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Kazakhstan announces new energy directions

Kazakhstan's Prime Minister Karim Masimov has announced major energy-related decisions in the wake of President Nursultan Nazarbaev's address to the nation last week. First, and most strikingly, he has ordered the suspension all negotiations with foreign investors on exploration, development and extraction of subsurface natural resources pending the working out of a new tax code.

Second, referring to Kazakhstan's recent success in forcing renegotiation of terms for development of the Kashagan offshore oilfield, he has declared that state policy on the "recovery of balance of the country's interests" in "strategic objects" will be continued. Third, he announced that there would soon be created a state trust analogous to KazMunaiGaz but operating "in the sphere of solid [rather than liquid] hydrocarbons", ie mainly oriented towards coal rather than gas and oil. This trust will be created within the existing structure of Samruk Holding.

Elaborating on the first of these three decisions, Masimov added that the government would, on an order from Nazarbaev, simply cancel contracts in the natural-resource sector in cases where foreign partners are not meeting their legal obligations. (These obligations could range from the planned schedule for capital investment to failure to observe Kazakhstani environmental law.) This clarification from Masimov is merely an extension of a law that entered into force last year.

The Majilis (Kazakhstan's Parliament) had, at the end of September 2007, approved amendments to legislation on subsoil resources, providing for annulment of contracts judged not to be in accord with "national security". At the time, the move was believed to be a device for putting pressure on the Western partners in Agip KCO, the consortium that is developing the offshore Kashagan oil field.

When these negotiations were concluded in mid-January, Astana had held firm on all its demands and successfully compelled their acceptance by the foreign partners: but not before Nazarbaev had, in early November, signed the amendments earlier passed by the Majilis. It is these amendments to which Masimov makes implicit reference.

Masimov's declarations follow on Nazarbaev's programmatic re-assertion of Kazakhstan's national interests as the point of departure for economic decision making, particularly concerning foreign direct investment in Kazakhstan. In particular, the construction of refining plants and production of "added-value energy products" in the country will likely become a negotiating demand on future foreign investors. Nor is this is likely to be a mere bargaining chip.

Nazarbaev identified the production of refined hydrocarbon products as "the main issue of our energy and petrochemical development" because of its capacity to increase the sector's profitability. And he left no doubt over whether the recent political pressures forcing renegotiation of the conditions of the Kashagan consortium were an accident, adding that large foreign investors in the natural-resource sector needed to make a "greater and concrete contribution to Kazakhstan's industrialization", especially diversification of the country's industrial base. And the government will, "if there is a need, initiate relevant legislation".

At the same time, the government in Astana plans to enhance its verification of foreign partners' compliance with environmental regulations both defined by contract and defined by national law. It is likely that this oversight will be integrated into, or coordinated with, a national program for increasing energy efficiency.

In order to facilitate all this, there is a declared intent to streamline, at least somewhat, the administrative process for the granting of rights to exploration and production, reducing lists of documents required, for example, and simplifying legal procedures. The preparation and implementation of the streamlined procedures will likely progress in tandem with the formulation of a new integrated national energy development strategy covering extraction and export of both oil and gas. For export, the country will target the world market as a whole but focus attention on Russia, China, Central Asia and the Caspian and Black Sea regions.

An important part of this overall vision would be the building up of the country's infrastructure, including but not limited to all forms of transportation of both people and goods. This component of the vision is somewhat problematic, however, despite (or because of) its emphasis on market forces in what would be a state-constructed plan, together with an at least rhetorical emphasis on free competition in rail transport. Demonopolization in telecommunications may be less problematic, but it would be difficult to guarantee more or less universal cellphone coverage without some sort of state mandates.

Perhaps an even greater problem, is assuring electrical power to some of the most populous parts of the country, viz southern Kazakhstan, Karaganda, Aqtobe (formerly Aktyubinsk), Kostanai, and Almaty city. India and Turkey have been trying separately for over 10 years to demonopolize their electricity sectors and their interrelated but distinct subsectors (such as power generation and power distribution, to name but two). If neither of them has succeeded, success for Kazakhstan in this endeavor should not be taken for granted.

Yet power generation and distribution are sine qua non for economic production and development. The two processes are in fact extremely intricate and interrelated almost like chicken and egg. Given the unhappy experience of Belgian firm Tractabel in the late 1990s, it is not certain whether Western investors will rush in.

Indeed, Kazakhstan is counting less on them than on state-driven integration of Central Asian energy grids and, probably, take-or-pay natural gas delivery contracts. The centrality of natural gas to ecologically friendly energy generation is surely why Kazakhstan has put a new accent on formulating a comprehensive national natural gas development and export policy (as well as exploring possibilities for developing nuclear energy).

It is no surprise, therefore, that a new national strategy for the natural gas industry in particular is to be prepared and given a legislative basis. In this connection Kazakhstan should, according to Nazarbaev, talk up the idea of a Central Asian "complex system of state energy networks" with its neighbors, looking to create a Council of Energy Security that would create "a market system providing regional and international energy security". The contradiction between such a market system and the state energy networks remains to be resolved in practice.

Despite uncertainties, what emerges clearly from all these indications is that Kazakhstan seeks to assert itself as strongly as possible as a pro-active player in Central Eurasian energy and not just be a field on which other states (and industrial trusts) play out their opposing interests. Whether history will follow the grand vision Nazarbaev has described, however, will depend on variables beyond Kazakhstan's control, including the attitude of its neighbors to the form of practical implementation of that design.

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URL:  http://www.robertcutler.org/blog/2008/02/kazakhstan_announces_new_energ.html
First published in Asia Times Online, 13 February 2008.

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