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The transition in much of the former Soviet Union has not led to democracy but instead to varying degrees of authoritarianism and dictatorship.1 Yet some states driven by endogenous and exogenous factors are pursuing a process of constitutional reform for the purpose of democratizing political processes. In the cases of Ukraine and Kyrgyzstan, among other factors, the process has been driven by the emergence of a “counter elite” that has provided an effective challenge to the incumbent power. The constitutional reform process in both Ukraine and Kyrgyzstan has been characterized by elite conflict, civic protest and the paralysis of government in both the executive and legislative branches. In Kazakhstan President Nursultan Nazarbaev believes his country is pursuing a unique model of constitutional and political reform that is defined by a moderate step-by-step process. Unlike the crises that have enveloped the process in Ukraine and Kyrgyzstan, the Kazakh model places economic stability before political reform and posits gradual democratization over radical change.2 Whereas in Ukraine and Kyrgyzstan a counter elite emerged, Nazarbaev has been able to define the political rules of the game on his own terms by disabling the ability of competing elite and opposition groups to compete for power. However, the Kazakh specific model of political modernization does not exist in a vacuum as internal and external factors are driving the process. Externally, approval from the international community has been a driving factor; in particular, the bid for chairmanship of the OSCE in 2009 has added a sense of urgency to complete the process. Internally, the emergence of an economic counter elite, the nontransparent electoral process and conflicts between competing elite groups, were all factors contributing toward the initiation and continuation of the reform process.

On 16 May, 2007, the president announced to a joint session of parliament changes to the constitution that were to signal, in particular to the West, that Kazakhstan is finally moving to reform its authoritarian political system. In the West some analysts and political representatives responded positively to the amendments.3 The administration is arguing the reforms constitute a shift to a presidential-parliamentary system. In this context, the aim of this paper is to survey the process and results of constitutional reform in Kazakhstan. It seeks explore and address two questions: what were the factors influencing the process of reform? And what do the results of the process tell us about the nature of Kazakhstan’s political transition. In answering these questions the article will examine the three bodies4 created by the president that have been used as a conduit for developing a dialog between the authorities, political parties and wider civil society, thus exploring the interconnection between the endogenous and exogenous variables affecting the process. The article will also analyze the results of the process in the form of the constitutional amendments. In analyzing the activities and role of the three bodies designated as enablers of political reform, the factors driving the process, and the output of the process, this article will argue that the changes were formulated by the presidential administration as an attempt to balance the competing demands of internal and external pressures. This is reflected in a need by the president to manage dissent within the country, while at the same time promoting Kazakhstan’s specific model of political modernization to the international community. However, the results of the process, which has seen the marginalization of opposition voices, suggest the president is limiting the possibility of any form of risk that challenges his position, while at the same time trying to present to the West the democratization of Kazakhstan. Therefore, the reforms amount not to a shift toward a presidential-parliamentary system, but instead a further consolidation of presidential power.

Continue reading…

The legacy of Soviet governance meant that each of the 15 newly independent states technically had a version of the executive, legislative and judicial branches in place, albeit in the form of the First Secretary of the Kazakhstan SSR Communist Party (as well as its first president - Nursultan Nazarbayev), the Supreme Soviet (legislature) and the Supreme Court. Far from being a bastion of multi-party democratic debate and discussion, the Kazakhstan SSR Supreme Soviet entered independence having undergone an election in 1990 that saw over 2000 candidates (of whom 90 represented “republican public organizations”) vie for 360 seats.

The focus of the present research is to examine the evolution of parliamentarism and multi-party democracy in Kazakhstan, using history and comparative analysis as a guide. Kazakhstan is the first of the newly independent states of the former Soviet Union to be vested with the responsibility of Chairing the Organization for Security and Cooperation in Europe, in 2010. As it prepares to assume this great responsibility, one may consider whether there is such a thing as a unique “Kazakhstani model” of democratic development, and if so, does it influence other states in the region, and does it meet the strict requirements mandated by the OSCE itself?

In 2007 the Parliament of Kazakhstan underwent its most radical transformation over a decade when seats were added to both the Senate and Majilis, with the latter body elected exclusively through a system of proportional representation, with nine members elected from within the 400-member Assembly of Peoples. This was the first time in the brief history of post-Soviet Kazakhstani parliaments that deputies were not directly elected to at least one house of the legislature (a breach of its OSCE commitments).

What can explain this phenomenon, and how can we view this with respect to the trajectory of democratic development in Kazakhstan and within the Central Asian region as a whole? Forecasting political development is never a simple task, even in Central Asia. Given Kazakhstan’s importance as a key exporter of energy resources, its strategic position among neighboring world powers Russia and China, and its own hegemonic status vis-à-vis the other Central Asian states, we best become more familiar with this important country’s political trends and tendencies, to both continue to engage it as a key partner as well as understand the broader implications for democracy development in the regional and other transitional democracies around the world.

Read the entire paper.

By Anthony Clive Bowyer

The president, Nursultan Nazarbayev, will stay in power in 2008-09, having consolidated his hold on Kazakhstan’s political structures, but could face growing dissatisfaction among businesses owing to the slow pace of reforms. Rising inflation and liquidity problems in the banking sector will be among the government’s main policy challenges in 2008-09. The National Bank of Kazakhstan (NBK, the central bank) might be forced to raise the refinancing rate from 11% if inflation remains higher than targeted. The Economist Intelligence Unit forecasts real GDP growth of 6.7% in 2008, rising to 7.1% in 2009. This is much slower than in recent years, and reflects the dampening effect of the global credit squeeze on Kazakhstan’s growth. High food prices and a loosening fiscal policy will exert upward pressure on consumer prices, pushing average annual inflation upwards to over 17% in 2008, from 10.8% in 2007. Disinflation should take hold in 2009. The possibility of more sustained downward pressure on the currency has risen, and greater volatility than in recent years is likely. The current-account deficit should narrow in 2008 because of higher oil prices, but it will widen again from 2009 owing to rising invisibles debits.

