Archive for November 26th, 2007
ExxonMobil Seeks a Bigger Piece of Action at Kashagan
The American oil giant ExxonMobil expressed the desire to take over as operator of the Kashagan project from the Italian Eni. According to sources in the government of Kazakhstan, this question that has been officially floated last week would need to be solved by the beginning of next year.
According to Interfax-ANI, the idea of ExxonMobil taking over the projects was first discussed by the U.S. Secretary of Energy Samuel Bodman and the Kazakh Minister for Energy and Mineral Resources Sauat Mynbayev last week at the World Energy Congress in Rome. In return for ExxonMobil winning the operatorship, the American official promised technological and financial aid in the execution of project. While there were no figures stated on what it would take for ExxonMobil to seal the deal, a compensation of up to tens of billions of dollars may not be unreasonable. This would be in line with the damages for the delay in oil production from the field repeatedly sought by the Kazakh authorities. As Dmitriy Aleksandrov, an analyst with the Russian brokerage Financial Bridge, noted in an interview with the business weekly Business and Power “the size of compensation is a question of negotiation. And if ExxonMobil takes upon itself any future financial expenses, then Astana will go with their proposal. It is clear that the sum will be in billions of dollars, and the final figure will depend on proportions of shares and conditions for the participation of all sides in the project.” The spectrum of possible outcomes is quite wide, the analyst reckons.
Of course, ExxonMobil (at that time just Mobil) vied for operatorship of the project throughout the negotiations leading to signing the Production Sharing Agreement in 1997. At that time, Eni was chosen as the operator of the field, mainly as a compromise choice for being the least contentious candidate among the companies in the consortium. ExonMobil apparently revisited this desire early in September this year when its representatives met with Prime Minister Masimov and President Nazarbayev in Astana following the Kazakh government’s announcement of its displeasure with Eni’s progress. At about the same time, the representatives of Total, the French oil company, met with Kazakh authorities as well to propose Total for the role of the operator. It is clear that these two rival bids will strengthen Kazakhstan’s negotiating position in talks with Eni, Exxon and Total about their future roles in the consortium. According to observers, however, ExxonMobil should have the upper hand in any serious negotiations given its deep pockets and the expertise of operating large-scale projects like Kashagan.
Until now, there were no public discussion on the planned increase in KazMunaiGas‘ share in the project. As Kazakh authorities indicated Kazakhstan will seek a greater involvement for the national oil company - an increased share in the project is nearly a given and a role as cooperator of the filed highly likely. According to some sources, Eni will probably give up some of its share instead of a penalty it will face as a result of the delays and cost overruns. And given that the consortium partners and the Kazakh authorities already came to a preliminary understanding of an increased share of KazMunaiGas in the consortium, it is likely that the process of redistribution has been discussed and will be completed soon.
“Technically, the change of operators is fully realistic,” emphasizes Mr. Aleksandrov. “And the conditions will be hardly unfavorable for Kazakhstan: Astana has numerous advantages in active negotiations with the Americans. For the United States, Kashagan oil is a strategic objective; therefore it is possible to try to pressure the Americans.” As far as further status of Eni is concerned, Mr Aleksandrov noted that the Central Asian market was too attractive to simply pack up and leave. “I do not think that Eni will decide to fully drop out from participation in the project, even if it is deprived of its status as operator”, recons the analyst.
Meanwhile, ExxonMobil chairman and CEO Rex Tillerson noted in the course of World Energy Congress that “the dialogue between the oil companies and the government of Kazakhstan about the participation in the development of the Kashagan field is proceeding very actively”. Answering a question from a journalist about whether the consortium partners will agree to increase KazMunaiGas’ share in the project to as that the government of Kazakhstan wants or whether they are intended simply to pay the (likely very steep) fine, Mr. Tillerson only repeated that “the negotiations go very actively in all aspects”.
Evan Feigenbau, the Deputy Assistant Secretary of State of the United States for South and Central Asia refused to elaborate on the fresh news from Rome while visiting Astana last week. “We would like the situation around Kashagan to be decided favorably for all. This sector is very important both from the point of view of the development of Kazakhstan and from the point of view of global energy “, commented Mr. Feigenbaum.
