In early October in Astana the 5th Eurasian Energy Forum KAZENERGY was held, organized by KAZENERGY, the Kazakhstani association of enterprises of the oil & gas and energy sectors. By admission of the event participants, for the five years of its existence the forum has become an essential discussion platform for the international energy community. This time the discussion was focused on the forthcoming changes on the energy map of Eurasia, and on what new risks and opportunities this transformation entails.
Considering the global character of the agenda, it is not surprising that the majority of speakers at the forum were prominent people. Among them, the most powerful and outstanding figures were former Prime Minister of Australia John Howard, former President of Poland Aleksander Kwasniewski, ex-Chancellor of Austria Dr. Alfred Gusenbauer, and former Prime Minister of the Czech Republic and President of the European Council Mirek Topolanek. Secretary General of the World Energy Council (WEC) Christoph Frei, World Petroleum Council President Randall Gossen, and Secretary General of the Gas Exporting Countries Forum Leonid Bokhanovskiy share their vision of the future energy sector. The representatives of the Kazakhstan government and heads of leading international and domestic oil & gas and energy companies took an active part in the forum.
In his welcome speech opening the event, KAZENERGY Association Chairman Timur Kulibayev emphasized that in today’s conditions it is important to realize how dynamically the world energy market is developing. “The role not only of new supply centers and new sources is increasing, but that of new types of energy as well. Atom, shale gas, energy of sun and wind… We have to analyze the future of energy of a new generation in order not to become the hostage, but a participant of the future changes.” In view of this, it is not by chance that a separate session in the forum was devoted to alternative energy development. However, Kazakhstan is a country-exporter of hydrocarbons. Thus, the forum program was mainly focused on oil and gas issues.
The Kazakhstan government officials used the tribune of the forum to announce the country’s position on major issues, related to energy security, and to share the plans of further development of the domestic oil and gas industry.
By statement of Kazakhstan Prime Minister Karim Massimov, the republic is carrying on intensive work to reduce a gap of uncertainty between the risks and opportunities in the energy sector, resulted from the recent world economic recession and the accident in the Gulf of Mexico. “Kazakhstan recognizes the general interests of the suppliers, consumers and those who transport energy resources, which are aimed at maintaining the world sector security. Kazakhstan will be acting as a reliable and safe supplier of energy resources to external markets.”
Regarding the point of reliability, the head of the government stressed that the oil spill at Deepwater Horizon became a tragedy for the environment with long economic and social consequences. This is especially topical for Kazakhstan, as the latter ties further development of the sector with offshore hydrocarbons production. “I gave an assignment to work out options of protection against or diminishing possible risks while carrying out offshore drilling. The Ministry of Oil and Gas in collaboration with the Environmental Protection Ministry set up a working group for consideration of safety issues in the carrying out of onshore and offshore petroleum operations in the Caspian.” The republic is intending to execute an intergovernmental protocol with neighboring states in the Caspian region over the safety of offshore oil production. Along with that, Mr. Massimov accentuated that the government will be “controlling non-target actions of the companies and the operators of projects.” “We will be closely working with the industrial sector so as to be sure that high standards apply in Kazakhstan and that the required balance between the goals of preserving the environment and development of oilfields is reached.”
Here at the forum the Emergency Minister of Kazakhstan Vladimir Bozhko and his colleague from Azerbaijan Kamaladdin Heydarov entered into an intergovernmental agreement for interaction in responding to emergencies in the Caspian Sea.
Minister of Oil and Gas Sauat Mynbayev announced the major performance indicators, characterizing the sector development dynamics. He reminded that today the proved recoverable reserves of Kazakhstan exceed 5 billion tons for crude oil and 3.7 trillion cubic meters for natural gas. The estimated oil output in 2010 will be some 81 million tons; of them, 68 million tons will be for net exports. “Kazakhstan is among a few other states, where the peak of oil production is ahead. Say the forecast for 2020 is 130 million tons. This means the possibility of exporting oil from Kazakhstan within 40–50 years in the amount of 80 million to 100 million tons a year.”
So, we have to admit that the forecast data provided by the Minister, both in terms of volume and timeframes, are considerably adjusted, compared to those statements announced a few years ago. It is not surprising that the plans of export routes diversification have changed. From now on the main focus will be made on expansion of already existing facilities, in particular, CPC (where the quota of Kazakhstan will increase from 27 million tons to 52.5 million tons) and KCP (the carrying capacity of the Kazakhstan-China pipeline will reach 12 million tons by next year).