DOMESTIC POLITICS: Mr Nazarbayev is expected to remain in power over the 2008-09 forecast period, although he will need to demonstrate considerable adeptness to ensure that a combination of tension among the elite and slowing economic growth does not weaken his control of the political scene. Moreover, double-digit consumer price inflation is causing public discontent and threatens to damage Mr Nazarbayev’s economic record. Recent personnel reshuffles demonstrate the president’s desire to ensure that he is surrounded by loyal and trusted supporters. Although speculation concerning an imminent cabinet reshuffle has died down, if measures to stabilise the economy prove ineffective Mr Nazarbayev could still opt to change his government, blaming ministers for the economic turbulence. The president’s longer-term aim is to shore up his position, with a view to ensuring a successful bid for re-election in 2012. The coming two years could prove crucial in this respect, as Mr Nazarbayev will seek to entrench his position and lessen the risk of challenges from disgruntled members of the elite.

INTERNATIONAL RELATIONS: Kazakhstan will continue to balance its relations with Russia and China, with co-operation in the energy sector driving bilateral ties. The country will also step up diplomatic activity with the Organisation for Security and Co-operation in Europe (OSCE), in preparation for its chairmanship of the body in 2010–the first former Soviet state to hold the position. The OSCE had postponed a decision on awarding Kazakhstan the chair in 2006, owing to doubts among some member states about the Kazakh authorities’ commitment to upholding democratic standards. The fact that most Western leaders favour the maintenance of cordial relations with Kazakhstan–particularly in the context of growing unease about energy dependence on Russia–appears to have influenced the decision to grant Kazakhstan the chair (although this will happen one year later than originally envisaged), and outweighed concerns at the lack of progress in political reforms.

POLICY TRENDS: Accelerating inflation and liquidity problems in the banking sector are among the principal challenges facing Kazakhstan’s policymakers. The two are partly linked, in that rapid growth in bank lending has contributed to strong growth in monetary aggregates, which in turn has put upward pressure on prices. The government intervened quickly to stabilise the banking sector when banking entities faced difficulty in refinancing loans in late 2007, and we expect further such intervention, should it prove necessary, in the coming months–the authorities have allocated at least US$3bn over the next year to support sectors such as construction, which is highly dependent on bank lending. An anticipated slowdown in credit growth in 2008-09 should start to have a positive effect on prices from late 2008, bringing inflation down from its recent seven-year high. However, there is a notable risk that tighter lending policies will dampen growth in the non-oil economy, thereby jeopardising the government’s diversification targets.

INTERNATIONAL ASSUMPTIONS: We have made a large upward revision to our forecast for the average price of dated Brent Blend crude oil in 2008, from US$79.5/barrel to US$91.3/b, and prices are expected to average US$85/b in 2009. Despite the slowdown in global growth, continued strong demand for energy products and an aggressive OPEC policy are keeping prices high. Moreover, a host of geopolitical risk factors present mainly upside risks to our oil price forecast. Slowing world GDP growth will nevertheless dampen demand for industrial raw materials over the forecast period, leading to a modest downturn in prices, including for metals–one of Kazakhstan’s main sources of export revenue.

ECONOMIC GROWTH: Kazakhstan’s GDP grew by 8.5% in real terms in 2007. The year-on-year slowdown was partly attributable to a deceleration in industrial output growth (to around 4.5%), but also reflects liquidity problems in the financial sector. The Kazakh authorities’ forecast for 2008 is for a further deceleration, to between 5% and 7%. Although we also expect growth to weaken, we believe that it will remain at the upper end of this range, given our expectation of continued high global oil prices, as well as the level of state investment planned in 2008. Moreover, spillover effects from the development of the oil sector should continue to benefit services sectors such as communications and retail trade. We therefore anticipate real GDP growth of around 6.7% in 2008, rising to 7.1% in 2009 as investment strengthens in the run-up to the coming on stream of the giant Kashagan oilfield.

INFLATION: Kazakhstan recorded average annual consumer price inflation of 10.8% in 2007 and a year-end rate of 18.8%–the highest rates since 2000. Rising food prices, in conjunction with rapid growth in monetary aggregates, were the main factors behind the acceleration in inflation. We anticipate a further pick-up in inflation in 2008, to an annual average rate of over 17%, owing to a combination of demand-side pressures such as public-sector wage increases and rises in social expenditure, and the continued impact of high food prices. Tighter monetary and credit policies should nevertheless encourage disinflation from late 2008, reducing average inflation in 2009 to around 11%.

EXCHANGE RATES: The NBK drew down its reserves to stabilise the tenge in the second half of 2007, when concerns over liquidity problems in the banking sector sparked higher local demand for foreign currency. In the final months of the year and into 2008 the currency was trading at around Tenge120.6:US$1, up by around 1% year on year in nominal terms in early April 2008. Given our expectation of continued large-scale foreign-exchange inflows, on balance the underlying pressure on the tenge will remain one of appreciation. Nevertheless, the possibility of more sustained downward pressure on the currency–particularly if liquidity problems in the financial sector become more acute, or if the current-account deficit were to widen–has risen, and the tenge is likely to be much more volatile than in recent years.

EXTERNAL SECTOR : The NBK has reported a current-account deficit of US$7.2bn in 2007, equivalent to 6.9% of GDP, a more than threefold year-on-year increase. Factors driving the deficit upwards in 2007–high services debits (for example, on transport and construction services), and large payments by Kazakh banks–will persist in 2008, although higher oil prices will push the trade surplus upwards. This will result in a slight fall in the current-account deficit in 2008, to US$6.3bn, before a weaker oil price in 2009 results in slower growth in export revenue and hence a larger current-account deficit. The risks to macroeconomic stability posed by the deficit have risen over the past year, but we expect Kazakhstan to meet its financing obligations relatively comfortably, owing to continued large-scale inflows of foreign direct investment (FDI). With the Kashagan oilfield coming on stream towards the end of 2011, and several other large projects under development, annual FDI inflows are likely to average around US$7.75bn in 2008-09.