So far, both the Kazakh authorities and Eni have never suggested publicly that Eni’s position as the main operator would be seriously at risk. There has not been any reaction from either side to the latest news of ExxonMobil’s advances to gain the operator role either. And while the Energy Secretary Bodman may have lobbied on behalf of the company at the Rome energy summit, Deputy Assistant Secretary Feigenbaum’s response suggests that this was not a part of a new unified political front on behalf of the United States.
Who Is Responsible for the Inflation in Kazakhstan
From Yaroslav Razumov in Exclusive. The English version can be found here, the Russian version here.
We asked Petr Svoik, the well-known economist whose economical forecasts frequently (and unfortunately) come true and the person who had experience working for government, to comment on the situation of increasing prices. In our opinion, the present situation shows that the economical problems in Kazakhstan are for the large part caused by the ineffective administering process. How and why does it happen?
- Petr Vladimirovich, to which extent the government and in general state organs are responsible for the increase of inflation?
- Considering the present state structures it is extremely difficult to say which member of the Cabinet is responsible for prices. The Ministry of Finance is definitely not. The Ministry of Economics has never monitored this issue and no one from its leaders said something definite about it, although ideally it should not be the case. The Statistics Committee examines the level of prices but can not influence it. Traditionally only the National Bank was responsible for prices. The population, community and journalists used to address all questions about prices to the National Bank.
In the meantime, the National Bank is able to influence only the monetary factor and there are many more other important price factors.
The present uncontrollable increase in prices revealed the problems that were implicit for many years. The state and a number of experts affiliated with it were euphoric when in 1999 oil prices started to increase, resulting in increase of the National Fund and the 10 % GDP growth rate. However, they didn’t consider seriously the simple fact that this economy was built on export of raw materials and import of absolutely all necessary goods.
- The monetary and non-monetary factors of inflation are sometimes a discussion topic among independent experts. Which factors prevail in our country?
- The inflation is a complex event and involves many factors - both monetary and non-monetary and the latter dominate. However, this fact was ignored and the National Bank made the government and all of us think that only monetary factor causes the increase in prices. However, it is not the reality.
What do we have now? First, the infrastructure component of pricing in Kazakhstan is problematic. The Kazakh transport, electricity and public utility industries, which influence every price, are in archaic condition, lack needed capacities and are catastrophically ineffective in everything. More specifically, they lack energy-efficient technologies. These industries as well as others, for example, road industry, require large investments not only to maintain the present capacities but also to enlarge them. Until now these industries were maintained using old Soviet reserve and as it came to its end the new investments are required.
These investments will result in higher utility, electricity and transport tariffs as well as in higher prices on everything else. And the government can not think of the prevention methods.
Moreover, there is no theoretical understanding of what parts of the investments and restoration costs could be included into infrastructure and utility natural monopolies’ tariffs. Also it is not clear how to obtain the money needed for the part of investments excluded from tariffs. For example, what money resources and on what terms should the government invest in infrastructure and public utility companies? And if there is private investor, what is the procedure of repayment? There are no answers to these questions. As there is no the required legislation. Thus it’s the description of the first non-monetary factor that caused the price growth.
Second, the domestic goods are quite expensive and hardly compete with the similar products from CIS countries even at the local market. Let‘s take a random example of Russian and Kyrgyz milk and sausage products that are demanded over the goods produced by several domestic companies.
Thus there is no real competition, effectiveness and the production costs economy. Consequently, these inefficiences affect the price growth.
And what is the effect of the domineering import on the inflation processes?
- Depending on the exchange rate of dollar for the importer‘s currency the imported prices carry the external inflation. And it is not the end. Already high import prices are increased further by the customs including the bribery and the payments to bazarkoms. These costs are essential.
