Votum Separatum
On Expanding the Resource Base, Gas Chemistry, Disputes with Investors, and Continuity in Policy
Oil and gas industry experts Askar Ismailov [AI] and Abzal Narymbetov [AN] reflect on some of 2024's key outcomes. Oleg Chervinskiy, publisher of the Petroleum Journal, moderates the discussion.
Askar Ismailov
A seasoned oil and gas expert who participated in the develop‑ ment of Karachaganak, Tengiz, and Kashagan in Kazakhstan, as well as Shah Deniz (Azerbaijan), the South Caucasus Pipeline, and TANAP (Turkey). Author of the Telegram channel «PACE.» With over 20 years of experience, he worked at ConocoPhillips, Eni, and Lukoil. Recently, he man‑ aged chemical and petrochemi‑ cal assets at the Samruk-Kazyna fund.
Oleg Chervinskiy
A professional journalist specializing in Caspian energy resourc‑ es since 1994. Early in career, he contributed to Russian Petroleum Investor and led business publi‑ cations Delovaya Nedelya, Novoe Pokolenie, and Kazakhstanska‑ ya Pravda. In 2000, founded and became editor-in-chief of Petro‑ leum. Author of Black Blood of Kazakhstan and Energy of the Great Steppe, and the Telegram channel «Kazakhstan Oil and Gas: Facts and Comments.»
Abzal Narymbetov
A business and oil and gas ana‑ lyst with a DBA and 18+ years of experience in the industry. Cur‑ rently director of Energy Analyt‑ ics and author of the Telegram channel «Energy Analytics.» He has worked at Baker Hughes, TotalEnergies, KMG, Eni, and CSI on various projects. A profes‑ sional member of the Society of Petroleum Evaluation Engineers (SPEE), he is well-versed in evalu‑ ating oil and gas reserves.
– Good evening. Let’s begin our review of the oil and gas year by discussing the situation regarding reserve replenishment by our two national companies, KazMunayGas and QazaqGaz. The situation appears rather dire based on publicly available information, as geological exploration has been nearly absent in recent years. Great hopes were placed on the Caspian shelf, but recent news from the shelf has also been disappointing. Last year, the well at the Zhenis block was dry, leading Lukoil to announce the closure of the project it was implementing jointly with KazMunayGas. Recently, similarly uninspiring news came from the Abay block, where oil exploration was conducted in partnership with Eni. Previously, the joint venture at the Isatay block didn’t even proceed to drilling.
Given this, let’s ask Abzal, an expert in reserve evaluation, what is happening with the industry's resource base and whether there is hope for improvement.
AN: – Good evening. This is an interesting topic! I would prefer not to comment on the current news you mentioned, as the work on these blocks was planned 5–10 years ago. From experience, administrative barriers account for roughly half of the project implementation process in geological exploration. If a project takes 10 years, about five are spent navigating administrative procedures.
This is generally an international standard—investors put money into projects when the operator promises to produce the first oil within five years. In Kazakhstan, meeting such timelines is challenging, which is one reason new investors are hesitant to come here. All the blocks we’re hearing about today are structures for which contracts were signed long ago, and it’s only now that drilling work is being carried out.
It seems that these investors have simply fulfilled their contractual obligations, drilled, confirmed that the wells were dry, and closed the project. I don’t believe they are interested in continuing to develop these structures.
I want to highlight that Kazakhstan’s potential for reserve replenishment is greater onshore than offshore. This is because we have mature fields in the fourth stage of development. If we focus on further exploration and drilling at these sites, I think the returns would be higher.
Of course, there are challenges preventing investments in these areas. One major issue is the quota system for supplying oil to the domestic market. Each year, these quotas are increased for companies, and as you know, prices on the domestic market are two to two and a half times lower than on the export market.
For example, 10 years ago, investors agreed to develop a field under a contract requiring them to sell 30% of the extracted oil on the domestic market and export the remaining 70%. Now, those investors are complaining because the quotas have been reversed—70% for the domestic market and 30% for export. Imagine how much revenue they’re losing!
As a result, the current fields are underfunded, meaning investors cannot fulfill their commitments to drill new wells, build facilities, and develop infrastructure. Reduced revenue has made it impossible for them to meet these obligations.
Currently, mandatory supplies to the domestic market average 70%. With rising demand, this may increase to 80%, and within the next five years, it could reach 90%. Domestic consumption of petroleum products is growing, and prices remain regulated.