Abstract

This article argues that there is a symbiosis between elite business groups and top politicians in Kazakhstan. It suggests a typology for the different kinds of symbiotic relationships that exist and highlights the activities of a number of prominent figures in Kazakhstani politics and economy. The article asserts that the rapidly changing weight and status of big business groupings due to the shifting fortunes of a booming economy may have an impact on politics. Moreover, the underlying dilemma associated with the future transfer of power when President Nursultan Nazarbaev ultimately leaves politics introduces considerable degrees of uncertainty to national politics as well as to the business sector. The result is that even as Kazakhstan appears as a tightly managed democracy, the political system is neither static nor inherently stable.

Introduction

The managed democracies in the post-Soviet area are neither static nor inherently stable. In Kazakhstan, politics are defined by the tight but fluctuating relationships between top politicians and big business groups. Two features constantly inject dynamism and change into this structure. One is the rapidly changing weight and status of big business groupings due to the shifting fortunes of a booming economy; the other is the underlying dilemma and uncertainty associated with the future transfer of power when President Nursultan Nazarbaev ultimately leaves politics. This article assesses why and how the symbiosis between politics and business is such a central feature of politics in Kazakhstan. It highlights some key characteristics of politics–business links and provides an overview of some of the most central business groups. It ends by discussing the prospects for change.

Key Features of Kazakhstani Politics

Most of the post-Soviet countries have evolved into “managed democracies.” These are countries where “elections are held, but the results are known in advance; courts hear cases, but give decisions that
coincide with the interests of the authorities; the press is plural, yet with few exceptions dependent on the government.” The formal political process, in other words, is tightly controlled and managed by the
country’s political leadership.

This system is accompanied by a passive electorate and deficiencies in political interest formation. Some exceptions aside, few political entrepreneurs link up systematically with distinct sections of society in order to define grievances or formulate political demands and agendas. A recent survey conducted by the Risks Assessment Group in Kazakhstan found that the population showed scant interest in politics and voiced few political demands towards the government, aside from wanting continued guarantees of economic freedom.

Managed democracy and electoral passivity in Kazakhstan make – aside from a few prominent exceptions – formal politics relatively static, homogeneous and consensus-based. Moreover, the tightly managed formal political process leaves ample scope for informal politics. With few institutional checks on state conduct and with little scrutiny on the part of the electorate, the top political leaders are free to choose which political questions should be openly debated in formal institutions and which should be left as formally undisputable decisions to be taken by themselves. The latter type constitutes a substantial part of government decision making in Kazakhstan – and major informal political battles are played out around these closed decision-making processes. Importantly, these political battles tend to focus on narrow issues associated with demands and interests of the sole highly politicized group in Kazakhstan – the business community.

Business groupings do not compete in order to ensure that their political ideals are incorporated into state strategies or social development. Rather, the key focus of intra-business elite struggles is on being able to attract attention and recognition from the head of state, seeking to influence the latter in a way favorable to the immediate business concerns of a particular group.

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By Heidi Kjaernet, Dosym Satpaev and Stina Torjesen

Unlike many nations that have recently developed their energy reserves, the rise in revenues from foreign energy sales have had a trickle-down effect in Kazakhstan, producing the embryo of a new middle class, a social development that was anathema in the USSR, whose ideology persistently sought to eradicate class distinctions.

Kazakhstan, ruled since independence by President Nursultan Nazarbayev, has made a cornerstone of its social policy to foster the development of an indigenous middle class, seeing it as a social and political guarantor of stability.

The world’s largest landlocked country, Kazakhstan is an ethnically diverse nation - the 1999 census determined the population to be Kazakh (Qazaq) - 53.4 percent, Russian - 30 percent, Ukrainian - 3.7 percent, Uzbek - 2.5 percent, German - 2.4 percent, Tatar - 1.7 percent, Uygur - 1.4 percent and other 4.9 percent.

This study charts the development of this new phenomenon in Kazakh society from the end of the USSR to the present day. The nurturing and development of this middle class, which is composed of former members of the Soviet apparat, younger professionals and newly minted businessmen, stands in contrast to events in the other post-Soviet “stans” - Kyrgyzstan, Turkmenistan, Uzbekistan and Tajikistan. While in the immediate aftermath of the dissolution of the USSR Kyrgyzstan was initially regarded by many Western analysts as the most reformist post-Soviet republic in moving swiftly towards Western-style political and economic infrastructures, it is in fact Kazakhstan that has emerged as the most progressive regional economic reformer, and it is unclear if its successes could be repeated elsewhere.

Read the entire paper…

John C.K. Daly

The production and consumption of electricity in Kazakhstan fell significantly following independence. However, robust economic growth since 2000 has helped boost generation to 64.2 billion kilowatthours (BkWh) in 2006 and consumption to 58 BkWh. Transmission issues necessitate that Kazakhstan continue to import electricity in the southern part of the country, as the country’s northern generating units are connected to a separate transmission grid (see below). In 2006 the Kazakh energy ministry expects 8 percent annual growth in electricity production to levels of 73 billion KWh, and consumption levels of 71 billion KWh. The latest statistics indicate that Kazakhstan exported roughly 4 billion kWh of electricity to Russia in 2005.

Although Kazakhstan technically generates almost enough electricity to meet its demand, the country has suffered from frequent power shortages since 1992 due to the sector’s deteriorating infrastructure. Kazakhstan incurs large electricity losses during transmission and distribution over its 285,000 miles of distribution lines. According to Kazakh Minister of Energy and Natural Resources Vladimir Shkolnik, an average of 15 percent of the electricity generated in Kazakhstan is lost before it reaches consumers due to the widespread deterioration of Kazakhstan’s power infrastructure.

