Kazakhstan's gas sector has vast potential as recoverable gas reserves in Kazakhstan are approved at the level of 3.9 trillion cubic meters, about 1.7% of the world's gas reserves. A significant part of natural gas resources is concentrated in western regions of Kazakhstan, whereas the biggest and most promising export market for Kazakh natural gas is in the east — China.

Despite all of the aforementioned natural advantages however, so far Kazakhstan's gas industry is in stagnation as it has been in the shadow of Kazakhstan's oil industry for too long. Most of the gas produced in Kazakhstan is associated gas and, therefore, gas production is not a major source of revenue for subsoil users.
That is why the interests of KazMunayGas (KMG) as the state-owned and vertically integrated oil company have so far prevailed over the often conflicting interests of its wholly-owned subsidiary KazTransGas (KTG) as the national gas operator, which puts the brakes on the development of Kazakhstan's gas industry.

So far, it has been important for Kazakhstan, therefore, to maintain the status quo with the current domestic gas market design, because this way the Kazakh government has been able to make investments in domestic gas distribution infrastructure and proceed with cross-subsidization of the local population and industries at the expense of foreign consumers and Kazakh gas producers.

The ‘new reality' of the COVID-19 pandemic and the looming official launch of the Eurasian Economic Union (EAEU)'s common gas market in 2025, however, require urgent gas market reforms.

The following are the major shortcomings of the current legislative architecture of Kazakhstan's domestic gas market that require strong political will to be addressed:

  1. State regulation of the wholesale and retail gas prices and the issue of cross-subsidization of local consumers at the expense of foreign consumers, remote or poor regions of Kazakhstan, gas-producing regions as well as Kazakh gas producers
  2. Lack of transparent and cost-reflective gas transportation tariff
  3. Undeveloped exchange (ie gas hubs) trading of natural gas
  4. State's preemptive right of KTG and the need to liberalize gas exports
  5. Incomplete privatization and division of the activities of the monopolists (KMG and KTG) by type of activity (ie ownership unbundling), and
  6. Unresolved issue of non-discriminatory third-party access to trunk and distribution gas pipelines.

Kazakhstan's gas market liberalization is, therefore, urgently required as it will eliminate inefficiency in the country's gas sector and create ample opportunities for foreign and local lenders and investors, including using Islamic finance-structured products, for the development of new gas fields and to proceed further with the gasification of the remote regions of Kazakhstan.

A failure to reform Kazakhstan's domestic gas market in time will jeopardize the proper functioning of the EAEU's common gas market and will negatively affect the competitiveness and effectiveness of Kazakhstan's domestic gas market.

Originally published by Islamic Finance News

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