The proven large reserves of oil and gas (about 3% and 1% respectively of the world’s total) and significant forecast reserves (13-18 billion tonnes of standard fuel) in Kazakhstan, make investing in the fuel and energy sector a priority.

At the moment, hydrocarbons are being developed at 241 fields, consisting of extraction at 74 fields (31%), extraction and prospecting at 106 (44%), prospecting at 59 (24%) and operations unrelated to extraction at two (1%). A total of 142 companies are operating in the sector: 20 joint ventures, 48 foreign companies and 74 local companies.

In total, $40.6 billion in investment have been attracted to the sector. Most of the investment was in extracting hydrocarbons; as a result, output doubled and exceeded 60 million tonnes of oil and gas condensate and 27 billion cubic metres of gas. And the limit has not yet been reached: according to forecasts, the country will extract up to 100 million tonnes of oil by 2010 and about 150 million tonnes of oil by 2015.

It should be noted that Kazakhstan occupies the eighth place in terms of proven oil reserves in the world and second place in the CIS. The proven reserves will ensure extraction for 50 years for oil and 75 years for gas which is in line with the world average figure for oil-extracting countries. The future development of the domestic oil sector mainly depends on developing the Kazakh sector of the Caspian Sea, whose forecast reserves are quite promising.

Oil and Caspian off-shore development strategy and pipelines policy

After Russia, Kazakhstan was the second largest oil-producing republic in the former Soviet Union at the time of its collapse, with production of about half a million barrels per day (bbl/d) in 1991. Kazakhstan has significant petroleum reserves. Proven oil reserves as of today are 32,5 bln. barrels. Projected oil reserves are 100-110 bln. barrels by 2015, placing Kazakhstan in global top five. Some estimates say that the offshore Kashagan field alone may contain up to 50 billion barrels of oil. Kazakhstan’s vast natural resources are projected to provide 2-3% of the worlds expected oil demand within the next decade.

State-run Program of Development of the Kazakhstan’s Sector of the Caspian Sea (KSCS) (herein after referred to as the Program) was elaborated with due consideration of the Government Program for 2002-2004, Strategy of Energy Resources Exploitation, and Strategic Plan of Development of the Republic of Kazakhstan up to 2010.

The ultimate goals of the Program have been defined as contribution to sustainable economic growth and upgrade of life quality of the Kazakhstan’s citizens through rational and safe development of the Caspian hydrocarbons; and encouragement of related sectors’ development.

By 2002, most O&G fields under development had reached peak levels of annual production. Further growth of ashore production output was first of all linked to intensified development of such oilfields as Tengiz and Karachaganak. At the same time, research has shown that major gains in explored reserves and in hydrocarbons production are expected to take place in the Caspian aquatic area. According to world practice, starting from the point of exploration works in offshore, it normally takes 8-10 years to get to the commercial production stage. The Program provides forecast for up to 2015. The Program takes into account growing importance of off-shore O&G, and integrates principles of rational subsoil use and environmental safety requirements. The Program envisages turning of the KSCS into a major hydrocarbons production zone in Kazakhstan.

Apart from development of O&G in the KSCS, the Program provides for development of associated production, social and environment-protection facilities.

For the recent 30 years there have been certain trends formed that have the global GDP growing 3,3% per annum, with the demand for oil as the major energy source growing by 1% per annum.

Hydrocarbons consumption lagging behind from GDP growth is attributed to resource-saving programs implemented primarily in industrialized nations. At the same time, the share of developing countries in the global GDP and in hydrocarbons consumption has been steadily increasing. This adds to the problem of hydrocarbons supply sufficiency.

According to international experts, with the current trends maintained, the global explored oil resources will only suffice for the next 40-50 years. Inclusion of the KSCS (Kazakhstan’s Sector of the Caspian Sea) resources into the global explored reserves has become a major component of global energy strategies. Kazakhstan is to be ready for flexible mix of strategies of systematic relocation of oil production to the Caspian aquatic area with speed-up of selected promising projects.

Proximity to such dynamically developing nations as Russia and China opens wide opportunities for Kazakhstan’s hydrocarbons exports. To ensure entering into the markets of the two countries, it is vital to develop and enhance trunk pipelines system.