Electricity Infrastructure in Kazakhstan

Energy officials in Kazakhstan estimate that electricity demand may outpace supply as early as 2008. Kazakhstan Electricity Grid Operating Company (KEGOC) President Kanat Bozumbayev estimates that over $3.0 billion will be needed to build roughly 1,500 MW of new power plants and to repair old ones in the next decade.

Transmission and Distribution

Due to the large geographical distance between cities across the vast Kazakh steppe, the country’s electricity distribution system consists of three disconnected networks rather than a unified system. The two in the north are connected to Russia, and the one in the south is connected to the Unified Energy System of Central Asia. The northern networks, which service the coal-fired power plants that make up most of the country’s installed capacity, have recently begun exporting electricity to Russia. In January 2003, the Ekibastuz Power Plant No. 2, located in the northern Pavlodar region, began exporting electricity northward. Conversely, the southern network, which is connected to the Unified Energy System of Central Asia, is forced to import electricity from neighboring Kyrgyzstan and Uzbekistan because of its lack of installed generating capacity.

Because Kazakhstan’s southern regions are largely dependent on expensive imported electricity supplies, in 2004 KEGOC proposed a project to construct a second North-South power line to complement the existing, 600-MW-capacity line, thereby making it possible to supply the country’s southern regions fully with energy generated in Kazakhstan (see map below). The line would also help connect Russia to other more electrically isolated countries in Central Asia. For example, it will enable Tajikistan, which plans to export up to 700 million KWh in 2005, to export electricity via Kyrgyzstan and Kazakhstan to Russia.

North-South Transmission Line Project

In 2003, the European Bank for Reconstruction and Development (EBRD) helped finance KEGOC’s implementation of the $148 million first phase of the 690-mile transmission project. The second and third phases will complete the remaining 530 miles of the transmission line, continue the upgrading of the Ekibasutzkaya and Agadyr substations, and will provide for the purchasing of new distribution equipment. Total funding for the project will amount to $347 million. The EBRD and World Bank are also funding KEGOC’s purchase of high voltage, telecommunication and information technologies equipment under a $180 million loan. More detail on these projects is available at the following pages maintained by KEGOC and by the EBRD.

Industry Organization – Deregulation Status

Kazakhstan has privatized all of its power plants, but the sale of regional electricity distribution companies has proceeded more slowly. Also, the majority of the distribution networks has not yet been privatized. KEGOC has granted management rights to several private companies, but KEGOC maintains control over high-voltage transmission lines, substations, and the central dispatching apparatus.

Non-payment of electricity bills, an inadequate collection system, and a lack of market-based transportation tariffs are all obstacles to further large-scale investment in Kazakhstan’s transmission and distribution sector. Under the former Soviet Union, Kazakhstan utilized a system of fixed electricity tariffs that were unrelated to production costs and investment needs. Kazakhstan’s State Anti-Monopoly Committee is working to bring electricity tariffs in line with those in other countries and to allow the market to determine transmission tariffs.

Nuclear Power

Kazakhstan has the second largest uranium reserves in the world, at around 1.5 million tons, which represents almost 20 percent of the world’s supply. Kazakhstan will soon join Canada and Australia as a principal source of mine-based uranium supplies. In 2006, Kazakstan produced approximately 5,280 tons of uranium, and the country has plans to increase production to 15,000 tons by 2010.

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.

During 2007, the Arcelor-Mittal Group pledged to invest $500 million to increase coal production in the Karaganda region by around 5 million tonnes. Kazakhstan’s largest coal producer, Bogatyr Access Komir, which accounts for roughly 35 percent of the country’s coal output, is a subsidiary of Access Industries Incorporated (U.S.A.). Bogatyr Access Komir develops northern Kazakhstan’s Bogatyr and Severny coal fields and is the country’s largest exporter to Russia. Russian firms are also stake holders in the Kazakh coal industry and roughly 16 Mmst are transited annually from Kazakhstan northward via rail to power plants in southern Russia.

Kazakh coal consumption fell from 97 Mmst in 1992 to a low of 58 Mmst in 1999 (see Figure 3). But in the last decade, manufacturing sector growth has provided incentives for increased coal consumption. Kazakhstan gets over 80 percent of its electricity production from coal. The country’s largest power generator, AES-owned Ekibastuz No. 1 is located in north-central Kazakhstan.

In 2007, the Oil and Gas Journal revised upwards its estimate of proved natural gas reserves in Kazakhstan to 100 trillion cubic feet (Tcf), putting the country on par with Turkmenistan. Most of Kazakhstan’s natural gas reserves are located in the west of the country, with roughly 25 percent of proven reserves situated in the Karachaganak field. This oil and gas condensate field reportedly has proven natural gas reserves of 48 Tcf. The consortium developing Karachaganak expects to produce 900 Bcf by 2012.

Natural gas in Kazakhstan is almost entirely “associated” gas. Several fields including Karachaganak reinject significant quantities of gas into the ground to maintain crude wellhead pressure for liquids extraction. In the long term, when the liquids are exhausted, this gas can be recovered.

The largest source of natural gas in the country is the Karachaganak natural gas and condensate field which produced 503 Bcf during 2007, up over 18 percent from the previous year. The consortium estimates that the field contains over 47 Tcf (1.35 Tcm) of natural gas reserves. Further information on the export of natural gas from this field and expansion plans are explained below.

Natural Gas Flaring

A World Bank commissioned study conducted by the National Oceanic and Atmospheric Administration (NOAA) estimated that Kazakhstan was flaring as much as 286 Bcf (8.1 Bcm) in 2006, making it the fifth-largest flarer worldwide. Official figures are around two-thirds less, and some overstatement occurs because of the inclusion of gas venting in the figures (especially in the case of Russia). Still, the report indicates that gas flaring in Kazakhstan increased by over 170 Bcf since 1995. Since a May 2005 government order to all 34 oil producing firms to reduce oil production to levels that would avoid natural gas flaring, flaring has declined slightly. Many of the companies that produce associated gas have made pledges to develop ways to use the gas (such as for electricity generation). New environmental legislation allows the government to fine any company that carries out unauthorized natural gas flaring.

