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Challenges in Kazakhstan❜s Upstream: High Costs and Industry Regulation

Halyk Finance Analytics Center has prepared a review of Kazakhstan's oil sector for 2023 (authored by expert Sanzhar Kaldarov and advisor to the board chairman Murat Temirkhanov). Petroleum Journal introduces its readers to the main points of the review concerning the challenges currently faced by the oil and gas extraction industry.
The oil sector in Kazakhstan continues to expand in physical terms. In 2023, oil production volumes reached about 90 mln tons, of which 70.5 mln tons were exported. These figures are the highest in recent years but are still below pre-COVID levels. Such high volumes are associated with record oil production at Kashagan, while the other two major fields—Tengiz and Karachaganak—showed modest dynamics last year.
Conversely, investments in the oil industry in 2023 decreased. In addition to issues related to attracting new investments, the reduction was also driven by lawsuits against the operators of Kashagan and Karachaganak, environmental fines, oil price volatility, and the postponement of expansion projects at the Tengiz field. Amid declining oil prices, especially in the fourth quarter of 2023, revenues from the consolidated budget and oil export earnings also decreased.
High Costs of New Oil Projects
One of the key challenges facing Kazakhstan's oil industry today is the high cost of exploration and production, particularly for new projects. According to S&P Global's estimates in the National Energy Report, the breakeven price for a typical new oil project in Kazakhstan in 2022 was about $67 per barrel, placing the country on the higher end of the global average cost curve.
In other words, the cost of new exploration and production projects in the country is extremely high. This level is above the average regional indicator for Eurasia, where the breakeven point for a typical project is about $66.35 per barrel – the highest among all regions. S&P believes that under such conditions, it will be very difficult for Kazakhstan to compete with other oil-producing countries and maintain, let alone increase, its share in the global oil market.
Meanwhile, S&P Global forecasts that the cost of Kazakhstani oil will remain relatively high in the long term compared to the international level. For example, in 2040, the breakeven indicator for new Kazakh oil projects, which will be operational that year, is expected to be around $70 per barrel. In contrast, for approximately 65% of the global volume of new crude oil production in other countries, this indicator will not exceed $50 per barrel by 2040.
In our view, this situation makes the oil sector extremely dependent on global oil prices, which could be a decisive factor in the profitability or unprofitability of investments in the exploration and production of new fields. If oil prices drop significantly, the high-cost base could render the launch of new oil projects unprofitable, further slowing investment in this sector, which has been stagnant in recent years.
In this regard, S&P also emphasizes that the current high price level generally means extending the operational life of existing fields, but most potential new production projects in Kazakhstan may be unprofitable. In the longer term, the country is likely to cede export market share to less costly producers, primarily located in the Middle East.
Domestic Crude Oil Supplies are Unprofitable
The situation with the domestic market for oil and oil products remains quite tense. Due to the production sharing agreements for three oil megaprojects (Tengiz, Kashagan, Karachaganak) with major foreign investors, all oil produced at these fields is exported. However, new fields are facing serious difficulties.
Firstly, there is a significant difference between export and domestic oil prices. Some estimates suggest that the purchase price of crude oil on the domestic market is nearly 55-70% lower than the export price due to the state’s policy of subsidizing domestic prices at the expense of mineral users. The state mandates mineral users to allocate a certain portion of the oil produced to the domestic market at low prices, terming this a "social burden." This condition is disadvantageous for private investors, so investments in new fields will likely stagnate.
Secondly, domestic oil consumption in Kazakhstan is rapidly increasing, and there is no guarantee that the government will not further pressure mineral users in the future to increase oil sales on the domestic market to the detriment of investors. Currently, about 20% or 18-19 mln tons of all oil produced in Kazakhstan goes to the domestic market, but this may not be enough to cover future consumption, which has increased by almost a third over the last ten years.
The situation is further complicated by weak prospects for oil production growth in the country, which are unlikely to continue rising rapidly after implementing expansion projects at Tengiz. If the current situation persists, by 2030, the oil producers' ability to subsidize the domestic market will be exhausted (see Fig.1).

The current situation with the domestic oil and oil products market is also described in the National Energy Report for 2023 (see "The National Energy Report Presents a Vision for the Industry's Prospects," Petroleum No.6-2023). As noted in the report, there is a very high degree of administrative control over the prices of oil products, which are maintained at a level lower, sometimes significantly, than prices in other EAEU member countries. As a result, Kazakhstan’s oil producers, refiners, and wholesalers, who receive extremely limited margins, lack incentives to supply the domestic market.