Business & Economics:
KAZAKHSTAN'S PRESIDENT PROMISES OIL BOOM
Mark Berniker: 7/02/03

On a recent trip to Canada, Kazakhstani President Nursultan Nazarbayev declared the country’s oil sector was ready to boom. Many multinational oil conglomerates, however, may not share Nazarbayev’s optimism. Foreign oil executives have grumbled of late about unfair Kazakhstani practices, including attempts to alter established contracts. Nevertheless, Kazakhstan’s abundant resources may render the country impossible for foreign investors to ignore.

A government initiative to raise energy-sector taxes could heighten corporate concerns about the Kazakhstani investment climate. Speaking at a joint session of parliament June 30, new Kazakhstani Prime Minister Daniyal Akhmetov told legislators that a government working group would prepare amendments to the country’s tax code by September 1. Akhmetov also characterized some existing oil-and-gas contracts as outmoded, but added that the government would not seek to rework deals made with foreign companies.

Akhmetov’s comments came just three days after Nazarbayev, while on a five-day visit to Canada, delivered a major address on Kazakhstan’s energy-sector development efforts. The president told a group of energy executives in Calgary that Kazakhstan plans to expand its oil production to 180 million tons by 2015, up from current levels of 50 million tons. That would more than triple the number of barrels Kazakhstan currently extracts each day.

Nazarbayev’s address comes at a time when Kazakhstan is hunting for $70 billion in capital, suggesting that the president may be trying to find a hedge against some existing deals with foreign oil companies that have become strained. Helping to inject tension into the Kazakhstani energy development landscape is a US bribery probe, involving merchant banker James Giffen. [For background see the Eurasia Insight archive]. In addition, Kazakhstani officials have become embroiled in disputes with foreign oil executives over development deals. In June, for example, Nazarbayev threatened a multinational consortium that includes ExxonMobil, Royal Dutch/Shell and Agip over the perceived slow pace of development at the Kashagan field off Kazakhstan’s Caspian Sea coast. [For background see the Eurasia Insight archive].

While in Canada, Nazarbayev seemed interested in offsetting the risk that the Kashagan deal might go sour. Minister of Energy and Natural Resources Vladimir Shkolnik announced plans to develop new areas of Kazakhstan’s Caspian Sea sector beginning in 2004. Industry press reported that KazMunaiGaz, the state oil company, will get the first opportunity to develop the new areas, and issue its own tenders for foreign investment in 2005. The government appeared to suggest that foreign corporations could bypass parts of the tender review process if they formed joint ventures with the state-owned company.

Nazarbayev may have chosen Canada for this announcement in part because the country provides a cooperative working environment. PetroKazakhstan, a Calgary outfit that has worked independently in Kazakhstan since 1996, has established a strong working relationship with the government. The company went to great lengths to make Nazarbayev’s Canada trip a good one. On June 29, the company announced the signing of a protocol with LUKoil, Russia’s massive oil company, to get access to the Russian-dominated Caspian Pipeline Consortium. In addition, on June 23, the day of Nazarbayev’s arrival in Canada, PetroKazakhstan announced the construction of a $77 million, 111-mile pipeline that stands to make Kazakhstani exports to western regions much more efficient.

PetroKazakhstan is also developing fields in the inland Kyzyl-Orda region, aiming to send barrels by rail to Atyrau, in western Kazakhstan, and then to Europe. Atyrau, on the Caspian Sea, is also a hub for the Caspian Pipeline Consortium’s oil pipeline, which heads westward through Russia’s Black Sea port of Novorossiisk. Bernard Isautier, a veteran energy executive who heads PetroKazakhstan, said his company is working on improving its pipelines from a refinery in the southern city of Shimkent in order to boost exports to both Iran and China. "The growth of oil production in Kazakhstan is one of the fastest in the world, and foreign investment is growing steadily – that’s reality," Isautier said.

Despite the concerns about Kazakhstani government practices, as well as the potential fallout from the US bribery probe, international investment interest in Kazakhstan, as Isautier indicated, remains high. [For background, see the Eurasia Insight archives].

Nazarbayev is setting his sights on new investors. He has tried in recent months to bolster ties between the Kazakhstani and Russian energy sectors. [For background, see the Eurasia Insight archives]. During his Canada visit, Nazarbayev touted a variety of export routes. "A very profitable route is the one from Kazakhstan through Iran to the Persian Gulf," he said. He also raised the possibility of building a pipeline from Kazakhstan to western China.

Meanwhile, human rights groups objected to Canada’s welcoming attitude toward Nazarbayev. "Kazakhstan’s vast energy wealth has made it an important geo-strategic partner for many countries, but it has not made the country more democratic," said Clayton Ruby, co-chair of Human Rights Watch’s Toronto Committee, in a statement. Ruby urged Canadian government officials to use Nazarbayev’s visit as an occasion to urge reform. "As the country’s wealth grows, the government is misusing revenue, consolidating power, and closing political space. Kazakhstan is starting to look like another case study in how oil windfalls bolster dictatorships rather than foster democracy." [For background, see the Eurasia Insight archives].

Editor’s Note: Mark Berniker is a freelance journalist specializing in business affairs in the former Soviet Union.