Organisation of the energy sector
Kazakhstan is the largest economy in Central Asia and home to more than 18 million people. As a country rich in coal, oil, natural gas and uranium, Kazakhstan's economic focus remains firmly on its industrial sector and the extraction and processing of its natural resources. There is also enormous potential for renewable energy in Kazakhstan, particularly from wind and small hydropower plants. Kazakhstan's total energy production covers more than twice its energy demand, which is why in 2018 Kazakhstan was the world's ninth-largest exporter of coal, ninth of crude oil and 12th of natural gas.
Energy accounts for about 21% of the country's gross domestic product (GDP), and approximately 62% of its exports.1 Interestingly, coal represents around half of Kazakhstan's energy mix (50% in 2018), followed by oil and natural gas (both with 25% shares), whereas the share of natural gas in the total final consumption (TFC) was only 13% in 2018.2
Gas
The current status of Kazakhstan's gas industry
The Kazakhstan gas sector has vast potential as its total proved reserves of natural gas at the end of 2019 in Kazakhstan was 2.7 trillion cubic metres3 making it in 2018 the world's 12th largest exporter of natural gas. Most of Kazakhstan's natural gas reserves are in crude oil or condensate-rich fields and, therefore, 90%4 of produced gas in Kazakhstan is an associated gas. Much of Kazakhstan's gross natural gas production is reinjected (more than 30% in 2019)5 to increase oil production. Natural gas production (gross extraction) has been slowly but steadily increasing in recent years in Kazakhstan - from 19 billion cubic metres (bcm) in 2009 to 23.9 bcm in 2018.6 Natural gas production in Kazakhstan is expected by many experts7 to remain stagnant and even decrease after 2025, as no new foreign direct investments are expected to be attracted in the near future in exploration and development of new gas fields in Kazakhstan, unless deficiencies of the legislative architecture of the current gas market design will be rectified to improve commerciality for gas, as discussed below. In terms of regional gas consumption, the western part of Kazakhstan is a significant gas consumer, while in the north and the east of Kazakhstan economies are run predominantly on coal. The south of Kazakhstan uses both gas and coal. This trend is expected to continue.8 Domestic consumption of natural gas, however, increased significantly, from 10.1 bcm in 2009 to 19 bcm in 2018,9 and it expected that Kazakhstan's apparent natural gas consumption will grow at about 1.9% per year on average out to 2040.10 Competition for available commercial gas volumes between domestic consumption and export to China, therefore, will soon become one of the major problems for Kazakhstan and will require the Kazakh government to make a tough choice - either continue to prioritise domestic consumption and in this way to receive less profit than one's due or instead opt for a more lucrative option of exporting limited gas volumes available to China at the expense of domestic consumption.11 Many experts, therefore, expect that Kazakh gas export to China will probably fall, from 7-8 bcm each to China and Russia in the early 2020s, to less than half that in the late 2020s.12
Most of the gas delivered by pipelines in Kazakhstan is consumed in power generation (50%), followed by residential-commercial users (domestic sector) (36%), and industry (14%).13 Under the national Green Economy Strategy adopted in 2013,14 Kazakhstan's programme of gasification and switching the predominantly coal-fired power sector to gas has made good progress in the last five years.
The official target stipulated in the Green Economy Strategy was to reach 20% of all electrical power in Kazakhstan to be produced on gas-fired power plants by 2020, though in practice already in 2019 20.2% of all electrical power in Kazakhstan was produced by gas-fired power plants. The next official target stipulated in the Green Economy Strategy is to reach 25% share of all electrical power to be produced by gas-fired power plants by 2025, whereas the final goal is to reach 30% share by 2050.
A significant part of natural gas resources is concentrated in western regions of Kazakhstan, whereas the biggest and most promising export market15 for the Kazakh natural gas is in the East - China. With the completion of the Beyneu-Bozoy-Shymkent natural gas pipeline in 2015 and reaching its design capacity of 15 bcm per year in September 2020, Kazakhstan aims for a gas export boost to China. On 12 October 2018, Kazakhstan and China signed a five-year contract for the export of up to 10 bcm/y of gas via Central Asia-Centre China Gas Pipeline System (CAGP) during this period. Over the last decade, therefore, China has replaced Russia as the main export destination for Kazakh gas, but still in 2018, Russia imported 12.3 bcm of gas from Kazakhstan.
Despite all above natural advantages, however, so far, Kazakhstan's gas industry is in stagnation as it has been too long in the shadow of the Kazakhstan's oil industry and longterm politics threatens Kazakhstan's long-overdue gas sector reforms, as discussed herein.
Major gas producers in Kazakhstan
The biggest gas producers in the foreseeable future for Kazakhstan are, according to many experts,16 the following companies:
- Tengizchevroil LLP17 that develops super giant Tengiz oilfield (272 billion cubic feet (bcf) dry marketed gas production in 2017).18 Shareholders of the Tengizchevroil are: Chevron, 50%; KazMunaiGas, 20%; ExxonMobil, 25%; and LukArco, 5%. Much of the natural gas produced at Tengiz field is high in sulfur, and therefore it requires special handling and is more costly to process.