Whether the supermarket or bazarkom «the sales business is entirely private. Still it is also akims» business. Through the land, rentals and infrustructure the local government controls everything from «bolashaks» to «„ramstores». The sales bussiness is obliged to pay a significant percentage of its income. My guess is from 20 to 25 %. Although it is just a conjecture as there are no specific researches to rely on. And this is also relevant to the question of price monitoring in Kazakhstan and who is responsible for it.
I can not estimate the increase in price of the import after it passes through customs, but here is the example from practice. The Kazakh businessman buys goods in Urumchi, delivery of one cubic meter volume of goods to Almaty costs 250 dollars for 1,5 km. But the delivery of the same cubic meter from Almaty to Astana costs 300 dollars for 1 km. It means that the Urumchi-Almaty transportation costs 50 dollars. Thus the rest 200 dollars were paid for something else. What part of this money is official customs taxes, profit of the transport company and what amount went for the structured bribery system?
Therefore, in conclusion it can be said that our economy – a) is noncompetitive in value, b) is highly corrupt, c) produces limited amount of goods and services, d) is inefficient in domestic production, i.e. not aimed at costs reduction. And all these factors result in higher prices. And the longer it gets the larger the influence.
- The initial increase of property prices and consequent price growth caused by mortgage loans are always associated with monetary factor …
- The property issue certainly had its impact on the inflation processes. However, it is not fair to blame banks as they also found themselves in difficult situation.
Kazakhstan has a dual economy. One part of this economy focuses on raw materials export and import of the foreign goods. The largest part of export earnings is accumulated in the offshore companies and National Fund and the rest is spent in the country as taxes, salaries and development funds. This additional currency initiates a substantial increase in purchasing capacity. However, this increase can be observed in the limited area of the country.
Those banks give loans using the external resources, which are borrowed at unreasonable interest rate. And this as well causes the inflation.
The above is one of the monetary problems. Another problem is that there are few options for investing the additional money, because of small number of domestic producers. Even assuming that all the production industry projects implemented since 1991 are functioning, the scale of industrial development is still not impressive. Consequently, the banks had to invest only to housing, office property and to giant trade centers. And it created so called “housing bubble” that everyone is worried about now.
So, the only banks that could function in this economy are export banks and they do not work with domestic passives. For example, let’s imagine there is one bank with geographical name. All the other banks do not have access to the export economy and its abundance of currency.
- It’s surprising that you are supporting the banking community. Especially after you criticized it 2-3 years ago.
- The banks can be blamed only for over active investments to property sector. But again it was the only possibility to invest. Also, banks had the unreasonably high margin when they could do well even with smaller interest rate. It is a simple fact - the smaller is the interest rate the stronger is the economy and longer is the economic cycle.
- And why the development cycle of Kazakhstan’s economy appeared to be so short – the “bubble” emerged within only several years?
- Unfortunately, in addition to small scale of our economy just half of transactions are made using tenge. Let’s take the official data without the black market’s unregistered circulation of cash. What is the ratio of credits in dollars to credits in tenge? Approximately fifty-fifty. What is the ratio of banking deposits? The same numbers. It means that half of the money in the economy is foreign currency. Consequently, the capacity of Kazakh economy is cut to half. It is the first reason.
The second reason. In my opinion, the present policy of the National Bank is harmful – it increased the refinancing rate to higher than the inflation level, practically stopping to grant loans to the second-tier banks. And the worst thing is not the rate but the unwillingness of the National Bank to give loans to commercial banks. This is very bad.
The correlation between the level of inflation and interest rate is arguable. In any case, the developed countries with independent credit emission do not apply it. The rates of Federal Reserve System, Japanese and EU banks are less than real inflation. If those countries applied the IMF and World Bank recommendations for the developing countries, their own development would have stopped. The developed countries connect their initial credit emission with the GDP growth rate. The emission involves the interval from 0 to maximum (rarely) 5%. The banks further raise the interest rate thus, the European and Japanese economies develop with 6-7 % interest rate. That is a normal practice. In our economy only the initial external rate is 8-9 % and it is further increased by the banks’ margins. That is why Kazakhstan experienced such a short economical cycle. The policy of the initial rate being higher than the inflation makes the loans forbidden. This policy is rather suitable for the inferior, undeveloped economies. However, in our country this rule is applied. Thus only foreign loans are available and those increase the level of inflation in the country.