The Tengiz field, which produced 248 bcf in 2007, is one of the largest contributors to natural gas flaring in the country. In 2005, the company was forced to shut down some production and release sour gas into the atmosphere after the emergency halt of its five energy generators. After four years of planning and construction, the Sour Gas Reinjection (SGI) Project will help increase both oil and gas production from the field and will help reduce the amount of gas flaring. The project began operating in limited amounts in October 2006.

Natural Gas Exports

Since Kazakh natural gas is a potential competitor with Russian natural gas, several new natural gas export pipelines from the Caspian Sea region also are in development or under consideration, potentially opening up new markets for Kazakh natural gas. The two branches of the Central Asia Center (CAC) gas pipeline, the main gas export pipeline from Central Asia, meet in the southwestern Kazakh city of Beyneu before crossing into Russia at Alexandrov Gay and feeding into the Russian pipeline system. Therefore, Kazakhstan is a major transit route for gas from Turkmenistan to Russia and on to other markets across the territory of the former Soviet Union

Turkmenistan-Kazakhstan-China Pipeline

In December 2007, CNPC pledged to invest $2.2 billion in a 1.06 Tcf (30 bcm) natural gas pipeline that would run from Turkmenistan through Uzbekistan and Kazakhstan to China. According to the construction plan, the pipeline is expected to start at Gedaim on the border of Turkmenistan and Uzbekistan and extend 1,100 miles. About 325 miles would run through Uzbekistan and the rest in Kazakhstan to reach Khorgos in China’s northwestern Xinjiang region. In August, Turkmenistan and China signed a 30-year supply agreement for the gas that would fill the pipeline. CNPC has set up two entities to oversee the Turkmen upstream project and the development of a second pipeline that will cross China from the Xinjiang region to demand centers in southeast China. The total cost of the entire project is expected to be $7.31 billion. Also, Russia is planning a natural gas pipeline to China.

Kazakhstan-China Gas Pipeline Routes

Central Asia Center Pipeline Expansion

In December 2007, Russia, Kazakhstan and Turkmenistan announced the signing of an agreement to carry Central Asian natural gas from Turkmenistan to Russia via the existing Central Asia Center gas pipeline. After the pipeline’s completion in 2012, the route will have a capacity of 2.6 Tcf (80 Bcm), up from around 2.1 Tcf (60 Bcm). The agreement stipulates that each country will be responsible for building the section of new pipeline in each of their respective territories. Russia’s agreement with the two countries was reportedly contingent on a Russian pledge to increase its buying price of Central Asian gas, but the exact price is still undetermined.

Natural Gas Distribution

Because of Kazakhstan’s divided distribution network, Karachaganak’s natural gas is exported northward to Russia’s Orenburg processing plant, as opposed to being delivered to Kazakh consumers in the south. Under a 15-year agreement signed during the summer of 2006, Gazprom will pay $3.96 per thousand cubic feet (mcf), or $140 per thousand cubic meters, for Kazakh gas imports while Kazakhstan will get a 50 percent stake in a new unit of the Orenburg gas processing plant just across the Russian-Kazakhstan border. Gas output from the Karachaganak field will be shipped to Orenburg for refining, with volumes expected to reach at least 530 Bcf per year. Gazprom and Kazmunaigaz will each have a 50 percent stake in KazRosGas, the joint venture which will purchase the gas and expand the Orenburg plant. Current deliveries of Karachaganak gas to the Orenburg plant, located 84 miles from the field, are estimated at 250 Bcf/y. Gazprom is reportedly expected to begin to receive gas deliveries from the field in 2012

Efforts are also underway to export Karachaganak’s gas condensate and other liquids through the CPC pipeline system. The Karachaganak Integrated Organization, which is developing the field, has thus far focused its efforts primarily on extraction of the field’s liquid condensate reserves. Several of the country’s other oil fields, Tengiz and Kashagan for example, also contain associated natural gas (a by-product of oil extraction). See the maps section of the country brief for more geographical detail.

Kazakhstan has two separate domestic natural gas distribution networks, one in the west which services the country’s producing natural gas fields, and one in the south which mainly delivers imported natural gas to the southern consuming regions. The lack of internal pipelines connecting Kazakhstan’s natural gas-producing areas to the country’s industrial belt (between Almaty and Shymkent) has hampered the development of natural gas resources. However, as stated above, the development of the Amangeldy gas field will help Kazakhstan’s southern region cease importing Uzbek gas. Kazmunaigaz, the state oil and natural gas company, operates Kazakhstan’s main natural gas pipelines.

Southern Kazakhstan receives its natural gas supplies from Uzbekistan via the Tashkent-Bishkek-Almaty pipeline. In 2008 Uzbekistan will supply a small amount of gas to Kazakhstan’s southern regions, including the area around Almaty, for $100 per 1,000 cubic meters, a price unchanged from 2007. This pipeline snakes through Uzbekistan before reaching Shymkent, crosses Kyrgyzstan, and terminates in Almaty. Dependence on imported natural gas for its southern regions has at times been problematic since erratic pricing and supplies from Uzbekistan, combined with illegal tapping of the pipeline by Kyrgyzstan, have resulted in significant supply disruptions to Almaty in the middle of the heating season.