Regarding the Kazakhstan-Caspian transportation system (KCTS), “this is a matter of the future, referred to 2018–2020.” It is worthy noting that our government officials still call this route one of current importance. Along with that, Mr. Mynbayev emphasized that, of course, diversification is needed; however, the “issues of commercial feasibility and what is the most important thing – comprehension and feeling that we are a desired partner in the project – are not of less importance. If this is not so, the motivation to seek alternatives is inevitable.”
It is not difficult to understand at whom they give a dig. It is no secret that the false start of the project resulted mainly from that tension, which had occurred because of the participating interests in the project, with the companies – potential consignors of oil. Partly, this was confirmed by the National Company KazMunayGas Chairman of the Board Kairgeldy Kabyldin later in his speech. In his opinion, the “analysis of motivation of extracting companies and other key players of the global oil & gas market for their compliance with the export strategies of the extracting countries” should become one of the aspects of risk regulation in the planning and implementation of hydrocarbons transportation projects.
Concerning gas production, according to Sauat Mynbayev, Kazakhstan will make an accent on joining the transit gas pipeline Turkmenistan – China through the construction of the inner pipe Beineu – Shymkent. With regard to joining the Nabucco project, he said that the so-called net back price from the Russian direction is now higher (moreover, Kairgeldy Kabyldin announced that Kazakhstan has no available resources of gas at all for this project).
In general, speaking of the policy in the field of transportation, Kazakhstani government officials stressed that the priority here will be given to the inter-country partnership relations, ability to predict actions and execute needed contracts, and take intro consideration the multilateral interests. The Minister of Oil and Gas made the interaction with Russia an example of “self-value of a long-term partnership”. In 2009 the supplies of gas from Russia to Europe reduced by 9%, compared to 2008, and the supplies to Belarus and Ukraine by 30%. Accordingly, the supplies of Central Asian gas to Russia reduced more than twice as well. However, this reduction did not affect Kazakhstan. “I explain why this was of special value to us. The matter is that almost all our is associated petroleum gas and the impossibility to sell it means a reduction in the output of liquid hydrocarbons fractions. This entails much greater losses than just failing to sell the gas. We remember and appreciate this partnership deed,” Mr. Mynbayev said. “The other fact is that we greatly advanced with the CPC expansion. The latter thing saves us from seeking alternatives for some period of time.”
The Minister also commented on “some crucial issues concerning the investment climate in Kazakhstan which were discussed lately”. In particular, he again assured that the government of the republic is going to reconsider contracts with the mineral producers, if the latter continue fulfilling their duties. “If they fail to do that, there is a disputable situation. In majority of cases, we are striving to solve this through negotiations”.
With regard to the increased tax burden on the extracting sector, he emphasized that the tax burden did not affect the stabilized contracts. Concerning the rest of the contracts, this is the “right of the state”. Along with that, in his opinion, the increased tax burden is adapted to the crude oil price level “that is fair”.
Vice Minister of Economic Development and Trade Timur Suleimenov announced in more detail the position of Kazakhstan on this matter. According to him, it is necessary to clearly realize that in the countries with a well-developed energy sector, the burden, due to which the measures of economic support will be implemented, will most likely lay on the extracting industries. “Neither of the states on the given stage can afford to increase burden on the non-raw material sectors, but money has to be raised somewhere. Most likely, petroleum companies are now and will in the future fill this reserve”. On the other hand, the government realizes that these measures are short-term, since in the medium-term and long-term prospect the petroleum industry will not be able to ensure the stable balance and increased hydrocarbons supplies without considerable investments in exploration and production. In connection with this, Mr. Suleimenov believes that the common task of the national governments and energy companies is to find a fine balance that will allow the government to carry out the required “fiscal withdrawals” so as to leave sufficient funds and possibilities with the companies for implementation of their capital expenditure programs.
The Vice Minister paid attention of the investors, which were present at the forum that in the light of the AIID program “an extra corporate, social and economic responsibility to set up and develop allied processing productions” is laid on the extracting sector as the backbone of the economy”. Meaning the mineral producers have to become “a source of demand for new domestic producers”.
