The Saga of Kashagan

This article was published in Kazakhstan’s monthly Exclusive this May. The original article was written in Russian and this translation is not great but it gives a hint of the emotions (and perhaps confusion) the Kashagan project evokes within Kazakhstan. I listed a few excerpts below and the original article can be found here.

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With a degree of exaggeration, we can say that “Kashagan is our everything!” The exaggeration wouldn’t be very big. The significant role of the oil sector in the economy of our country is known even to schoolchildren; it is also known that during recent decades, there hasn’t been any discoveries of large new oil or gas fields, and the majority of the fields exploited now are old and used up very much. Thus, the resource base of the most important industry of our economy is not in its best form. New technologies that increase the share of oil extracted from a field, more precise exploration of old fields, and the development of such projects as Tengiz and Karachaganak help, but they don’t change the situation fundamentally. Moreover, their peak extraction periods are expected at different times. As reflected in the main development programs of our country, the oil industry is the locomotive of our economy. The resources of the shore look like a salvation, like a chance for a better future. Kashagan is the biggest pearl among the resources. This has become especially true in recent years, as the shine of others, such as Tyub-Karagan, significantly reduced after unsuccessful oil exploration works. That’s why the endless delays in the commencement of development of Kashagan and full-scale oil extraction on the field are serious problems. Under some unfavourable conditions, it could influence the overall economy of the country. Let’s imagine that oil prices decreased. It will decrease the profitability of many of Kazakhstan’s old oil fields and the revenues from exports are also decreasing. Then it would be possible to compensate the price reduction with an increase in sales of oil, even at lower prices (not the best way, but it may be the only way to do under some circumstances). And the increased production could come from the shore; but then we’d have to finally start the extraction.

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Discovering oil in Eastern Kazakhstan, of course, is an important event. However, I’d like to warn the government and the people against a premature and groundless euphoria… One shouldn’t forget, first of all, about the risk of a “commercial bluff”, when very optimistic forecasts regarding the newly opened oil fields sharply increase the stock prices of the companies involved in the consortium, hence bringing large profits to the shareholders. Let’s remember that this happened with respect to many oil structures in the shallow waters of Azerbaijan (For example, Karabakh). But all of it finished sadly.

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Kazakhstan’s Banks Feel the Pinch of Global "Flight to Quality"

Even Kazakhstan is not immune from the trembles that shook the credit markets worldwide following the crisis in the American market for subprime loans. Today, Reuters reported a “liquidity deficit” that Kazakh banks are facing after a rise in interest rate spreads on international credit markets. While the banks dismissed the lack of domestic liquidity as temporary, it clearly points to a systematic problem in Kazakh financial markets.

In the last few years, Kazakhstan experienced a significant boom in its banking sector that was fueled by rapid economic growth and increased investment in Kazakhstan oil and gas sector and, more recently, by availability of cheap credit on international financial markets. While initially Kazakh banks catered mainly to commercial clients and provided investment services, lately they expanded their services to include small business and retail to a much greater extent than earlier. While this shift in strategy led to some impressive growth numbers (especially with banks specializing in retail clients like Alliance Bank), it remains to be seen how much of this growth can be attributed to sound strategy and how much to temporary exploitation of abnormally cheap credit.

This development has not gone unnoticed by both credit rating agencies and, thankfully, Kazakhstan’s macroeconomic policy-makers. The National Bank and the Agency for Supervision of Financial Services (FSA) are concerned with this situation and have instituted a series of measures to curb foreign currency borrowing and local credit emission. They have planned an increase in the percentage amount of required reserves the banks are to hold (to be effective on August 27) and set limits in exposure to short-term liabilities to non-residents.

As a Moody’s report on Kazakhstan published in July states “it remains to be seen whether the aggregate effect of such new prudential norms will slow foreign currency borrowing and credit emission. Over the medium-term, these problems will abate as the rate of inflation falls and when and as local capital markets mature, providing investors with alternatives to speculative real estate transactions. Moody’s will continue to monitor the rate of foreign currency borrowing and credit expansion in Kazakhstan. In terms of Kazakhstan’s sovereign credit rating, it should be stressed that the government has ample resources to deal with any problems that arise in the banking system.”