Kazakhstan produced approximately 1.45 million barrels per day (bbl/d) of oil in 2007 and consumed 250,000 bbl/d, resulting in petroleum net exports of around 1.2 million bbl/d. EIA expects oil production in Kazakhstan to average 1.54 and 1.71 million bbl/d in 2008 and 2009, respectively (See Table 3b of EIA’s Short Term Energy Outlook for updated estimates). Major producers include Karachaganak (250,000 bbl/d), Tengiz (280,000 bbl/d), CNPC-Aktobemunaigas (120,000 bbl/d), Uzenmunaigas (135,000 bbl/d), Mangistaumunaigas (115,000 bbl/d), and Kumkol (70,000 bbl/d). These producers account for 1 million bbl/d (or around 70 percent) of liquids production in the country. Other production is centered in smaller fields.

Increased oil production in recent years (see Figure 1) has been the result of an influx of foreign investment into Kazakhstan’s oil sector. International projects have taken the form of joint ventures with Kazmunaigaz (formerly Kazakhoil), the national oil company, as well as production-sharing agreements (PSAs), and exploration/field concessions. See EIA’s table of PSAs in Kazakhstan for more information. The country expects the majority of the growth will come from four enormous fields: Tengiz, Karachaganak, Kurmangazy, and Kashagan. See the IMF’s November 2004 report for an expanded discussion of oil production in Kazakhstan.

Slower growth rates from 2005 to 2007 can be attributed to government restrictions on associated gas flaring, field maintenance at Karachaganak and Tengiz, cold weather, and a lack of progress on expanding the Caspian Pipeline Consortium (CPC) pipeline. Further restrictions due to environmental non-compliance, especially at the Tengiz field, may cause the revocation of the operator’s PSA and would therefore impede production growth.

Oil Fields

Tengiz

The Tengiz field is located in the swamplands along the northeast shores of the Caspian Sea (see Map 2) and is the largest source of oil production in the country. The field has been developed since 1993 by the Tengizchevroil (TCO) joint venture. Production averaged almost 280,000 bbl/d during 2007, and recoverable crude oil reserves have been estimated at 6-9 billion barrels by consortium member Chevron. According to Chevron, Tengiz could potentially produce 700,000 bbl/d by the end of the decade with the sour gas injection program fully implemented . Most of the oil from the field is being sent through the Caspian Pipeline Consortium (CPC) pipeline to the Russian Black Sea port of Novorossiysk.

Due to current government regulations against the flaring of associated sour natural gas (see Natural Gas section), restrictions on flaring hurt production performance from the Tengiz field during 2005 and 2006. Repeated mechanical problems have also hurt output during the first half of 2006. In 2007 the consortium was fined around $609 million by the Kazakh authorities for environmental violations relating to the storage of over 9 million tonnes of sulfur, a waste product of oil production at the field.

A $1-billion plan to reinject the sour gas (SGI) is currently being tested and is one factor in the field’s increased production during late 2007. Full-scale implementation of SGI, along with newly-drilled wells (called the second generation project) should allow for an increase in oil production to more than 460,000 bbl/d during 2008.

Kashagan

The Kashagan field, the largest oil field outside the Middle East and the fifth largest in the world (in terms of reserves), is located off the northern shore of the Caspian Sea, near the city of Atyrau (see Map 1). The consortium operating the field, the Agip Kazakhstan North Caspian Operating Company–Agip KCO has estimated the field’s recoverable reserves at 13 billion barrels of oil equivalent, with total reserves-in-place around 38 billion barrels. In late 2007, an Eni spokesman estimated that the field would initially produce around 300,000 bbl/d from the field as early as late 2011. According to Kazmunaigaz, full-scale commercial production is not expected to commence until 2013. The consortium originally estimated peak production at around 1.3 million bbl/d, but this figure may be adjusted under a new ownership structure agreed to in early 2008.

The Kashagan field has presented particular challenges for its developers. ENI, the operator of the consortium, has pushed back the projected startup date from 2005, then to 2008, and then to the end of 2011. Kashagan contains a high proportion of natural gas under very high pressure, the oil contains large quantities of sulfur, and the offshore platforms require construction that can withstand the extreme weather fluctuations in the northern Caspian Sea area. During negotiations over the redistribution of British Gas’s (BG’s) share, and in light of new government policies introduced at the same time, the project was delayed further.

In September 2007, Kazakhstan requested over $10 billion in compensation from the multinational consortium that was developing the Kashagan field in Kazakhstan, and the government prohibited further work on the field (in part, because of environmental violations) until the parties come to an agreement. After months of negotiations during 2007 and 2008, the shareholders finally agreed to allow Kazakhstan’s Kazmunaigaz (KMG) to raise its stake from 8.33 to 16 percent, paying $1.87 billion or roughly half their book value . The other shareholders will reduce their respective 18.52 percent stakes and will compensate the Kazakh government for delays. The companies will pay an additional $2.5-$4.5 billion to the country, depending on the price of oil. According to the Economist Intelligence Unit, government receipts from the field’s production are expected to total $20 billion through 2041. Large scale production will require completion of the Kazakh pipeline as well as an oil and gas treatment plant with an initial capacity of 300,000 bbl/d.

Although details of the new 2008 agreement have not been made public, reports indicate ENI will remain responsible for exploration and development of the field but will lose official “operator” status after the field comes online in 2011. Total and Shell, along with Kazmunaigaz, will form a new operating company after the field comes online. Kazakh sources estimate the total cost of the project has increased from $57 billion to $136 billion.

The Kashagan area also holds other hydrocarbon prospects. Other discoveries in the Kashagan area include Kashagan SW, Aktote, Kairan and Kalamkas. These offshore fields are large by international standards, but still considerably smaller than the giant Kashagan field. Appraisal programs for these fields are currently underway.

Karachaganak

The Karachaganak oil and gas/condensate field is located onshore, in northern Kazakhstan, near the border with Russia’s Orenburg field (see map 2). In 2007, the field produced over 250,000 bbl/d of natural gas condensate. Karachaganak is being operated by Karachaganak Petroleum (KPO) consortium (see above for shareholders). According to KPO, the field holds reserves of around 8-9 billion barrels of oil and gas condensate and 47 Tcf of natural gas. The consortium members aim to triple output with up to $10 billion in investment within 6-8 years.