Emergence of independent states in the post-soviet territories entailed search for solutions to multiple problems arising upon gaining sovereignty by the once Soviet republics. One of the problems was territorial issues. Caspian littoral states faced the necessity to ensure fair and civilized delimitation of the Caspian Sea.  If up to 1991 the Sea had belonged to only 2 states, now its waters wash the coastlines of 5 sovereign states – Russia, Iran, Azerbaijan, Kazakhstan and Turkmenistan.

As of today, the Kazakhstan’s Sector of the Caspian Sea is regulated by the following agreements:

·        July 6, 1998 Kazakhstan and Russia signed agreement on delimitation of northern part of the Caspian Seabed, with a Protocol to the Agreement being signed in Moscow May 13, 2002.

·        November 29, 2001 Kazakhstan and Azerbaijan signed agreement on delimitation of the Caspian Seabed, with a Protocol to the Agreement being signed in Baku February 27, 2003.

·        May 14, 2003 Kazakhstan, Azerbaijan and Russia signed agreement on the junction point of lines delimiting adjacent zones of the seabed and subsoil of the Caspian Sea, which finalized the process of legal registration of the national sea bottom sectors of the three states.

Speed-up of elaboration and adoption by all of the littoral states of the Frame Convention on the Legal Status of the Caspian Sea incorporating issues of the seabed delimitation is an important political move in putting in place legal ground for the Kazakhstan’s sector exploration.

Up to recently, investments into development of the Caspian hydrocarbons potential were channelled within the frameworks of two projects – Northern Caspian Project and KazakhOil –JNOC Project. Northern Caspian Project is a logical continuation of the works started in 1993 by the International Consortium; it has been implemented on the basis of the PSA signed [on sea blocks] by Kazakhstan. As of January 1, 2008, investments within the Northern Kazakhstan Project reached USD 15,7 billion.

Works on the KazakhOil – JNOC Project started in March 1999. Expenses totalled USD 50 million. According to the basic agreement signed by KazakhOil and JNOC there was geological exploration performed, including areas Terenozek – Prorva and Northern Slope of the Bozashin Arch located in hard-to-reach zones of the intermediate part of the Caspian Sea.

KSCS development calls for solutions to problems reflecting inter-industry nature of tasks of long-run extension of maritime O&G operations, dependence of many development parameters on the composition of hydrocarbons and on geologic and technical conditions at the oilfields.

• gains in explored hydrocarbons resources and bringing of production to a stable high level;
• development of multimodal system of hydrocarbons transportation;
• reprofiling and modernization of domestic machine-building enterprises;
• development of the maritime fleet and sea ports;
• build-up of the local engineering capabilities; training of domestic specialists;
• enforcement of health protection and environment protection measures;
• development of petrochemistry enterprises.

The order of the KSCS resources development will be based on uniform allocation of blocks to subsoil users in northern, central and southern parts of the sea. Blocks adjacent to protected natures sites, recreation zones, defence sector facilities and large population clusters can bean exception.

The Government shall be in charge of defining blocks to be offered for tenders, and of defining the order and conditions of setting them forth for tenders.

The order of setting of blocks forth for tenders is a package of procedures targeted to ensure staged and rational development of production potential; the package includes defining of blocks’ territory, arrangement of tenders and negotiations with prospect investors.

At the present time, there are about 23 undistributed blocks, exploration of some of them is planned to be financed out of the state budget. To define the most suitable subsoil users for both exploration and development, the plan is to offer for tenders at least 3 blocks per annum. At the same time, there will be blocks offered for additional exploration. Thus, the initial stage will cover 7-8 years (up to 2010), in the course of which necessary amendments could be inserted in the schedule of development up to 2015 with a view of transportation and marketing issues.
On-land production has been performing by 33 companies at over 100 oilfields located in 5 oblasts. Major gains in production take place at Tengiz, Karachaganak, Uzen and some other oilfields.

The Kazakh Government’s commitment in cooperation with partners from abroad is to respect contracts signed with foreign companies but the contracts must be honoured by both sides. 

Research showed that substantial gain in hydrocarbons production is expected to take place in the KSCS.  Recoverable reserves of the KSCS stand at 8 billion tons. At the first stage – up to 2005– major works included drilling of exploratory wells in blocks of first priority.
Forecast KSCS resources allow bringing production at the KSCS oilfields to 100 million tons per annum and maintaining the said level for 25-30 years.