- North Caspian Operating Company (NCOC)19 is an international consortium owned by KazMunaiGas Kashagan B.V. (16.9%), Shell Kazakhstan Development B.V. (16.8%), Total E&P Kazakhstan (16.8%), Agip Caspian Sea B.V. (16.8%), ExxonMobil Kazakhstan Inc. (16.8%), CNPC Kazakhstan B.V. (8.3%) and Inpex North Caspian Sea Ltd. (7.6%). NCOC acts as the Operator of the North Caspian Project (that covers Kashagan field), the first major offshore oil and gas development in Kazakhstan (more than 100 bcf natural gas production capacity).20 Much of the natural gas produced at Kashagan field is high in sulfur, and therefore it requires special handling and is more costly to process. The challenges of this project make it one of the most complex industrial projects ever developed in the world.
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Footnotes
1. See The World Bank DataBank. Available at: https://databank.worldbank.org/reports.aspx?source=2&country=KAZ.
2. See IAE's Kazakhstan Energy Profile dated April 2020 at: https://www.iea.org/reports/kazakhstan-energy-profile.
3. See BP's Statistical Review of World Energy 2020 at: https://www.bp.com/content/dam/ bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-statsreview-2020-full-report.pdf, p.32.
4. See Strategic Plan of the Ministry of Energy of Kazakhstan for 2020-2024 as approved by the Decree of the Ministry of Energy of Kazakhstan No.445 dated 31st December 2019 (hereinafter - "Ministry of Energy Strategic Plan 2020-2024"), p.9. Available at (in Russian): https://www.gov.kz/memleket/entities/energo/documents/ details/68779?lang=ru.
5. See Strategic Plan of the Ministry of Energy of Kazakhstan for 2020-2024 as approved by the Decree of the Ministry of Energy of Kazakhstan No.445 dated 31st December 2019, p.9. Available at (in Russian): https://www.gov.kz/memleket/entities/energo/documents/details/68779?lang=ru.
6. See BP's Statistical Review of World Energy 2020 at: https://www.bp.com/content/dam/ bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-statsreview-2020-full-report.pdf, p.34.
7. See presentation of Ashley Sherman, Principal Research Analyst of the Wood Mackenzie at the joint virtual event of the KPMG and the British-Kazakh Law Association "Kazakh Oil & Gas: new reality and challenges" held on 15th October 2020. Available at: https://www.youtube.com/watch?v=gIk9yUdrirw&feature=youtube.
See The National Energy Report-2019 of the KAZENERGY Association, Chapter 4. Kazakhstan's Natural Gas Market and Future Challenges to Gasification, p.89. Available at: https://www.kazenergy.com/upload/document/energy-report/NationalReport19_ en.pdf.
9. See BP's Statistical Review of World Energy 2020 at: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-statsreview-2020-full-report.pdf, p.36.
10. See The National Energy Report-2019 of the KAZENERGY Association, Chapter 4, Kazakhstan's Natural Gas Market and Future Challenges to Gasification, p. 90. Available at: https://www.kazenergy.com/upload/document/energy-report/NationalReport19_ en.pdf.
11. See The National Energy Report-2019 of the KAZENERGY Association, Chapter 4, Kazakhstan's Natural Gas Market and Future Challenges to Gasification, p. 84. Available at: https://www.kazenergy.com/upload/document/energy-report/NationalReport19_ en.pdf.
12. See Pirani, S. n.d. "Central Asian Gas: Prospects for the 2020s" OIES Paper. Oxford Institute for Energy Studies. Available at: https://www.oxfordenergy.org/wpcms/wpcontent/uploads/2019/12/Central-Asian-Gas-NG-155.pdf.
13. See The National Energy Report-2019 of the KAZENERGY Association, Chapter 4. Kazakhstan's Natural Gas Market and Future Challenges to Gasification, p.90. Available at: https://www.kazenergy.com/upload/document/energy-report/NationalReport19_ en.pdf.
14. See the Decree of the President of the Republic of Kazakhstan dated 30th May 2013 No. 577 "On the Concept of transition of the Republic of Kazakhstan to a "green economy"" (hereinafter - the "Green Economy Strategy"). Available at (in Russian): https://online.zakon.kz/Document/?doc_id=31399596#pos=224;-45.
15. The main buyers of Kazakh natural gas in 2019 were China, which accounts for 36% (1.1 bcm), Russia - 16 % (888.1 million cubic metres) and Ukraine - 18% (566.9 million cubic metres). See: Kazakhstan Stock Exchange (KASE) report on Kazakhstan's oil & gas industry dated July 2019, p.6. Available at (in Russian): https://kase.kz/files/presentations/ru/KASE_OilGas_industry_2019.pdf.
16. See presentation of Ashley Sherman, Principal Research Analyst of the Wood Mackenzie at the joint virtual event of the KPMG and the British-Kazakh Law Association "Kazakh Oil & Gas: new reality and challenges" held on 15th October 2020. Available at: https://www.youtube.com/watch?v=gIk9yUdrirw&feature=youtube.
17. See Tengizchevroil's official website at: http://tengizchevroil.com/en/products#drygas.
18. See data of the U.S. Energy Information Administration (EIA), Table 1. Available at: https://www.eia.gov/international/content/analysis/countries_long/Kazakhstan/pdf/kazakhstan_bkgd.pdf.
19. See NCOC's official website at: https://www.ncoc.kz/en.
20. See data of the U.S. Energy Information Administration (EIA), Table 1. Available at: https://www.eia.gov/international/content/analysis/countries_long/Kazakhstan/pdf/kazakhstan_bkgd.pdf.
Originally published by Global Legal Insights - Energy 2021, Ninth Edition.
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