- Then why the abundant in the last years foreign capital was invested into property and not, as there was no potential in industry, for example, to agriculture?
- Banks are interested in fast yielding investment projects. The agriculture lacked such projects until lately. This year the wheat industry experienced renewal. There is natural rent now, and the prices suddenly increased covering the costs 2-3 times. By the way the wheat is the only component of export that brings foreign currency into country. Unfortunately, this currency mainly goes to agriculture producers, common agriculture workers do not get advantages from the perfect world market conditions. At best they cover their costs. The city owners of hundred thousand hectares and elevators are the ones who enjoy the greatest profit. At least they are domestic owners and they carry the currency into the country. Probably, this would help develop the agriculture industry. Of course, if the land owners make investments to the agriculture and not to the city property.
- Which factors – monetary or non-monetary – had a greater influence on increased prices of bread at Kazakh market?
- At the time of “perestroika” reform, at the final years of the USSR, the country received rich harvest. But the system was so unbalanced that it couldn’t be gathered. Zhvanetsky had an exceptional statement: the rich harvest was the last straw that completely ruined the USSR economy. That was a really funny joke.
What do we have? Kazakhstan long ago received the advantage of high oil prices, but for the population it resulted only in high prices of gasoline at the local market. Now we have higher prices on wheat, however, instead of profit people get higher prices for bread.
Why? It is a question for the government. The independent government should establish the national social and economical policy that will provide the total surplus from favorable prices.
Then it should redistribute this surplus in the country more or less fairly and effectively in economical sense.
At present time, there is no government structure (or even a person) that could be responsible for prices, understand the pricing situation and influence it.
The government is absolutely unable to make the necessary actions in this sphere. For instance, now it is forming wheat stocks by artificially lowering the purchasing price. The world market price is 250 dollars, while government pays only 200 dollars. Prime minister calls for the actions from “akims”, but the government itself uses anti market measures to market entities.
Now, from all said you can make a judgement which factors were crucial for the inflation.
News Roundup - November 26, 2007
New Europe: ExxonMobil wants to become Kashagan field operator
US energy giant ExxonMobil is seeking to become the operator of the project to develop Kazakhstan’s Kashagan offshore Caspian oil field, whose oil reserves are put at a minimum of seven billion barrels and its total oil reserves at 38 billion barrels…
The Oil and the Glory: Exxon’s sharp elbows
New Europe has an interesting story on the prospect of ExxonMobil assuming control of developing Kazakhstan’s supergiant Kashagan oilfield. The issue is important, since amid tight oil supplies for the next few years we’re talking about the eventual export of some 1.5 million barrels of oil a day from the field…
Forbes: Kazakhstan’s TuranAlem and Kazkommertsbank IDR’s affirmed at ‘BB+’ - Fitch
Fitch Ratings affirmed Kazakhstan’s largest commercial banks — Bank TuranAlem (BTA) and Kazkommertsbank’s (KKB) — long-term foreign currency issuer default ratings at ‘BB+’ and short-term foreign currency IDR at ‘B’…
Forbes: Kazakhstan’s Temirbank rating affirmed at ‘BB-’ with stable outlook - Fitch
Fitch Ratings said it affirmed the ratings on Temirbank reflecting the Kazakh bank’s high credit risks due to rapid expansion of its retail loan portfolio against slowing growth rates in the third quarter…
BusinessWeek: Turkmen gas pipeline work to begin soon
Construction of a new pipeline to carry natural gas from Turkmenistan to Europe via Russia could begin ahead of schedule in the first half of 2008, the resource-rich nation’s president said Friday…
Financial Times: Kazakhstan sets up $4bn fund
Kazakhstan has put together a $4bn (€2.7bn, £1.9bn) stabilisation fund to help its economy weather the credit squeeze stemming from the US subprime mortgage crisis, the Kazakh central bank governor has told the Financial Times…
Neweurasia.net: Where are the strong families in Kazakhstan?
