in the state's oil policy," said institute analyst Adil Kojikhov. "This is because Iraqi and Kazak oil are not fundamentally in competition, especially in terms of the international marketplace and the quality of their crude oil." Kojikhov sees the main future demand for Kazak oil coming from Europe and Russia, rather than the US.

Nevertheless, there are several risks associated with Kazakstan's oil industry that raise question marks about its ability to fulfil its ambitious programme.

First, there is the effect of changing oil prices. It is unclear how the international oil price is going to behave over the period covered by Kazakstan's oil strategy, but in the short term the only debate seems to be about how far it will fall. In late June, the London financial analysts Bloomberg reported that consensus opinion suggested prices would fall this year and next, though still remaining above the important 20 US dollars a barrel marker.

Any longer-term slump in prices resulting from an excess of Iraqi oil exports will be toughest for those countries whose extraction and transportation costs are relatively high - among them Kazakstan.

Second, assessments of the true potential of Caspian oil differ considerably. The Kazak government programme assumes there are eight billion tonnes (around 60 billion barrels) of oil and gas in the part of the sea it controls - and that means the amount that is recoverable, not just hypothetical reserves. Yet western investors said last year that Kashagan, the major field, held just seven to nine billion barrels of proven reserves.

The volumes likely to be exported also affect issue of whether there will be enough pipeline capacity to carry the expected Kazak oil to market.

Perhaps the most important issue, though, is the investment climate. There is a perception that in its dealings with foreign firms, the government changes the rules whenever it feels like it. In January, for example, the government brought in a controversial law which left foreign firms worried that they would have to renegotiate existing contracts. A month later it revoked a tax concession it had previously granted to the Kashagan consortium. And last year ChevronTexaco simply closed down production at the Tengiz oilfield after falling out with the Kazak authorities over financial matters.

Political scientist Andrei Chebotarev of Transparency Kazakstan told IWPR that conflicts arising out of this unstable investment climate will obstruct the government's strategy for boosting production. The so-called "Kazakgate" scandal, in which a US court is investigating allegations of high-level corruption involving Kazak officials and western oilmen, will further reduce confidence in the country, he said.

The poor investment climate is the factor that makes Kazakstan most vulnerable to investors pulling out - but unlike oil prices and the size of reserves, it's something that the government can influence.

Venera Abisheva is the pseudonym for a journalist in Almaty