While the liquidity issues that the banks were facing today seem to be a relatively minor and temporary problem, it clearly shows that the measures introduced by Kazakhstan’s financial authorities are necessary. Kazakhstan’s financial system, despite its rapid development over the last years, still remains quite illiquid and relatively undiversified even compared to markets like Russia and dependent on international financial markets. The latter has been a blessing until now but could turn into a curse if international investors and financial institutions continue their “flight to quality”. Thankfully, this issue is well known and the authorities have taken steps to decrease the likelihood of a serious crisis. And should a crisis really arise, the government would likely step in and contain it to prevent it from spreading to other sector of Kazakhstan’s economy.

News Roundup - August 8, 2007

Bloomberg: Eni May Lose Control of Kazakhstan’s Kashagan Field
Eni SpA may lose control of Kashagan, the world’s biggest oil discovery in 30 years, after costs at the project more than doubled to $136 billion. The Kazakh government is “very disappointed” with execution of the project and doesn’t rule out replacing Eni as its operator, Kazakh Prime Minister Karim Masimov said…
Forbes: Kazakhstan Threatens to Remove Eni as Operator of Kashagan Oil Field
The prime minister of Kazakhstan, Karim Masimov, said his government might remove Italy’s Eni SpA as operator of the Kashagan oilfield due to cost overruns…
Wall Street Journal: Kazakhstan and Italy’s Eni Face Off Over Key Oil Field
In 1997, Italy’s Eni SpA entered an agreement with oil-rich Kazakhstan to operate Kashagan, the largest oil field outside the Middle East by reserves. Under the deal, Eni would recover its costs from Kashagan’s revenue before having to start sharing large proportions of their income with the Kazakh government….
Radio Free Europe / Radio Liberty: Kazakh, Azerbaijani Companies Agree On Joint Oil Venture
The Kazakh and Azerbaijani state oil companies have signed a memorandum on the joint implementation of a Trans-Caspian project…
Radio Free Europe / Radio Liberty: Journalist’s Traffic Death Recalls Past Tragedies
Saken Tauzhanov was a hard-hitting journalist who criticized both the opposition and the government in his native Kazakhstan. His frequently caustic online articles made Tauzhanov more than a few enemies, which is why his death on August 2 raised many suspicions…
Voice of America: Shanghai Cooperation Organization Holds Biggest War Games Ahead of Leaders Summit
Some 6,000 troops from China, Russia and four Central Asian states will hold their biggest-ever joint counterterrorism military exercise. Some analysts suggest the group, known as the Shanghai Cooperation Organization, is evolving into an anti-West defense alliance and Iran is looking to join…
Angus Reid Global Monitor: Kazakhstan Set for Low Voter Turnout
Most people in Kazakhstan will not participate in this month’s legislative ballot, according to a poll by the Association of Sociologists and Political Scientists…
Transitions Online: From Communism to Clannism
Against a backdrop of intrigue in the Nazarbaev clan and a changing of the guard in Ashgabat, two experts tackle the vagaries of political power in Central Asia…
CityWire: Kazakhmys Q2 Copper Cathode Production Falls
Shares of Kazakhmys, Kazakhstan’s biggest producer of copper, fell after it reported lower second-quarter copper cathode production because of smelter maintenance…
The New York Times: Ancient Nomads Offer Insights to Modern Crises
Every summer for the past eight years, Michael Frachetti has come to the desert steppe that rolls like endless yellow waves across this expansive Central Asian nation searching for evidence of a vast, connected nomadic society…
Reuters: Indicators - Kazakhstan - August 8, 2007
Kazakhstan’s economic indicators based on data provided by the State Statistics Agency, government institutions, the central bank and exchanges…