Not a Second Kuwait

Industrial oil production in Kazakhstan dates back to the days of the Russian Empire. Yet the country’s reputation as oil-rich began to emerge at the very end of the Soviet era, when the leadership of the USSR decided to hand over the huge Tengiz field in the Atyrau region of Kazakhstan for development by the US company Chevron.

This episode turned out to be highly symbolic for the further development of the Kazakhstani oil industry: virtually all of its new and lucrative oil fields posed geological and operational challenges and could only be developed by bringing in foreign technologies and companies. As a result, during the early years of Kazakhstani independence, such companies — mainly from the US, UK, and China — began to control most of its oil production.

The results of this were twofold: on the one hand, the technology and investments they brought allowed a dramatic increase in oil production from 25.8 million tonnes in 1992 to more than 80 million tonnes per year since 2010. The industry became a leading source of state funds. On average, more than 60 percent of the state budget came from the oil industry, which also served as the main source of income to the Kazakhstan National Fund.

This structure, modelled on the Norwegian State Oil Fund, accumulates surplus financial revenue from raw material exports when they exceed a certain threshold. The National Fund, according to Grigory Marchenko, one of its creators and former chairman of the board of the National Bank of Kazakhstan, “fulfils both of the main functions of such funds: saving for future generations and stabilizing fluctuations in oil prices”.

Dependence on Fossil Fuel “Monoculture”

On the other hand, Kazakhstan’s economy has become extremely dependent on this “monoculture”. Price fluctuations on the energy markets have repeatedly necessitated sharp declines in the exchange rate of the Kazakhstani tenge (KZT) against the US dollar, pushing several other industries to the background, essentially marginalizing them.

The country’s economy relies heavily on imports of various commodities — from pharmaceuticals and foodstuffs to a variety of technical goods. The depreciation of Kazakhstan’s currency against the dollar had meant constant difficulties for the country in funding these imports, as well as significant distress experienced both by the economy and by Kazakhstani consumers. Furthermore, the dominance of foreign companies in oil production has drawn public criticism, although objectively there is no real alternative.

In terms of its population sharing in the gains from oil production, Kazakhstan fares better than many other developing countries that export resources on a large scale.

The expectations of the 1990s and 2000s — that both oil production and exports would vastly expand in the foreseeable future — turned out to be greatly exaggerated.

For instance, in 1997, Nurlan Balgimbayev — who held the positions of Minister of Oil, Prime Minister, and President of the national company Kazakhoil — predicted that by 2003 the annual production volume could reach 100 million tonnes. Later on, he even cited figures of 120 million tonnes by 2010, and 200 million tonnes between 2010 and 2015. The highest of these hopes were based on the Kashagan oilfield in the Caspian Sea. Industrial oil production was slated to commence there in 2005, but did not start until 2013.

The current figures are far below those forecasted in the 1990s: in 2022, according to the country’s Ministry of Energy, a total of 82.4 million tonnes of oil were extracted in Kazakhstan. Expectations from 2023, from the same source, indicate a production of 90.5 million tonnes, of which 71 million will be sent to export. For comparison, in 2010, according to the Ministry of Oil and Gas, 79.7 million tonnes of oil and gas condensate were produced and 71.2 million exported.

Oil over Political Reform

The development of oil production played a role in reinforcing authoritarian tendencies in Kazakhstan’s politics from the 1990s to the 2010s, enabling Nursultan Nazarbayev — the country’s president from 1990 to 2019 — to remain in power for almost 30 years.

Oil provided the financial resources that allowed for a relatively high standard of living in Kazakhstan compared to other countries in the region. Moreover, it ensured international diplomatic and informational support for Nazarbayev from countries with interests in the oil extraction projects. It was against this backdrop that Nazarbayev’s slogan emerged: “Economy first, politics later!” This implied an emphasis on economic advancement primarily rooted in oil production, followed by the implementation of political reforms once the socio-economic situation had been securely stabilized. These advancements were to be guaranteed by the president, whose name had become linked to the success of the economic reforms.

How much does the oil industry contribute to the well-being of Kazakhstan's population? How fairly are its revenues distributed? These are very complicated questions.

On one hand, oil revenues are the country’s most important income source and consequently make state social programmes possible. The National Fund, which receives revenues from the export of oil and other raw materials when they exceed specific forecasts, acts as the fiscal cornerstone of the nation, providing support for the national budget with transfer payments during difficult periods.