– We’re currently talking about oil, but what about gas? We acknowledge that Kazakhstan will become a gas-deficit country in the coming years. It’s absurd, given that we have substantial gas resources. Yet, instead of exploring and developing our fields, we will buy gas from Turkmenistan and Russia...
AN: – I’ve been saying and writing for 2–3 years now that underfunding is the main issue. The figures you hear about gas reserves—62 trln cubic meters, and so on—are just resources. This means no wells are being drilled, no infrastructure is being built; these numbers are simply added to the state balance to show that we have these gas volumes.
However, for international practice and potential investors, resources don’t matter as much as reserves. I highly doubt our reserves exceed 3 trln cubic meters because 80% are concentrated in large fields like Kashagan, Tengiz, and Karachaganak, where gas reinjection volumes are increasing annually. At these fields, there aren’t even plans to prepare gas for commercial production for the domestic market or export.
In essence, we are not developing our gas fields but instead importing gas. Recently, it was reported that Kazakhstan spent $324 mln on imported gas from Russia over eight months. This figure will grow as consumption increases. I believe we will face a gas shortage by 2025.
We hear news about QazaqGaz signing memoranda and agreements with Chevron and the domestic company Kor, but as I’ve mentioned before, it takes at least five years to go from signing a contract to project implementation. Only then will we see tangible results—such is the reality in Kazakhstan. For instance, Kusto Group, which launched a field recently, stated that it took them 10 years of navigating ministry corridors just to complete the necessary paperwork.
– Let me summarize your recommendations for addressing the issue of reserve replenishment. First, adjust the proportions between domestic market supplies and exports. Second, reduce bureaucratic hurdles for new oil and gas projects. What else?
AI: – Honestly, all our major fields were discovered back in Soviet times. Large and super-giant discoveries are unlikely at this point, so we need to work with what we already have.
In my view, the priority purchase right for associated gas granted to the national company is a major obstacle for investors interested in fields with significant gas content. Since QazaqGaz has the priority right to purchase the gas produced, negotiations shift from economics to politics—you have to agree on the price at which the gas will be sold.
Additionally, the market for commercial gas in Kazakhstan, like the petroleum product market, is heavily regulated by the government. Prices are artificially constrained, which discourages new investors from entering the industry.
We urgently need to launch new gas projects. Much has been said about the gas processing plant (GPP) construction project at Kashagan, which aims for 1 bln cubic meters capacity. I doubt it will be launched soon, given the numerous challenges involved.
– Don’t you see a paradox here? On one hand, we are collaborating with the North Caspian Consortium to build a GPP to supply the domestic market with gas. On the other hand, we’re engaged in international arbitration with them over a bizarre $150 bln claim—three times the amount they’ve invested. Moreover, there’s intense discussion about the fate of the three mega-projects, with suggestions to revise the Kashagan PSA. On one side, we invite investors to cooperate; on the other, we scare them away with such actions. How can we strike a balance between defending state interests and ensuring investors meet their obligations? Askar, would you like to start?
AI: – Some people argue that we should strictly adhere to PSAs once they are signed. I would offer a counterargument. For instance, during Kashagan’s development, the investors themselves violated the contract during the construction phase: they increased infrastructure costs and extended timelines.
– But those steps weren’t taken unilaterally; the authorized body approved them.
AI: – That’s correct; they were approved. For example, in construction and installation contracts, one could go to the contractor and say, "Sorry, we agreed on a specific amount, and you must stick to it." Instead, concessions were made because the reasons for cost overruns were understood, and contract amounts were adjusted accordingly.
If we apply this logic to PSAs, the same principles hold. You could argue that the times have changed—oil prices are different, and our circumstances have also shifted. So, why not revise the PSA? There’s nothing inherently wrong with this idea. After all, PSAs have already been adjusted at the request of investors. Initially, KazMunayGas wasn’t even a participant in the PSA, but now it is, and its share has gradually increased. The PSA term was also extended—it’s now valid until 2041—and the timeline for commercial production has changed.
Further revisions wouldn’t be unprecedented. The key is to find a compromise that will satisfy Kazakhstan and the oil companies involved in the project.
As for the $150 bln claim you mentioned, I believe Kazakhstan, as the plaintiff, will justify these amounts. I imagine negotiations are underway, and the arbitration court will eventually determine whether the claim is reasonable or excessive. That’s my opinion since we don’t know all the details.