Wednesday, 23 October 2002

POLITICAL TWISTS OF KAZAKH OIL BOOM

Published in Field Reports

By Marat Yermukanov, Kazakhstan (10/23/2002 issue of the CACI Analyst)

The genesis of the oil boom in Kazakhstan can be traced back to 1993, when Kazakh government and the American Chevron Corporation signed a landmark $20 billion contract, unanimously dubbed at home and abroad as "the deal of the century", to develop the Tenghiz oilfield jointly. Very few optimists could have thought at the time that the highflying joint venture would be generously rewarded for the risks taken within a decade. Foreign investors, despite all sorts of bureaucratic hurdles and ill-disguised pressure from the government of Kazakhstan, are stepping up production.

The genesis of the oil boom in Kazakhstan can be traced back to 1993, when Kazakh government and the American Chevron Corporation signed a landmark $20 billion contract, unanimously dubbed at home and abroad as "the deal of the century", to develop the Tenghiz oilfield jointly. Very few optimists could have thought at the time that the highflying joint venture would be generously rewarded for the risks taken within a decade. Foreign investors, despite all sorts of bureaucratic hurdles and ill-disguised pressure from the government of Kazakhstan, are stepping up production. As announced by chief executive director of the Chevron Texaco Corp., David O`Reilley, last year the output of oil in the Tenghiz field reached 87 million barrels, and an additional 100 million barrels were produced in the Karachaganak field. Over the last 10 years, the corporation has invested $4 billion into the oil sector of Kazakhstan.

Another encouraging sign of the growing oil industry of Kazakhstan became evident at the recent International Oil and Gas Exhibition held in the former capital Almaty. The event drew more than 360 companies from 30 countries, and for the first time business circles of Croatia, Finland and Malaysia were represented. As it was generally recognized, the exhibition was a great success and it contributed to the reputation of Kazakhstan as an oil country.

Oil is pivotal not only for the economic prosperity of Kazakhstan. It also greatly determines the political behavior of the leaders of the country. Kazakhstan never developed an independent and clear-cut oil strategy. Lacking funds to reconstruct its oil-processing plants, storage and transportation facilities, Kazakhstan has always vacillated between the oil giants of Russia and America. That inconsistency was particularly obvious when the government had to make a choice between the  Tenghiz-Novorossiysk pipeline and the American-favored Baku-Ceyhan route to bring Kazakh oil to foreign consumers. Asked why the government had finally opted for the transportation of Kazakh oil through Russia, the deputy Minister of Energy and mineral resources Uzakbay Karamanov retorted: "We try to follow simple rules: a bird in the hand is worth two in the bush".

Many moves of the government in the oil sector baffle even experienced oil experts. Strictly speaking, the benefits of Russian investments are not visible for the local population in oil-producing regions of Kazakhstan. In contrast, the revenues of Atyrau region from the Agip KCO company operating in the area is expected to total $1 billion 800 million in the year 2003. It is true that production comes first and foremost for foreign investors, often at the expense of the environment. Yet the whole network of social infrastructure in Atyrau region has been created by western oil companies.

Yet geopolitical factors seem to take sway over purely economic interests. Not long ago, Russia and Kazakhstan set up a joint venture "KazRossGaz". It was followed by the signing of an agreement on joint development of Kurmangazy oil field. Earlier both sides had reached an agreement to allow the long-term transportation of Kazakh oil through Russia. According to Azat Shamsurov of the Russian Lukoil Overseas Holding, annual Russian oil output in Kazakhstan is equal to 3,5 million tons, but they plan to invest   up to $250 million this year, which would help increase production.

The Kazakh-Russian rapprochement on oil issues after a period of cooling comes at a time when western investors are feeling a growing pressure from the government. Take the recent case of Chevron Texaco Corp., fined for storing 12,000 tons of sulfur, or the scandalous bribery allegations involving the American consultant James Giffen. The revelation did not surprise much the wide public in Kazakhstan. Big oil companies, domestic and foreign, have long been suspected of tax evasion and financial improprieties. Bribe-taking is normalcy in the current situation. Nevertheless, government officials contend that the investment climate has not worsened a bit in the country, and urge foreign companies to funnel more money to the oil industry. For a handful of them, but not for general public, oil fields are a real Klondike.

Marat Yermukanov, Kazakhstan

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