Kazakhstan's leaders, confident that demand for their country's oil will expand rapidly, are taking an aggressive approach on new exporting and licensing projects. As high oil prices boost Kazakhstan's economic health, the country's government is adopting a tougher negotiating stance with Western investors, while exploring deals with Russian and Chinese companies.
Analysts say the government's new approach, which would give the state a higher share of profit from new development projects, is based on a bet that Western conglomerates need Kazakhstan's oil. It is also rooted in Kazakhstan's improving economic climate. In late May, the Standard & Poor's rating agency upgraded Kazakhstan's debt to investment-grade. This exceeds the rating for every other oil exporter on the Caspian Sea, including Russia. While Kazakhstan does not sell many bonds to investors, the rating helps lower financing costs for state-owned concerns, such as KazMunaiGaz. [For background see the EurasiaNet archive].
The bond-rating adjustment coincided with new signs of boldness from Nursultan Nazarbayev, Kazakhstan's president. In a May 25 interview with The Financial Times, Nazarbayev stated that a southern pipeline to Iran could be "the most attractive" option for delivery of Kazakhstan's oil reserves. "It would be much better than Baku-Cehyan, better than China, better than Russia," Nazarbayev said.
Though such a pipeline has long been touted as offering the most convenient access route for Caspian Sea oil to Persian Gulf ports, US opposition to the project -- rooted in the lingering hostility marking Washington's relations with Tehran -- has long prompted Kazakhstan to steer clear of the project.
With oil priced at roughly $37 per barrel, Kazakhstan's additional profit power enables it to bargain hard. On June 1, parliament announced that it would add another $428 million to the 2004 budget to account for higher oil revenue. "They know what they're doing," said Carnegie Endowment for International Peace Central Asia analyst Martha Brill Olcott, who visited Kazakhstan in spring 2004. "These are not the blunderings of the Turkmen. There has been this real gain in expertise of a new generation of people in the economy ministries and oil ministries. They've figured out what the costs are and they know what margin of profit the Western firms work with. And their assumption is that [outside investors] don't have the right to make high-risk projections" that would justify modest payments to Kazakhstan.
To strengthen the government's position, one provocative step has already been taken. On May 20, 47 energy companies sent the government a letter objecting to potential laws that would give the state favorable terms on subsurface exploration. The Kazakhstan Petroleum Association, a lobbying bloc representing multinational corporations, effectively warned the government not to treat itself as a sole provider of regional oil. Olcott, though, suspects that companies with large investments already in place in Kazakhstan would not find it economical to pull out, even under the government's proposed terms for revenue from subsurface exploration. (The association did not respond to a request for comment).
Kazakhstan has tried to increase its negotiating leverage, sources say, by playing up its relative economic advantages over Azerbaijan, another Caspian Basin energy exporter. The credit upgrade has reinforced Kazakhstan's assertiveness. Also emboldening Astana is a deal with China, signed shortly before the announcement of the credit upgrade, to complete a long-planned pipeline to its border from Aktau, a Kazakhstani port. KazMunaiGaz will split construction costs with the China National Petroleum Corporation. The pipeline would deliver 10 million tons of oil to China a year by 2006, according to Chinese officials. While earnings for this project remain unclear, Kazakhstan's cheaper borrowing costs should boost its returns. Some analysts say that securing market entry to China matters more to Kazakhstan than the revenues for one deal alone.
Nazarbayev's administration may also look to Russia as a business partner. "Kazakhs have lukewarm feelings about multinational companies," says Olcott. "Their Russian partners will come into smaller projects on terms that aren't as attractive for Westerners, because they can make side deals on transport." [For additional information see the Eurasia Insight archive].
For now, foreign investors remain cautious about Kazakhstan's capabilities and prospects. Some observers point out that Kazakhstan continues to grapple with substantial structural risks. In March, The Economist Intelligence Unit placed a high risk rating on Kazakhstan's macroeconomic situation. The group's report noted that "Kazakhstan suffers from the disadvantage that its oil production costs are relatively high and its tax and legal regimes increasingly unfavorable."
A wild card in Kazakhstan's energy development effort is an ongoing corruption case in New York, involving oil consultant James Giffen, who is accused of illegally transferring over $78 million to bank accounts controlled by top Kazakhstani government officials to help cement energy deals in the mid 1990s. [For background see the Eurasia Insight archive]. Potential revelations concerning oil deals could encourage political turmoil in Kazakhstan, which is preparing for parliamentary elections this fall. [For additional information see the Eurasia Insight archive].
Julia Nanay, who follows the region for the PFC Energy consultancy in Washington, said progress at the Kashagan field, due to produce 450,000 barrels of oil a day beginning in 2008, will determine how Kazakhstan can expand its production. Revisions to the contract for Kashagan and another field, Tengiz, prompted a standoff between Nazarbayev and investors in 2002. [For background see the EurasiaNet archive].
Alec Appelbaum is a freelance reporter based in New York.