This is the question that I have been interested in since morning. So, I studied the statistical data and took the most recent published figures (which are for January-March 2007) and divided the number of divorces on the number of marriages…
Banking Business Review: Bank Hapoalim acquires Kazakhstan Bank
Bank Hapoalim has completed the acquisition of Demir Kazakhstan Bank, which is claimed to be the first bank in Kazakhstan and in all of Central Asia to be purchased by an Israeli bank…
World Nuclear News: Nuclear power plans for Kazakhstan firm up
Two small nuclear power reactors will operate in Kazakhstan from 2015, according to a government decision. The first-of-a-kind VBER-300 units will likely be sited at Aktau on the Caspian Sea…
Global Voices: Kazakhstan: Economic crisis aftermaths
In the aftermath of slight economic and financial crisis, which the government prefers to call a “correction of the market”, the bloggers keep on discussing its consequences…
RIA Novosti: Kazakhstan reports outbreak of drug-resistant tuberculosis
Kazakhstan’s health ministry said Wednesday that the number of people, infected by drug-resistant tuberculosis is on the rise in almost all of the country’s regions…
United Press International: Analysis: KazMunayGaz’s prosperity rises
s much of the world faces an economic slowdown because of record-high energy prices, oil exporters are enjoying windfall profits, with Kazakhstan’s KazMunayGaz wallowing in record profits…
Interfax: KPO consortium begins building Karachaganak-Uralsk pipeline
The Karachaganak Petroleum Operation (KPO), an international consortium that is developing the Karachaganak gas condensate field in western Kazakhstan, has began building a Karachaganak-Uralsk pipeline on Friday…
Relatives and acquaintances have expressed concern over the fate of a self-described philosopher and political analyst in Kazakhstan who was forcibly admitted to a psychiatric facility…
Guardian Unlimited: Total wants quick deal on Kashagan, return to Iran
France’s Total hopes for a swift end to the dispute between Kazakhstan and operators of its giant Kashagan oil field, but a formal deadline of Nov. 30 will be hard to meet, the head of Total said…
Guardian Unlimited: Raiffeisen CEO says in talks on Kazakh acquisition
Austria’s Raiffeisen International is in ongoing acquisition talks with several Kazakh banks Chief Executive Herbert Stepic told Reuters in an interview. “We are in discussions with several banks, not just with one,” said Stepic, whose bank is flush with fresh cash after a 1.2 billion-euro ($1.8 billion) rights issue this year…
Eurasia Daily Monitor: Nazarbayev orders defense and security reforms
Last week, Kazakhstan’s President Nursultan Nazarbayev again called for the reform of the country’s defense and security structures. On November 15, he ordered the various heads of the defense and security bodies to prepare detailed proposals for restructuring their agencies, as part of the ongoing administrative reforms in the country…
Radio Free Europe / Radio Liberty: Kazakh journalists see tighter internet control ahead
Independent journalists in Kazakhstan say authorities have signaled their desire to place domestic Internet content under stricter government regulation…
Neweurasia.net: Winds of change
Kazakhstan’s financial markets were hit hard by the US subprime crisis. That’s not surprising when one looks at the national banks’ exposure to international credit markets…
Neweurasia.net: A warm-up in relations between Ashgabat and Baku
On 19 November, the Azerbaijani governmental delegation headed by the Deputy Foreign Minister Halaf Halafov came to Ashgabat to participate in the subsequent round of Turkmen-Azerbaijani talks on cooperation in the field of oil and gas industry…
Xinhua: Romania, Kazakhstan to co-op in transporting oil
Romania and Kazakhstan will cooperate in transporting Caspian oil to European consumer markets, the Romanian and Kazakh presidents stressed in a joint press statement on Thursday…
The president of Kazakhstan’s state-run nuclear power company Kazatomprom has revealed that the company intends to swap some of its shares in a uranium mine in exchange for stakes in Chinese nuclear power projects, domestic media reported today…