Following the relatively harsh statements of the domestic government officials, the speeches of the spokespersons of European countries sounded more complimentary. This is not a surprise. Today, the hydrocarbons share in the EU’s energy consumption structure is some 80%, and dependence on energy commodities imports will be growing. About 70% of all exported hydrocarbons go to the market of Europe, and this proportion is not likely change in the near future. According to Norbert Jousten, the head of the EU delegation to Kazakhstan, two thirds of the investments by Europe in our country are concentrated in the energy sector.
Ex-President of Poland Aleksander Kwasniewski believes that even now Kazakhstan is an important partner for many countries of Europe. “Your country has enormous reserves of oil and gas and not only that. Europe is also interested in the export of Kazakhstani uranium. I think the role of Kazakhstan will be strengthening”. Further, he called our republic an “exporter of economic and political stability in the region” that creates a promising environment for running business.
A special emphasis was put by ex-President of Poland on the forthcoming event, the OSCE summit in Astana. He emphasized that this event was last run 11 years ago in Turkey. “This is a sign of how the political role of Kazakhstan on the international scene has changed… You do have friends and we would like to help you. We need such a serious, stable and reliable partner for future socio-economic projects”, Mr. Kwasniewski summarized.
Analogous opinion was expressed by former Chancellor of Austria Alfred Gusenbauer: “…Many OSCE chairmen wished to conduct a summit and gather the members of the organization in one place, but only Kazakhstan succeeded in that. Now some sort of signal comes from Kazakhstan for all states. More and more countries and large companies are interested in this place. This territory has to become an economic bridge. Here, the large reserves of minerals are located.”
It is worthy noting that with regard to their own policies the foreign guests expressed their opinions more critically and emotionally. For example, former Prime Minister of the Czech Republic Mirek Topolanek, commenting on the state of matters with the Nabucco project, stated that the poor ability of the European Union to outline the general energy policy is seen as the basic problem. “I am afraid we will be discussing this project within the next 10 years without any action or events… I hope the large players in the European Union will be able to come to an agreement and begin investing in this project, since this route is quite important for our independence and security.”
Daniel Stein, Senior Adviser, for the Office of the Special Envoy for Eurasian Energy, U.S. Department of State, believes that to create new export routes from the Caspian region, a compromise has to be found. “It is necessary to succeed in selling any large idea. It is not a secret that the largest projects were being kept for a long time on the shelf as expensive and of low-attraction. After the recession, to raise funds will be a more complicated task… A variety of transportation projects available for today – South Stream, White Stream, Middle Stream, Blue Stream, the pipeline from North Iraq, CPC, КСТS, Nabucco etc. – all this seems incoherent and knotty, and it is not clear whether they will be implemented in fact… The best solutions are those the market provides, and the market has to give an ideal solution.”
By the way, the representative of the U.S. Department of State, probably, was the only one among the high-ranking officials at the forum, whose statements contained criticism against Kazakhstan. On the one part, he said good words about our country that in the past Kazakhstan had been a good example of success, achieved as a result of international cooperation in the area of mineral development, and deserved a good reputation for creating the investment climate for attraction of investors. On the other hand, Mr. Stein stated that in the last few months “we could hardly miss noticing the sign of some alarming actions, which can undermine trust on the contracts… The cases of accusation and criminal investigation that took place. We realize that the changing circumstances and other factors require the amendment of the agreements in effect, but this should be done on a fair basis, i.e. through negotiations.”
The words of the American official were not left unanswered. In particular, Kanatbek Safinov, Executive Secretary of the Ministry of Oil and Gas, announced that criminal cases are not initiated without ground. “There were times, when the investor acted relatively freely, while the state agencies did not react to that. Now the situation is changing, and we are revealing violations made in that period of time. My recommendations are to strictly obey the law, and then there will be no claims, even alleged ones, since there will be no ground for this… We guarantee the investors the compliance with the terms of the contract, provided that the balance of economic interests is met”. Also, he emphasized that the greater number of companies meet the terms and conditions of the contract and their liabilities. Along with that, “there are some investments that came to Kazakhstan with speculative purposes; they were raised in the condition of a mess in the law and managerial decisions that were present in those periods”. Now the government is trying to solve those matters, applying the contract termination as the extreme measure.
In conclusion, Mr. Safinov told that the investment climate in the framework of the law is not a dogma, but a constantly developing process. “Possibly, there is some swaying, but in general, we and mineral producers have a common understanding of how to build mutually beneficial business.”