In January 2008 Kazakhstan successfully finished talks with Kashagan consortium (“Eni”, JSC “National Company KazMunayGas”, “ExxonMobil”, “Shell”, “ConocoPhillips” and “Inpex”). The companies signed the Memorandum of Understanding. The stake of “KazMunayGas” in the project was doubled to 16,8%, equalling the holdings of the largest western members of the consortium. “KazMunayGas” will take a bigger role in running the project. Kashagan is the largest single oilfield discovered anywhere in the world in the past 30 years. Annual production at Kashagan will make up 60 million tons in 2015.  Production at other blocks of first priority is expected to start in 2009-2010.

According to preliminary estimates, the Program implementation will allow bringing production at maritime oilfields to 40 million tons in 2010, and 100 million tons by 2015.

Source: Platts

As KSCS oilfields get developed, the need for diversification of export routes keeps growing.  Enhancement of export routes implies multimode transportation of hydrocarbons, with efficient combination of capabilities of pipe, railway and sea transport.

Below is the list of current and prospect routes for transportation of hydrocarbons from the KSCS oilfields:

·        Main oil pipe Uzen – Atyrau – Samara.  One of transit export routes for Kazakhstan’s oil via Russia. Given planned growth of oil production in Western Kazakhstan, there is a plan of staged build-up of the pipe’s carrying capacity.

·        Baltic Pipelines System is a promising route to increase Kazakhstan’s oil supply to the market of East Europe and Baltic States.

·        Caspian Pipeline Consortium (CPC). Given the attractiveness of the Mediterranean market for high-quality grades of Kazakhstan’s oil, CPC is a major export route. In this connection, carrying capacity of the pipe is planned to be expanded to 67 million tons by 2011.

·        Sea port of Aktau. Oil transfer capacities of the port and/or those of the Aktau port branches in the bays of Bautino and Kuryk is planned to be increased to 8 million tons per year.

The current transport systems will be sufficient for export of domestically produced oil up to 2009.

When after 2009 oil production in Kazakhstan hits the target of 92 million tons per year, including 21 million tons at KSCS, there will be a need for construction of the first new export pipeline. When production hits the mark of 140 million tons per year, including 54 million tons at the KSCS, there will be a need for construction of a second new export pipeline by 2012.

In this context, the following oil transportation routes are being considered:

·        Aktau – Baku (Baku – Tbilisi Ceyhan (BTC) pipe).

·        Project Western Kazakhstan – China. Access to the Chinese market and to Asia Pacific market for the Kazakhstan’s as a promising export route. There’s a master agreement between the Kazakhstan Ministry of Energy and Mineral Resources and the CNPC to construct a pipeline running from Western Kazakhstan to Western China.

·        Project Kazakhstan – Turkmenistan – Iran. According to preliminary research, this route is economically viable to export Kazakhstan’s oil to the Gulf countries. The project stipulates that the oil pipe starts in Western Kazakhstan and runs via Western Turkmenistan to northern Iran.

Kazakhstan oil export capacities 2005-2015 Pipeline Capacities  (in millions of tonnes per year)
	2006 confirmed	2010 most likely	2015 likely
CPC (Kazakh share)	23	50	55
Atyrau-Samara	15	25	30
Alikbekmola-Kenkiyak-Orsk	6	6	6
TransCaspian to Makhachkala	5	5	5
TransCaspian to Neka/ Neka-Jask	6	18.5	20-27 (or 40)
Trans-Caspian to Baku/ BTC	6-10	20	30-50
China	10	20	30
KTI	-	-	25
Rail	7.5-14.0	(15)	(15)
Totals:	78.5-89.0	158.5-159.5	201-228 (241)
Source: Platts

Kazakhstan’s policy is to make a positive contribution to global energy security. This largely aims Kazakhstan’s energy resources export strategy on diversification of the transportation systems.

In 2006-2010, investments into the KSCS development are expected to reach USD 12,9 billion, and another USD 16,8 billion in 2011-2015.

The core of the financial component of the Program is full assumption of exploration-related risks by subsoil users and investors up to the approval of the first plan of development.

