Commodities, Energy, Frontier Markets

Kazakhstan’s Energy Sector Will Find Relief, Eventually

  • Low energy prices, flat production, project delays and aging fields will continue to plague Kazakhstan’s energy sector in 2016.
  • These difficulties will force the Kazakh government to continue downsizing its state energy firm to keep it afloat financially.
  • However, a series of projects that will be in development in 2016 could give Kazakhstan a boost in production and exports by the end of the year and into 2017. These developments will not solve the energy sector’s overall problems stemming from low energy prices, but they will give Kazakhstan a slight reprieve.  

By Stratfor Global Intelligence

Kazakhstan Oil - Embassy of the Republic of Kazakhstan

As in neighboring Russia, Turkmenistan and Azerbaijan, energy revenues are the lifeline of the government and economy in Kazakhstan. Energy revenues make up some 40 percent of the government’s budget. The country reveled in the high energy prices of the past decade and in the amount of foreign involvement in its energy sector, where foreign firms took on the heavy costs of tapping difficult reserves. Until recently, with the exception of the 2008-2009 recession, Kazakh GDP growth has exceeded 6 percent each year since the country’s energy sector boom began in 2000.

But the past two years have been tough on the Kazakh energy sector; the profits of state energy firm KazMunaiGas and its subsidiaries have declined as their expenses have risen. The biggest blow to KazMunaiGas has been the low oil prices seen since mid-2014. Approximately 80 percent of KazMunaiGas’ revenues come from the sale of oil, natural gas and refined products, and low energy prices have shrunk the company’s profits by more than 75 percent during the past year and a half.


Low oil prices, however, are not the Kazakh energy sector’s only problem. Oil and natural gas production in Kazakhstan have remained flat during the past four years, despite the government’s plan to increase production by between 2 and 8 percent each year. Kazakhstan produces 1.7 million barrels per day (bpd) of oil and 19 billion cubic meters of natural gas. Nearly 40 percent of this energy production comes from two large fields, Tengiz and Karachaganak, which were launched by major Western firms over the past two decades. The Western-led consortia for Tengiz and Karachaganak have refused to move forward with production expansion plans because of low energy prices and the Kazakh government’s financial pressures on the projects.


Kazakhstan’s third-largest Western-led project, Kashagan, was intended to be the country’s beacon of hope for increasing production. Considered one of the five largest oil fields in the world with an estimated 35 billion barrels, Kashagan was initially slated to start production in 2005 and ramp up to more than 1 million bpd by 2015. However, production at the notably difficult field, which is afflicted with treacherous weather conditions, spats between the consortium members and extremely high sour gas content, did not begin until 2013. At the end of 2013, leaks caused by the corrosive properties of the sour gas were found in the pipeline system, and the entire project stopped production yet again. The Kazakh government has tried to pressure Kashagan’s consortium to work faster to get the field producing. Meanwhile, the cost of the project, which was initially set at $10 billion, has soared to $46 billion and could exceed $60 billion.

Kazakhstan’s other major problem in trying to boost energy production and revenues is that the remaining 60 percent of oil produced comes from aging fields from the Soviet period that are mostly run by KazMunaiGas or its subsidiaries. According to a Stratfor source, most of these Soviet-era oil fields not only are in sharp decline, but also can only be profitable if oil prices are above $60 per barrel.

All of these issues have led Kazakh GDP to grow by slightly less than 1 percent in 2015. The government estimates it will grow by 2 percent in 2016 as long as oil prices are above $40 per barrel. In recent weeks the government has been holding economic stress tests in case oil prices fall to $30 or even $20 a barrel, though it is not clear what the government could do to mitigate such losses.

These problems have also led the state energy firm and its subsidiaries to start looking for alternative sources of cash. KazMunaiGas’ debt is $18 billion, half of which is due in 2016. The company has lofty plans for investment next year, which many Kazakh analysts believe will be financed with new debt or delayed. The Kazakh government has announced that it will try to privatize shares of KazMunaiGas and its subsidiaries over the next few years. The company is already floating shares or ownership of more than a hundred subsidiaries, 51 percent shares in the big three Kazakh refineries, and all of its foreign assets except offices in London, Beijing and Moscow. In September, KazMunaiGas sold half of its shares in Kashagan to the Kazakh state wealth fund, Samruk-Kazyna, for $4.7 billion with the stipulation that it would buy the shares back between 2018 and 2020, when the company’s financial burden is lighter.

Although 2016 looks to be just as rough for Kazakhstan’s energy sector as the past two, several developments could start to turn things around toward the end of next year and going into 2017. First, the Kashagan consortium and Kazakh government are fairly sure that the megafield will start producing in December 2016, after all the pipes have been replaced. Though it will take years for the consortium members to start reaping profits from their investments, the Kazakh government is expected to make billions in taxes and other financial obligations each year the project is producing.

Second, the Kazakh government is pressing Chevron to make a decision in April 2016 to start expanding production at the Tengiz oil field — something the Kazakh government has lobbied the Chevron-led consortium running Tengiz to do for years. Increasing production at Tengiz would bring in another estimated $34 billion in investment and create tens of thousands of jobs. An expansion at the Tengiz field would occur in anticipation of the completion of the next phase of the Caspian Pipeline Consortium oil pipeline, which would run from Kazakhstan to the Russian Black Sea port of Novorossiysk. The pipeline expansion is expected to be complete by the end of 2016 and will double the pipeline’s capacity from 700,000 bpd to 1.4 million bpd.

Lastly, in 2016 Russia and Kazakhstan are set to launch the Eurasia Project, which involves Russian firms sharing technology with KazMunaiGas during the next six years to help the company drill deeper into its aging fields. This is expected to nearly double the Kazakh energy firm’s drilling capabilities. Costs will remain high at Soviet-era fields, but new drilling technology will extend their usefulness.

Overall, 2016 will be a bleak year for Kazakhstan’s energy sector and for the country more broadly. However, developments are on the horizon that could help alleviate the financial pain caused by continued low energy prices.

Courtesy of Stratfor Global Intelligence, © 2015 Stratfor
Stratfor is a geopolitical intelligence firm that provides strategic analysis and forecasting to individuals and organizations around the world.  For more information, please visit Stratfor Global Intelligence


One thought on “Kazakhstan’s Energy Sector Will Find Relief, Eventually

  1. Reblogged this on World Peace Forum.


    Posted by daveyone1 | December 29, 2015, 4:03 pm

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