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28/09/2007 | Kazakhstan - End of an Era

Stratfor Staff

The Kazakh parliament approved a measure Sept. 26 empowering the government to re-fabricate any contract it desires. If implemented, the decision will mark the end of Kazakhstan's oil-fueled economic growth.

 

The Kazakh parliament unanimously approved a bill Sept. 26 that would allow the government to modify or break any contract unilaterally in which the "interests of Kazakhstan" are threatened (as defined by the government). The decision will certainly give the government what it is looking for in ongoing contract negotiations, but at the cost of freezing the country's economic development.

Kazakhstan is a landlocked former Soviet state in the middle of Asia, with neither decent transport links to the rest of the world nor a meaningful industrial base from which to grow. All hopes for the country's future have been placed in its large oil and natural gas reserves, and for the past 15 years Astana has adopted among the world's most open investment laws in order to encourage development.

It has been slow going -- Kazakhstan started from almost nothing -- but the strategy has paid off. Kazakhstan now produces 1.3 million barrels per day (bpd) of oil, and if the projects currently signed are completed, within 10 years it hopes to be producing 3.5 million bpd.

The crown jewel of this plan is Kashagan, a field that is expected to produce 1.5 million bpd (up from zero today).

The project certainly has management issues. It is run by a consortium of several firms that have worked neither efficiently nor well together, but Kashagan brings its own problems to the table. The field is one of the most technically challenging in existence, boasting vertical and variable deposits loaded with high-pressure hydrogen sulfide. The field itself is in a high wind zone that freezes over in the winter. Kashagan will be the most technically challenging -- and expensive -- oil project ever attempted.

Now it looks like the project is dead on arrival.

For the past few years, President Nursultan Nazarbayev has aggressively consolidated his control of the country and now wants a much higher take of the country's energy revenues. All projects now, by law, have to have a 30 percent state component.

As for Kashagan, Nazarbayev already has forced the consortium, led by Italy's ENI, to let the state into the project, and now he demands a 40 percent share. The Sept. 26 law is explicitly linked to Kashagan -- even its expected date of activation, Oct. 22, matches the deadline Nazarbayev has given ENI to accede to his demands. Other Kashagan participants include Royal Dutch/Shell, ExxonMobil and ConocoPhillips.

If the law is formally adopted, it will end not just the Kashagan project -- which was of questionable economic feasibility before the new bill -- but also Kazakhstan's emergence as an energy player. Kazakhstan is not only a challenging and expensive working environment, it also is geographically isolated. To bring its energy to market it must first transit other states for thousands of miles. The only reason that any sizeable investment exists in Kazakhstan is its previous liberal investment environment. Nazarbayev's consolidation program is killing that.

Moreover, the new law is the very definition of overkill. No one doubted that if Nazarbayev wanted to he could force his will on Kashagan -- after all, he does control all branches of the government with a dictatorial grip -- but changing the country's legal framework so that the ability to abrogate contracts is actually in the legal code is akin to going rabbit hunting with a nuclear warhead. Sure, you will get the rabbit, but you will get everything else too. It is greedy. It is shortsighted. It is about to become policy.

If the law is adopted, the complexion of Kazakhstan will greatly change. No new investment will seek Kazakhstan when the country formally reserves the right to set unilateral terms at any stage in the process. And this dark future is not limited to energy. The law's text does not limit state-dictated changes to any specific sector -- it will freeze all development in all sectors.

The best that Kazakhstan will be able to hope for is a Venezuela-like situation, in which foreigners freeze all expansion efforts and focus solely on inexpensive methods of maintaining existing output. In Venezuela output has fallen from 3.5 million bpd to 2.3 million bpd since government restrictions began 10 years ago.

In fact there is only one state that might be willing to operate under such constraints, a country for which economics really does not factor into its calculus: China. Beijing needs energy and does not much care what it has to do to get it, but this is hardly a panacea for Astana. Chinese firms might not be picky about terms so long as they can take the oil, but they lack the technology to develop most of Kazakhstan's complicated energy fields. For geopolitical reasons, Russian state firms could be interested in some projects, but their technological prowess is even weaker -- and their pocketbooks slimmer -- than China's.

Stratfor (Estados Unidos)

 



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