In previous years, almost all of Karachaganak’s crude oil production was processed at Russian facilities associated with the Orenburg field located just across the border. In April 2003, a pipeline spur southward to Atyrau was completed that connects the Karachaganak field to Kazakhstan’s primary export pipeline, the Caspian Pipeline Consortium (CPC) project. The new connection has enabled increased exports from Karachaganak, and has reduced the consortium members’ dependence on Russian buyers.
Other Upstream Prospects: Kurmangazy, Zhemchuzina (Pearls Block), and Kalamkas

Located on the maritime border between Russia and Kazakhstan, the Kurmangazy field is the least developed of Kazakhstan’s upcoming oil field developments. Russia and Kazakhstan signed a new $23 billion PSA agreement for the 7.33 billion barrel Kurmangazy oil field in July 2005. After some delay on the terms of the agreement, Russian and Kazakh state oil firms Rosneft and Kazmunaigaz signed the deal in the hopes that this would hasten the field’s development. The first well was drilled in early 2006 but came up dry. Further drilling could occur in 2008.

In October 2007, Shell discovered hydrocarbons in its Pearls Block (called Zhemchuzina in Kazakh). The Pearls PSA was signed in 2005 by Shell, with a 55% stake, and KazmunaitEniz, an offshoot of state oil and gas concern Kazmunaigas (KMG), with 25%, and Oman Pearls, a subsidiary of Oman Oil, with 20%. The Pearls block lies just south of the Kalamkas field discovered in 2001 by the Agip KCO consortium. According to a Nefte Compass report, Kalamkas, which is in the same contract area as the Kashagan field, contains recoverable reserves of about 500-600 million barrels of sweet, 34° API oil and roughly 3.5 trillion cubic feet (Tcf) of natural gas. The Kalamkas reservoir, which is almost 6,000 feet underground, would be much easier to bring on stream than Kashagan, which is deeper and prone to extreme high pressure. Kalamkas could be producing 100,000-120,000 bbl/d of oil within about four years of starting development.

For a detailed map of the Caspian Region’s oil and gas infrastructure please see the Maps section of the brief.

Oil Exports

Kazakh oil exports are growing rapidly, with current infrastructure delivering it to world markets via the Black Sea (via Russia), the Persian Gulf (via swaps with Iran), to the north pipeline and rail (through Russia), and now to the East to China.

During 2007, Kazakhstan exported around 1.2 million bbl/d of petroleum on average in all directions:

-408,000 bbl/d northward (via the Russian pipeline system and rail network);

-620,000 bbl/d westward (via the Caspian Pipeline Consortium Project), which does not include an additional 72,000 bbl/d of Russian production.

-70-80,000 bbl/d is sent southward via a swap agreement with Iran.

-85,000 bbl/d eastward to China on the Atasu-Alashankou pipeline route during 2007.

Connections to ports on the Black Sea and the Persian Gulf have allowed some Kazakh oil (or proxy oil from Iran) to be traded on the world market. Efforts are underway to expand the country’s export infrastructure (especially to the east) over the next decade as Kazakhstan’s oil production increases.

Trans-Caspian Barge Shipments

In order to facilitate exports of oil from Kashagan during the next decade, Kazakhstan is developing an internal “Kazakhstan Caspian Transportation System” (KCTS), which will include the construction of a 500,000 bbl/d pipeline from Eskene in western Kazakhstan to the port of Kuryk. From Kuryk and the current nearby working port of Aktau, oil will be shipped via barge across the Caspian to the BTC pipeline. Current trans-Caspian shipments are expected to double at Aktau to around 400,000 bbl/d, and will augment a new 760,000-bbl/d oil terminal at Kuryk, just south of the Aktau port. Kazmunaigaz has not yet decided on the exact site for the port. Expansions of the oil terminals in Baku and Kuryk and the pipeline’s construction could cost at least $1.5 billion. Kazakhstan has also taken an interest in sending oil via rail (and the port of Batumi) to the Black Sea and then onwards to the reversed Odessa-Brody pipeline.

Caspian Pipeline Consortium (CPC)

The 980-mile long CPC pipeline connects Kazakhstan’s Caspian Sea area oil deposits with Russia’s Black Sea port of Novorossiysk. The governments of Russia, Kazakhstan, and Oman developed the CPC project in conjunction with a consortium of international oil companies. See the table above for the consortium members.

The pipeline is an extension of the existing oil transit infrastructure surrounding the Caspian Sea. Newly constructed components of the line run from the Russian town of Komsomolskaya straight westward to Novorossiysk. The pipeline is supplied with Kazakh oil through the Soviet-era links surrounding the Sea, which the consortium members have refurbished.

The CPC pipeline exported around 690,000 bbl/d of crude oil in 2007, and the consortium has plans for a $1.5 billion expansion project to increase the pipeline’s peak capacity to 1.34 million bbl/d. With the completion of the two pipeline spurs from Kenkiyak and Karachaganak to the CPC at Atyrau (see Map 1) and the usage of additives, CPC transport levels have increased from around 600,000 bbl/d in 2005 to a monthly peak of 800,000 bbl/d in February 2007.

In September 2007 consortium members reached a major milestone in agreeing to raise the transport tariff to $38/thousand tonnes (mt) from $30.24/mt, effective in October 2007. The shareholders also agreed to cut the interest rate on CPC loans to 6 percent/year from the previous rate of 12.66 percent. The decisions followed several meetings among the project partners this year as they attempted to resolve financing issues, which have held back expansion of the link. Consortium members are also awaiting the formulation of the Bourgas-Alexandropoulis pipeline route, which would keep incremental CPC volumes from further crowding the Turkish Straits.

