Internal Struggles Threaten Kazakhstan’s Energy Future

Internal Struggles Threaten Kazakhstan's Energy Future

Kazakhstan’s oil and gas minister has threatened to freeze development of one of the country’s three main energy projects. The threat emerges from political competition within the government. Internal struggles are intensifying as the eventual departure from office of the country’s long-time president approaches. Continued pressure by competing government factions threatens the future of Kazakhstan’s energy sector.

Analysis

Kazakhstan will freeze future development of the Karachaganak natural gas field if its government’s dispute with the project’s foreign shareholders goes unresolved, Kazakh Oil and Gas Minister Sauat Mynbayev announced May 18.

The announcement is a product of political competition inside the Kazakh government. Internal tensions could damage the country’s key energy projects and hamper its future energy production.

Seeking a Stake in Karachaganak

Karachaganak is Kazakhstan’s most productive natural-gas project. The field produces 6.6 billion cubic meters (bcm) for export annually and has estimated reserves of 1.2 trillion cubic meters. Karachaganak also produces some 200,000 barrels per day of oil. It is one of Kazakhstan’s “big three” energy projects under development, along with the Tengiz and Kashagan projects.

Kazakhstan’s state energy firm, KazMunaiGaz (KMG), has sought a stake in the consortium running Karachaganak for the past year. The consortium, KPO, consists of BG Group (32.5 percent stake), ENI (32.5 percent), Chevron (20 percent) and LUKoil (15 percent). KMG wants a 10 percent stake in KPO and has employed aggressive tactics against the consortium and some of its members to achieve it. These have included charges of infringement of the production-sharing agreement as well as immigration and tax violations. Last summer, ENI’s chief, Paolo Scaroni, offered KMG a 5 percent stake in KPO. KMG rejected this, however, continuing to hold out for a 10-percent share.

Firms involved in the Tengiz and Kashagan projects have experienced similar pressure from the Kazakh government. Fines paid by foreign firms as part of this campaign helped Kazakhstan weather the global economic crisis. KMG, a state firm lagging decades behind in technology, has also picked up valuable technical know-how from the foreign firms.

Part of the Political Struggle

The attacks emerge from struggles within the Kazakh government, as clans vie for power over the Central Asian country’s strategic energy sector. According to STRATFOR sources, this political tussle may soon see some significant shifts. Since Kazakhstan’s April elections, President Nursultan Nazarbayev has been rearranging and purging the government in preparation for his succession. According to sources, three key figures could be next in line for a shift: Mynbayev, Industry Minister Aset Isekeshev and Finance Minister Bolat Zhamishev. All three have belonged to political factions targeting foreign firms.

Meanwhile, their main political rival, Nazarbayev’s son-in-law Timur Kulibayev, has been gaining in power. Kulibayev was recently named supervisor of the Samruk-Kazyna National Welfare Fund, which oversees state assets constituting 70 percent of Kazakhstan’s gross domestic product. Kulibayev already has a stake in the running of KMG and is a popular government negotiator among foreign energy firms. This is not to say that Kulibayev acts on behalf of the foreign energy companies, but he does see the benefit of having these firms in the country. He thus has walked a fine line, trying to strengthen the Kazakh energy sector without resorting to too many attacks on foreigners.

With Kulibayev’s strength increasing during the past few months and a possible purge of key ministers ahead, he could well move to settle some of the tussles between the government and foreign firms. His power, however, is limited. Kulibayev does not control the financial police, tax police, customs services or court systems — all of which wish, for various reasons, to aggressively target foreign firms. These groups are meant to act as a counterbalance to Kulibayev’s power — a fail-safe to prevent Nazarbayev from being overthrown by Kulibayev.

The government has been so focused on these political struggles that it has ignored the damage the wrangling is causing to the heart of the country’s economic existence — the energy sector. Government interference has continuously delayed and interrupted Kazakhstan’s big three energy projects. The government’s threat to freeze future expansion of Karachaganak could seriously harm Kazakhstan’s energy industry in the next few years. Karachaganak’s current production level is expected to peak in the next year, and expansion — something foreign companies have the technical ability to perform — is needed to maintain the field’s production.

With the “big three” energy projects under attack and their futures uncertain, the government will need to put its political infighting aside to address how it wants to handle the future of its energy sector — and along with it, the future of the country.

https://www.stratfor.com/analysis/internal-struggles-threaten-kazakhstans-energy-future

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