To ensure gains in O&G production, it is possible to attract additional financial resources from Kazakhstan’s sources through issues of debt by subsoil users. The securities can be then purchased by domestic accumulation pension funds, second-tier banks, and other financial institutions, as well as individuals.

Maximum possible attraction of internal investment capabilities for the Program implementation should be a priority component of the financial strategy.

The Program implementation allows bringing oil production in the KSCS to 100 million tons in 2015. Assumed gas production will make up 63 billion cubic meters in 2015.

Performance of oil operations in the KSCS calls for vast investments: the need for investments in 2006-2010 will reach KZT 1545 billion ($10,3 billion).

Inflow of major part of oil revenues is expected upon completion of the first and second stage of development. At the third stage, the state budget is expected to enjoy substantial revenues coming from maritime operations.

The coal sector is also a priority investment area. Kazakhstan is among the world’s top 10 coal-rich countries, after the USA, Russia, China, Australia, India, South Africa and Ukraine. Kazakhstan contains Central Asia’s largest recoverable coal reserves. The state register records 142 closed mines and 55 open-pit mines. Most mines are located in central Kazakhstan (the Karaganda and Ekibastuz coal basins and the Shubarkol mine) and north Kazakhstan (the Torgay coal basin). Recoverable reserves account for 45% and unrecoverable 55%.

Mining is carried out at 53 mines, including 15 in the Karaganda coal basin, by 34 companies (one joint venture, five foreign and 28 local companies). The major companies are: Bogatyr Access Komir, Shubarkol Komir, Mittal Steel Temirtau, the Eurasian Energy Corporation, Maykuben West, Karazhira Ltd, the Kazakhmys Corporation and Gamma. These companies invested over $3bn in mining coal (however, only 1% of it was spent on prospecting). The annual volume of investment grew 10-fold in 2005 from 1996 volumes and totalled $375m; output reached about 80 million tons. This figure is expected to grow to 90 million tons by 2010 and 95 million tons by 2015.

The coal sector is said to have enough reserves to last over 100 years. In future, the development of the raw materials base will be achieved through enriching and improving the quality of the coal and the deep processing of coal to obtain fluid fuel and synthetic substances. Developing shale is also topical. As an alternative source of energy, methane from coal mines in the Karaganda basin can be used. The high concentration of methane in coal layers and the existence of a well-developed infrastructure and major gas consumers make it possible to extract it and utilise it on a large scale. This will also increase central Kazakhstan’s energy potential and provide gas not only to enterprises in Karaganda, Ekibastuz and Pavlodar districts but also to the country’s capital, Astana.

Kazakhstan has the second largest uranium reserves in the world (following Australia), at around 1.5 million tons, which represents almost 20 percent of the world's supply. Kazakhstan aims to overtake Australia and Canada as uranium exporters by 2010. In 2006, Kazakstan produced approximately 5,280 tons of uranium, and the country has plans to increase production to 15,000 tons by 2010.

Kazakhstan has 55 uranium deposits, 70% of which are feasible for development using the underground leaching method. Kazatomprom, the Inkay and Katko joint ventures and the Stepnogorsk Mining and Chemical Combine are involved in uranium extraction. They are now extracting over 4,000 tons of uranium, 85% of which is extracted by Kazatomprom.

Over $551 million was invested in the sector in a decade, and 98% of this in extraction. The uranium sector has enough raw material base to last it 100 years.

Taking into account the growing capacities of nuclear power engineering and shortages of uranium, joint investment projects in Kazakhstan have already generated great interest among companies from the USA, Europe, Russia, Japan and China. In April 2005 South Korea and Kazakhstan established a joint mining venture for uranium, scheduled to begin operations in 2008 with an eventual annual output of 1,000 tons. In April 2006 Kazakhstan and Japan signed a civil nuclear cooperation agreement under which Japan will import uranium for power generation from Kazakhstan. Other foreign companies investing in Kazakhstan's uranium industry include Canada's SXR Uranium One Inc., Japan's Marubeni Corp., China's Guangdong Nuclear Power Group, Britain's New Power Systems Ltd. and the U.S. uranium trading company Nukem. In October 2007 Kazatomprom completed its purchase of a 10% stake in Westinghouse from Toshiba for $540 million.