Kazakhstan-China Pipeline

The 613-mile-long, 813 mm, and 200,000-bbl/d capacity pipeline from Atasu, in northwestern Kazakhstan, to Alashankou in China’s northwestern Xinjiang region is exporting Caspian oil to serve China’s growing energy needs. PetroChina’s ChinaOil is the exclusive buyer of the crude oil on the Chinese side and the commercial operator of the pipeline is a joint venture of CNPC and Kaztransoil. In addition to around 85,000 bbl/d of Kazakh crude that flowed through the pipeline during 2007, Gazpromneft and TNK-BP have received around 12,000 bbl/d each in allocations for their crude oil exports during the first quarter of 2008.

The source of Kazakh oil for the pipeline comes from CNPC’s Aktobe field and from CNPC and Kazmunaigaz’s Kumkol fields. Securing long term crude oil supply for the pipeline’s capacity is the current priority so plans to expand the pipeline to 400,000 bbl/d are now of lower concern. The quantity of crude oil supplied to China through this route will still represent only a small percentage (i.e. less than 5%) of China’s expected oil demand by the time the project reaches completion.

The first stage of the project was completed in 2003 and runs westward across Western Kazakhstan from the oil fields of the Aktobe region to the oil hub of Atyrau near the Caspian Sea. This line will be reversed when all stages are complete. Construction began on the second section of the Kazakhstan-China pipeline in late September 2004 and was completed during 2006. Crude oil reached the Chinese side on July 29, 2006, around two months behind schedule, and was then pumped to the Dushanzi refinery. Pricing issues were the main reason behind the delay, but China and Kazakhstan eventually came to a compromise. The final stage of the project, scheduled to be complete around 2009, will connect Kenkiyak and Kumkol at a cost of around $1 billion, will connect the first two sections, and will theoretically double the pipeline capacity to 400,000 bbl/d. The speed of this final leg will in part also be dependent on the availability of Kashagan crude oil.

Atyrau-Samara

Kazakhstan’s other major oil export pipeline, from Atyrau to Samara, is a northbound link to the Russian distribution system. The line was recently upgraded through pumping and heating stations additions and has a capacity of approximately 600,000 bbl/d. Before the completion of the CPC pipeline at the end of 2001, Kazakhstan exported almost all of its oil through this system. But, since Kazakhstan desired more independence from the Russian transit systems, it favored the development of transport alternatives. In June 2002, Kazakhstan and Russia signed a 15-year oil transit agreement under which Kazakhstan will export 340,000 bbl/d of oil annually via the Russian pipeline system. Russia’s trade ministry also pledged to increase the capacity of the line to around 500,000 bbl/d.

Government Energy Policy

During 2007, Kazakh authorities announced they would review all energy and mineral resources contracts in a bid to generate more revenue and diversify the sources of investment. President Nursultan Nazarbayev signed an amendment into law in October 2007 that allows the government to unilaterally break contracts with oil companies, possibly motivated in part by frustration over delays with the Kashagan project. The new law, effective in November 2007, gives Kazakhstan two paths to terminate contracts with energy companies. One option forces the company into negotiations with the government, and the other option allows for the repudiation of the contract with a notice period of only two months.

In response to concern about Kazakhstan’s investment climate, the Tax Ministry proposed reforming the foreign investment structure. Within one month, however, the government decided to drop a proposal that would have turned the PSA regimes into a concession-type system, allowing the country to change tax rates and contract terms more easily. According to the director of the Ministry’s Tax Department the PSAs should be replaced because of a lack of transparency, the inability to monitor and adjust subsoil users’ expenditures, and the lack of a clause to redistribute interests in the agreement. Oftentimes, the PSA terms are generally undisclosed, and the taxation structure is fixed for the entirety of the project, even in the event of a change in ownership.

The government has successfully implemented other reforms in the past. The introduction of a new tax structure in January 2004 included a so-called “rent tax” on exports, a progressive tax that increases as oil prices grow. The amendment raised the government’s share of oil income to a range of 65 to 85 percent, and it removed a clause guaranteeing investors a static tax rate throughout the duration of the contract. The new structure includes an excess profit tax, and limits foreign participation to 50 percent in each offshore project with no guarantees of operatorship. The remaining share will belong to KazMunaiGaz.

In 2005, Kazakhstan amended the subsoil law to preempt the sale of oil assets in the country. These changes helped the state’s case to buy part of British Gas (BG’s) share of the Kashagan project. Another amendment to the country’s subsoil law in 2005 extended the government’s power to buy back energy assets by limiting the transfer of property rights to strategic assets in Kazakhstan. This helped legitimize the government’s bid to acquire a 33 percent share in Canadian-based PetroKazakhstan after it agreed to a takeover deal with CNPC. For more information on the subsoil law changes please see the fact sheet from the American Chamber of Commerce and from the Central Asia Caucasus Institute.

Downstream/Refining

In contrast to the upstream sector, the refining sector has remained largely in the state’s possession. The refining sector in Kazakhstan has not received high levels of FDI like other parts of the oil and gas production sector. Since domestic prices for refined products have remained low, oil producers have more incentive to export crude oil to international markets instead of refining it locally.

The refining sector in Kazakhstan has three major oil refineries supplying the northern region (at Pavlodar), western region (at Atyrau), and southern region (at Shymkent), with total crude oil refining capacity of 345,093 bbl/d. Refinery runs increased by around 2 percent during 2007, showing that the facilities are still improving their profitability. Around 193,000 bbl/d of refined products were produced during 2007, up from around 191,000 bbl/d in 2006.

The refinery at Pavlodar is supplied mainly by a crude oil pipeline from western Siberia (since Russian reserves are well placed geographically to serve that refinery); the Atyrau refinery runs solely on domestic crude from northwest Kazakhstan; and the Shymkent refinery currently uses oil from Kazakh fields at Kumkol, Aktyubinsk, and Makatinsk, although it is linked by pipeline to Russia.