The National Energy Report Presents a Vision for the Industry’s Prospects
At the Kazakhstan Energy Week-2023 / XV Eurasian KAZENERGY Forum, held in Astana in early October, the annual National Energy Report (NER) was unveiled.
The NER-2023, prepared by the S&P Global team of authors, focused on key themes this year:
- The global dynamics of the economy and energy markets in 2022-2023 and the forecast for the future.
- Kazakhstan's energy security.
- Kazakhstan's initiatives in the Energy Transition.
- Kazakhstan's oil industry: achievements and problems, oil refining, and exports in the changed geopolitical reality.
- Kazakhstan's gas industry: a new vision for the sector and the country's gasification progress.
- LPG in Kazakhstan: increasing complexities with supply due to rising demand for autogas and petrochemical products.
Energy continues to be a significant component of Kazakhstan's economy: the COVID-19 pandemic in 2020 resulted in the most serious economic downturn (a GDP decline of 2.6%) since the dissolution of the Soviet Union in the 1990s. However, active economic recovery afterward has been mainly due to the energy sector.
Kazakhstan's Oil Industry: Achievements and Challenges
In 2022, the hydrocarbon sector accounted for about 20% of Kazakhstan's GDP, compared to 23% in 2019—a contribution fluctuating with production levels and global oil prices. Oil export volumes in 2022 remained similar to those of 2021, but oil export revenues surged by 51% to $48.4 bln amid rising prices (see Fig. 1).
Despite occasional export constraints, Kazakhstan's oil production has shown resilience against numerous destabilizing factors. By 2023, it is expected to return to a growth trajectory and reach peak levels by the mid-2020s, in line with S&P Global's baseline scenario.
As the report notes, Kazakhstan has taken steps to mitigate emerging risks associated with transit through Russia amid the escalation of the armed conflict in Ukraine, partly by diversifying oil export routes, mainly through the resumption of regular exports via the Baku-Tbilisi-Ceyhan pipeline (see "Across the Caspian Sea. Can Kazakhstan Diversify Its Export Flows?", Petroleum No. 4-2023). This includes differentiating between Kazakh and Russian oil in Transneft's export pipelines by introducing a new grade of oil named KEBCO to the world market in 2022.
However, the industry's development faces numerous constraints. A key issue is the relatively high cost of extraction, including a significant share of taxes and fees due to the state, stringent local content rules, and other unfavorable non-geological factors, continuing to negatively impact the economy of exploration and extraction projects and investments in the longer term.
High transportation tariffs and infrastructure limitations will hinder Kazakhstan's ambitious goal to significantly increase trans-Caspian export deliveries in the coming years, aiming for them to constitute about a quarter of the country's projected export volumes.
Accelerating the pace of oil and oil product price liberalization is essential for Kazakhstan to achieve its integration within the Eurasian Economic Union and to avoid a chronic shortage of crude oil for supply to Kazakh refineries and oil products for the domestic market.
S&P Global experts anticipate that oil production in Kazakhstan will reach its peak at 105.4 mln tons (2.23 mln barrels per day) by 2025, after which it will gradually decline to 72.1 mln tons (1.51 mln barrels per day) by 2050. Under an alternative (optimistic) scenario, the country's production could peak at 118.9 mln tons (2.51 mln barrels per day) by 2035 and then decrease to 92.7 mln tons (1.94 mln barrels per day) by 2050. In a pessimistic scenario, the peak would be just 94.2 mln tons (1.99 mln barrels) by 2025, with a decline to 44.3 mln tons (924,000 barrels per day) by 2050 (see Fig. 2). The primary difference between the optimistic and pessimistic scenarios hinges on whether the expansion program within Phase 2 of the Kashagan field is realized.
The country's main drivers of production growth, especially in the short to medium term, are three mega-projects: Tengiz, Kashagan, and Karachaganak. According to the baseline scenario, the "big three’s" share of total oil production is expected to rise from 63.1% in 2022 to a peak of 71% in 2029 due to the expansion of Tengiz and Kashagan and partial stabilization at Karachaganak. Post-2030, this share is anticipated to decrease to 60% by 2050 gradually.
In the longer term, production at the older active assets of KazMunayGas is expected to decline, but this will be offset by the progressive introduction of new technologies for mature fields (including hydraulic fracturing, horizontal drilling, steam, and polymer injection).
Smaller independent oil companies could play a much more significant role in Kazakhstan than currently projected, provided they are given more favorable business conditions: they have a substantial collective reserve base and significant potential for discovering new fields.
Overall investment attractiveness is extremely important for securing exploration and production investments worldwide, as companies are increasingly looking to invest in "advantaged" oil, as emphasized in the report.
Although Kazakhstan's rating positions have improved over the last decade, it currently ranks only 78th among 112 markets in the PEPS rating, largely due to a low score in the financial-tax (fiscal) environment indicator due to high tax collections and low profitability for operators. Kazakhstan's positions also lag behind comparable countries with which it competes for investments (see Fig. 3).