KazMunaiGas: Kazakhstan’s National Oil Company

analysis

KazMunaiGas: Kazakhstan’s National Oil Company

By SRI ⋅ September 12, 2007 ⋅

The size of Kazakhstan’s oil and gas reserves alone make Kazakhstan’s national oil company, Kazmunaigaz (KMG), a worthy inclusion in any study of national oil companies. Kazakhstan’s proven oil reserves are estimated between 9 billion and 17.6 billion barrels, making it a potential producer of considerable influence.

When Kazakhstan’s major new projects reach full production (probably in 2015), it hopes to produce at least 3 million barrels of oil a day, which would make it a larger producer than Norway, and just behind Mexico and Iran. Even today Kazakhstan is an oil producer of consequence, producing 1.29 million barrels a day. 2 And virtually anyone interested in investing in Kazakhstan is forced to work, in one form or another, with NC KMG.

NC KMG is also worth attention by those interested in the changing structure of the international oil industry. The company is very much a work in progress; one of the world’s youngest national oil companies, it could turn into something of a model for other evolving national oil and gas countries, especially those in the former U.S.S.R., where a significant portion of the world’s untapped oil and gas reserves are found.

KMG has some features in common with other NOC’s formed in post-Soviet states, such as Russia, Azerbaijan, and Turkmenistan. But the Kazakh government has defined a much more aggressive developmental mission for NC KMG than has the Azerbaijani government for SOCAR, and certainly than the Niyazov government did for the various iterations of its national oil and gas companies. Unlike in Russia, where there are two NOCs Rosneft and Gazprom, with sometimes competing interests, Kazakhstan has opted to consolidate its holdings in a single company. Nonetheless, NC KMG has features in common with both Gazprom and Rosneft. Its degree of vertical integration resembles that of Gazprom. Rosneft, meanwhile, while lacking the same transportation and refining capacity of KMG or Gazprom, shares another equally important similarity with the Kazakh Company: both are seeking to introduce western management styles in order to create international investor confidence. Yet one very large difference remains between these two companies. Unlike Rosneft, whose chief oil producing asset is Yuganskneftegaz, which was bought at auction after seizure from Yukos, 3 virtually all of NC KMG’s assets were obtained in a pretty straight forward fashion. They were either acquired by purchase or by the transfer of a state held license to the company (directly or by the consolidation of smaller stateowned
companies).

NC KMG is more likely to become a model for other post-Soviet NOC’s than any other company, in large part because of its development strategy is both more forward looking and better articulated than that of its counterparts. The stated intent of both the Kazakh government and of KMG is that the company will devolve into a largely publicly held corporation, with the government insuring the protection of its interests through the voting of its shares by a larger holding company, Samruk—which’s name is the Kazakh translation of the golden phoenix—created in 2006.

For now the relationship between KMG and the government of Kazakhstan is a very close one, as is the relationship between the family of the president of Kazakhstan, Nursultan Nazarbayev, and the country’s oil industry. Those in key positions throughout the oil industry and a government, including the various ministries and executive level positions associated directly with the oil industry, understand the challenge that reform of the industry presents. They all realize that KMG needs to be transformed into an independent and transparent company within the remaining years of President Nazarbayev’s term in office, which ends in 2013—a company which no longer serves as an indirect instrument
of foreign policy or as a source of domestic graft.

As this paper explains, it is as yet unclear as to whether they will meet this challenge. Kazakhstan still faces the task of creating sustained investor confidence. The Kazakh government’s treatment of international oil companies (IOCs) will partly influence the level of this confidence. Virtually every company of any importance has some activity in the country. Success will also depend upon the evolution of NC KMG itself—that is, on whether it introduces full transparency in all of its upstream, downstream and associated activities and on whether it helps foster an atmosphere of competition in the service sectors that are associated with its primary operations.

The company will need to decide whether it intends to remain a production company, or to simply be a stakeholder in all of the country’s major exploitation projects, as well as the major transit partner and a dominant player in Kazakhstan’s downstream market. Whatever decision the company makes it is likely to still need to divest at least some of its assets, and become more focused in its acquisition of assets. Without this winnowing NC KMG will not maximize the value of their assets. They also must turn the company into a reliable partner for other investors in the country. This requires the completion of the political reform process within Kazakhstan, to provide a better articulation of the rights of investors, and better legal protection to respond to those situations in which investors believe their rights have been violated. Achieving these goals will strengthen NC KMG’s own position in the international oil industry, and open new foreign upstream and downstream options to it—one of the stated goals of the company.

Read the whole paper…

By Martha Brill Olcott (Carnegie Endowment for International Peace)