We can certainly say that the population benefits from the development of the country’s natural resources, considering that a limited number of individuals are directly engaged in oil production itself or in related sectors, and that the average standard of living in Kazakhstan is relatively high: the country’s mean wage in the first quarter of 2023 was KZT 340,636, about 760 US dollars. By comparison, in the “non-oil” countries which neighbour Kazakhstan, the situation is quite different: in April 2023, the mean wage in Tajikistan was equivalent to only 176.60 dollars, and in Kyrgyzstan 377 dollars.

Between 2000 and 2008, Kazakhstanis enjoyed a substantial increase in prosperity and consumption due to the soaring global oil prices — although the country’s economy simultaneously faced the Dutch disease. Oil producers, whether local or international, have constructed many modern social facilities, such as sports complexes and hospitals, in the areas of their operations.

Finally, shares in the state-owned company KazMunayGas are listed on the Kazakhstan stock exchange and are open for acquisition for purchase by private individuals. It is also worth noting that in some regions of western Kazakhstan, the oil industry is the main and sometimes only employer, since harsh natural and climatic conditions severely impede the development of agriculture or other activities in these areas.

Nevertheless, the dramatic “oil bias” of Kazakhstan’s economy hinders the development of other more technologically complex sectors. It attracts the best and most significant investment and personnel, effectively curbing the establishment of new, more sophisticated, well-compensated job opportunities in other areas.

Uneven Development

The picture is also not unambiguous in the context of Kazakhstan’s distinct regions.

According to various social development ratings, which track different aspects of education, healthcare, and quality of life, Atyrau, where the bulk of Kazakhstan’s oil is produced, often ranks first. At the same time, other oil regions noticeably lag behind it.

The following facts illustrate the situation: in Mangistau, the second-largest region in terms of production and reserves, there are often strikes involving economic demands, primarily for higher wages. It was here, because of the increase in the price of liquefied natural gas, that the protests of January 2022 began. These protests spread throughout most of the country and led to many injuries and lives lost as well as political change.

In general, the oil industry is not the most egregious contributor to environmental issues in Kazakhstan — the situation is much worse in the mining, transport, and energy sectors.

In terms of its population sharing in the gains from oil production, Kazakhstan fares better than many other developing countries that export resources on a large scale, such as Nigeria or Venezuela. Nonetheless, the resource distribution practices of developed countries like Norway and the Netherlands are still unattainable.

Considering the oil problem from the perspective of the environment and climate, we again have to talk about contradictions. When the USSR collapsed, the ecology of oil-producing regions was in a deplorable state: the gas associated with oil production was flared almost everywhere, resulting in considerable greenhouse emissions. This served as the main “contribution” of the oil industry to adverse environmental and climatic processes.

In 2004, Kazakhstan’s oil legislation was amended to prohibit the flaring and release of excess gas into the atmosphere from 1 July 2006. Although it still took some time for these guidelines to be implemented in practice, by the mid-2000s Kazakhstan had emerged as one of the most successful countries in reducing CO2 emissions and gas flaring. Today, the most problematic area of Kazakhstan’s economy in terms of meeting climate goals is not oil production but power generation, which mainly uses coal. Another problem — oil spills from leaking pipes in production areas — has also to a great extent been resolved.

Furthermore, oil companies are also responsible for the storage of sulphur, a component found in various types of Kazakhstani oil that needs to be extracted prior to transporting the crude through pipelines. The consortium of companies developing the offshore Kashagan field in the Caspian Sea has been working hard to address public concerns in the areas around the Caspian Sea regarding the possible environmental impacts to the region.

In general, the oil industry is not the most egregious contributor to environmental issues in Kazakhstan — the situation is much worse in the mining, transport, and energy sectors. But a number of environmentalists continue to criticize the oil industry as well, for the environmental damages it causes. For example, the prominent environmental expert Sergey Solyanik raises the problem of groundwater pollution, which occurs as a result of environmental law violations during the drilling of oil wells.

Conflict over Pipelines through Russia

The beginning of the Russian–Ukrainian conflict had a bearing on Kazakhstan’s oil sector as well. The events had little practical impact on oil production, but they caused acute problems with transportation. Oil transport has become one of the main topics of Kazakhstani–Russian relations over the past year. Since Soviet times, most of the oil produced in Kazakhstan has traditionally been transported via pipelines through Russia.