At the end of the forum Dr. Shirin Akiner, a lecturer in Central Asian Studies at London University's School of Oriental and African Studies (SOAS), made quite an interesting summary of the said. According to her, for the time of its independence Kazakhstan passed a long way and learnt many lessons. One of them is that not all contracts concluded earlier were right and not all friendly relations declared turned out to be as such. Now the country wants to protect the national interests, and this is justified. “To me, it is a surprise that Kazakhstan did manage to become the follower of its central positioning. In the nineties, many people thought of Kazakhstan as a periphery, later on as a bridge. If you are a periphery, you are aside. If it is a bridge, people use it but not notice. Today the country has a deep understanding that it must become a center, around which things rotate.”
Shirin Akiner stressed that in today’s political and economic scene new players appeared, which set new game rules, and Kazakhstan is among them. “The process of negotiations over a bargain in Kazakhstan is not like it was in the nineties. The mineral resources belong to the Kazakhstan nation, and the latter wishes that their development will be fair for all the parties. Some time requires that the international community will be used to that and this will happen.”
That fact that Kazakhstan did have trump cards on the global energy map is apparently evidenced by the statements of international sectoral experts, according to which the demand for energy commodities in the next year will reach the pre-recession’s level. According to data of the World Petroleum Council President Randal Gossen, the global demand for energy commodities by the year 2030 will increase by 40% with an increase of 1.5% in average a year.
With this, the coal, oil and gas, despite the outperformance for the alternative types, will still remain the major energy sources in the world in the foreseeable future. To meet the growing global demand, huge capital investments are needed, while the total investments in energy infrastructure till 2030 are estimated at $26.3 trillion. Of them, $11.8 trillion has to be invested in the oil & gas sector. With this, about 80% of this amount has to be directed for exploration and production. So, Kazakhstan can count on a certain part of this pie.
Vice President of Statoil, Tim Dodson, believes that the most considerable contribution in providing the world with oil in the next 10 years will be made by Iraq, Canada, Kazakhstan, Brazil, Venezuela, and USA. Deputy Executive Director of the International Energy Agency, Richard H. Jones among the major sources of increased supplies among the non-OPEC member-countries called Canada, Brazil, Columbia, Kazakhstan and Azerbaijan. In general, experts agree in their opinion that in the mid of the twenties of the 21st century our country will be among the top ten leading producers and exporters of oil.
Meanwhile, even now the OECD member-states are stopping being the major consumers of hydrocarbons, little by little giving this place to the developing countries. In the last decade their share has dropped from 63% to 53%. With this, by forecast of experts, a 99% increase in the demand for oil in the next 20 years will be focused on the markets of Asia, Middle East and Latin America. For Europe, which entered into serious commitments on the Kyoto Protocol, the main topic of the agenda will be the development of alternative sources of energy and increasing energy efficiency.
On the one part, Kazakhstan has nothing to worry about. Even considering the fact that Kazakhstan is a land-locked country, nevertheless, the country has a strategic position from the viewpoint of options to select the routes for energy commodities supply. Moreover, China is the neighboring state. However, the proximity with the centers of consumption is by no means always a “trump” advantage as it seemed from the first sight. A technological break-through achieved in the USA in the area of production of shale gas and oil and expansion of LNG producing facilities has led to a situation where the suppliers who were customarily oriented to the North American markets started seeking alternative consumers. Along with the increased imports of oil and gas by its Eurasian neighbors, China is increasing the buying of hydrocarbons from other parts of the world. Even now the greater part of oil exported to China comes from Saudi Arabia, Oman, Sudan, Angola, and Venezuela (about 50%).
According to former Prime Minister of Australia John Howard, one of the factors that helped Australia to relatively easy overcome the economic recession was re-orientation to the market of China. “In the last year China became the major export direction for Australia – for the first time in the history of the two countries.”
Also, more and more gas comes to Europe from outside of Eurasia. In particular, the LNG supplies from Russia are substituted with ones from Norway and even Qatar.
So, the global energy map undergoes changes. The competitive struggle for the most advantageous markets is in full swing. Currently, Kazakhstan has no exessive oil to offer it to the said markets. It is not by chance that the topic of a possible delay in the Kashagan oilfield development 2nd Phase – the sheet anchor in the oil break-through of the country – had not been raised at the forum, at least in the reports and official discussions.