A Struggle Over Energy May Alter Kazakhstan's National Fund

Some officials and experts in Kazakhstan believe the government has "lost control" over the country's energy sector, and want to take steps to reduce the influence of foreign conglomerates over oil and gas development. A few have reportedly proposed tapping into Kazakhstan's oil fund to finance new state-controlled energy ventures. But the idea is encountering stiff resistance from top Kazakhstani finance officials.

On October 23, Nefte Compass magazine quoted an anonymous source as saying that some officials in President Nursultan Nazarbayev's administration want to divert some of the National Fund of the Republic of Kazakhstan's assets, via the national development bank, to develop oil and gas projects. The $1.6 billion fund is ostensibly designed to serve as a savings vehicle to safeguard the country's stable development. Fund-backed projects are supposed to have broad social benefits. On October 30, Kazakhstanskaya Pravda quoted Nazarbayev as saying in an address that the fund "has been set up to protect the domestic economy from volatile external environments."

According to Nefte Compass, some government officials, including Prime Minister Imangali Tasmagambetov, are embracing a protectionist view concerning energy development, and are looking for ways to encourage a greater local presence in the oil and gas sector. Their goal is for Kazakhstan to gain parity with Western oil giants in the country's energy development ventures.

Oil represents a major store of Kazakh wealth, and much of it sits in foreign hands. "The
state has practically lost control over the largest and the most promising oil and gas fields," says
Sergey Smirnov, Senior Research Fellow of the government's Institute of Strategic Studies. He claimed 75 percent of geological reserves of oil and 79 percent of gas reserves are controlled by foreign capital.

The state oil and gas company, KazMunaiGaz, at present lacks the capital to finance large exploration projects, according to Nefte Compass. This is prompting the economic nationalists within the administration to explore new sources of funding.

An informed observer, who spoke to EurasiaNet on condition of anonymity, suggested the National Fund proposal is a reflection of "a struggle for oil among Kazakhstan's interest groups." The observer goes on: "this struggle intensified [over the] last year, prompting Nazarbayev to urge leading financial and industrial groups to consolidate and finance development of the Caspian shelf together."

Various Kazakhstani interest groups, including those controlled by friends and close relatives of Nazarbayev, have engaged in intense jockeying over lucrative economic sectors, including mass media. [For background see the Eurasia Insight archives]. The economic struggle spilled over into the political realm in 2002 with Nazarbayev cracking down on the opposition movement, Democratic Choice of Kazakhstan (DCK), whose leaders included several prominent entrepreneurs. [For additional information see the Eurasia Insight archives].

Oleg Yegorov, an oil expert from the Institute of Economic Research of Kazakhstan, has publicly backed the idea of mobilizing the National Fund to help make KazMunaiGaz more competitive. A top KazMunaiGaz official is Timur Kulibayev, a son-in-law of the president.

"The National Fund must not be kept in an amorphous state," Yegorov said. "I do not mean all the funds have to be taken and allotted for this purpose since this is a fund for future generations and it should be replenished. Thus, financing of petroleum refining is much more profitable than [the extraction] of crude oil."

The nascent debate over the utilization of the state's oil fund is not unique to Kazakhstan. Indeed, in Azerbaijan, President Heidar Aliyev's has already decreed that money in that country's oil fund will be used to finance construction of the Baku-Tbilisi-Ceyhan pipeline. The July decree specifies that oil fund assets will used to finance at least 30 percent of the state oil company's $220 million share of pipeline construction costs. The decree would thus divert at least $66.5 million of the fund's estimated $600 million in assets to the state oil company, SOCAR. Some experts say the amount drawn from the oil fund could be significantly higher.

Few observers expect the Kazakhstani government to use state oil fund money to finance oil and gas projects in the near future, in large part because some powerful officials won't endorse the concept. The Nefte Compass source says that National Bank of Kazakhstan head Grigori Marchenko opposes the idea, as does the deputy head of the presidential administration, Yerzhan Utembayev, who reportedly has a prominent voice in economic matters. These officials reportedly believe that using National Fund assets for energy development ventures goes against the best interests of Kazakhstan. The fund's charter, as Nefte Compass notes, says investments should be in "stable and liquid foreign financial holdings" so that they can offset gaps in the government's collection of tax and fee revenues.

Some Kazakhstani officials complain that energy ventures are increasingly funneling exports through offshore havens – including Bermuda and the Virgin Islands – thus reducing tax revenue due to Astana's coffers. Indeed, exports from Kazakhstan to offshore zones have increased from $100 million in 1995 to $2.2 billion in 2000. During the most recent reporting period, $1.1 billion of $5 billion in total oil exports passed through the offshore zones, MP Valeriy Zemlyanov told the Respublika newspaper. Since oil ventures sell energy to trading companies in offshore havens at deeply discounted prices, Zemlyanov estimates the state lost as much as $2 billion by letting oil flow this way.