The Caspian Pipeline Consortium (CPC) is an international company established in 1992, with its main shareholders being Transneft of Russia and KazMunayGas of Kazakhstan, alongside a number of Western companies. The CPC operates a pipeline, built in the 1990s, extending from western Kazakhstan to the Russian port of Novorossiysk. About 80 percent of Kazakhstan’s oil exports follow this route, and its operations had not raised concerns until last year. Another 11 million tonnes of oil [per year, TN] are transported to Xinjiang province through the Kazakhstan-China pipeline, which has a nominal capacity of 20 million tonnes. In the spring of 2022, CPC operations were unexpectedly halted owing to damage to mooring equipment at the marine terminal following a storm.

This incident, which resulted in several court cases and the possibility of the pipeline being shut down for a month, came as a complete surprise to Kazakhstan as well as to the companies who supply their oil via the pipeline. The CPC's operations were later restored, but within Kazakhstani society, this incident had a highly unfavourable impact. Many commentators perceived it as a means of exerting pressure on Kazakhstan.

Oil exports allowed the country to survive hard times and ensured a decent level of social development, but various circumstances have led Kazakhstan into a critical dependence on the oil sector, underscoring the urgent importance of diversification.

In July 2022, Kazakhstan’s president, Kassym-Jomart Tokayev, stated that the country needed to diversify its export routes, prioritizing the trans-Caspian route — that is, transporting oil by tankers from Kazakhstan’s ports to Baku, for further transmission through the Baku–Tbilisi–Ceyhan pipeline (BTC). This is the only route to European markets which bypasses Russian territory. The government is studying the possibility of developing this route so that at least 20 million tonnes of oil can be transported.

Given the geopolitical situation, it has a keen interest in a solution like this, but there are a number of obstacles to the rapid realization of such plans. The existing port infrastructure in both Kazakhstan and Azerbaijan is insufficient and in need of large-scale development. The tanker fleet in the Caspian Sea is negligible, and new ships take time to build. In Kazakhstan, a new oil pipeline will also need to be built to bring oil from the fields to the port.

The route could become significant if a seabed pipeline were to be constructed from the eastern to the western shore. This idea was considered in the 1990s, but involves a number of engineering and environmental challenges, and it is hard to imagine that Moscow and Tehran would be happy with such a project. Finally, it is not currently clear whether the major production companies are ready to feed the trans-Caspian route with a guaranteed volume of oil.

One major event this year was the commencement of direct deliveries of Kazakhstani oil to Germany, facilitated by Russian company Transneft, a process based on transit through the Druzhba pipeline. As Russian and Kazakhstani media reported in early June 2023, 90,000 tonnes have been delivered since January. While this might not seem substantial, according to President Tokayev, it is feasible to supply up to 1.2 million tonnes annually, with the potential for expansion in the future.

The Imperative to Broaden the Economy

Considering current political realities, it can be assumed that deliveries via Druzhba, and especially via the trans-Caspian route, will expand, but not particularly quickly and not on a very large scale. It is also possible that Kazakhstan’s oil exports to China will increase.

For the foreseeable future, the Novorossiysk route will continue to be the main export route, and it is likely that the decision makers in the Kazakhstani and Russian capitals and in the oil companies will reach an agreement on the stability of its operation: Moscow must be cautious not to excessively pressure the matter, as such an approach could risk alienating Kazakhstan. However, even in the darkest scenario, envisioning a complete halt of this route's operations, the socio-economic situation in Kazakhstan could become extremely complicated, which would not be favourable to Russia from any perspective — after all, the Kazakhstani–Russian border is the second longest in the world.

We can draw several conclusions from Kazakhstan’s “oil history” during the post-Soviet period. The expectations of the 1990s and 2000s were not met — the country did not become a “second Kuwait”. Still, oil exports allowed the country to survive hard times and ensured a decent level of social development. Yet at the same time, various circumstances have led Kazakhstan into a critical dependence on the oil sector, underscoring the urgent importance of diversification.

Oil exports will remain the main driver of the country’s economic development for the foreseeable future, however, and it is likely that, owing to geographical, geopolitical, and technological factors, the European Union will remain the core market for Kazakhstan's oil, and the primary export routes will likely continue traversing through Russia. [1]

Translated by Christopher Fenwick, Rowan Coupland, and Anna Dinwoodie for Gegensatz Translation Collective.