Exclusive
On the Fragmentation of the Global Oil Market and Kazakhstan❜s Role in Current Processes
Exclusive interview with Vyacheslav Mishchenko, international energy market expert and former Head of Argus Media in Eurasia
Vyacheslav Mishchenko began his international business and investment career in 1993. He worked with American and British companies on strategic consulting projects in the financial and energy sectors of Russia, the former USSR, and Central and Eastern Europe, focusing on the development and implementation of market strategies for major international oil and gas companies such as Total, BP, Alcoa Inc., Exxon, and others.
His main area of expertise is pricing in international commodity markets.
– Vyacheslav, let us begin with an overview. How would you assess the current state of the global oil market?
– I would like to highlight one important fundamental process that has become evident over the past few years – the fragmentation of the global oil market. All participants in this market are feeling the impact of this process: producing countries, buyers, and transit states alike. These changes are unfolding rapidly.
In essence, we are witnessing the transformation of the classical global market model that took shape several decades ago, following the dissolution of the Soviet Union and the emergence of new independent states, including Kazakhstan. At that time, all participants of the global market became integrated into the unified system of international hydrocarbon trade.
Today, that order is breaking down. We are witnessing a conflict along the “Russia–West” axis, although that is not the only factor – one can recall a range of earlier global developments that have influenced the market. Among them are the “Arab Spring,” which triggered complex processes in the Middle East; the Syrian crisis; the Iraqi issue; and the Iranian question, associated with many years of sanctions imposed on Iran. I want to remind that Iran is one of the largest oil- and gas-producing countries in the Middle East region.
In Latin America, we also observe the evolving confrontation between the United States and several Latin American countries. One of them is Venezuela, a major oil producer that has long faced significant pressure from sanctions. All these developments, in essence, are linked to hydrocarbon flows which, in the view of some global actors, must either be redirected to other markets or redistributed in favour of certain global players or transnational corporations. These processes are not new, but they have intensified, particularly in recent years.
As I mentioned earlier, the current “Russia–West” confrontation has determined the reorientation of Russian energy flows toward the East and the so-called “Global South.” I should note that, overall, this trend coincides with the broader trajectory of global economic and trade development, and primarily with the shift of the world’s demand center toward the countries of the “Global South,” or more precisely, toward the nations of Southeast Asia.
These countries are characterized, first and foremost, by rapid population growth: India and China together are home to nearly three billion people, forming the world’s largest energy consumption market. In addition, there is Pakistan, with a population exceeding 200 million, and Indonesia, with nearly 300 million people, as well as other countries with rapidly growing populations. Accordingly, global demand for energy resources, primarily oil, is shifting toward the countries of this region.
Europe, on the other hand, is deliberately reducing its oil and gas consumption as part of the “Green Deal,” striving to achieve net-zero emissions and a complete transition away from hydrocarbons by 2050.
– Does this mean Europe is ceasing to be a promising market?
– I would put it this way: the European market is becoming ever more complex. The countries of the European Union are operating under the “Green Deal,” which they jointly adopted at the end of 2019. It is precisely the Green Deal that fully defines the energy strategy of the EU countries through 2050, aimed not merely at reduction but practically at the elimination of the use of hydrocarbons in these countries’ energy systems and economies. A total transition to renewable energy sources is envisaged. Hydrogen and various other substitutes that can produce energy without fossil fuels are also mentioned.
In effect, the current conflict has become a vivid manifestation not only of political contradictions but also of the consequences of a change in the global market's structure. As I noted, demand is shifting away from the traditional market that for a long time was the European direction, and indeed the broader Western direction, toward the southeast and the east. In addition, all of this is overlaid by a powerful sanctions policy, as well as a policy of introducing various duties or tariffs, as they are now commonly called, emanating from the new U.S. administration of Donald Trump.
This is the primary instrument of political and economic influence in the world that the United States' leadership is currently employing. We are seeing an unprecedented level of across-the-board pressure on virtually all economies and countries from the world’s economic hegemon. Very serious tariffs were recently imposed on India, intended to complicate the foreign economic activities of Indian companies significantly. The introduction of tariffs and duties regarding China is also under discussion. China is, in essence, the world’s industrial center.
In my opinion, over recent decades, there was a lack of a full understanding of China’s development dynamics, and it was not anticipated that China would become an economy that now outpaces other leading economies of the world on many parameters. It was assumed that China had numerous problems and a large population that would not be able to produce a high gross domestic product due to technological lag, among other factors. It turned out that these forecasts were incorrect in principle, and the calculation of China’s pace was mistaken. China will continue to dominate not only in the countries to the east of the Suez Canal but, more broadly, globally.
Russia, as it builds out its eastern vector of development, is one of the world’s largest oil producers and a very important partner for China. As for oil production, over the past decade, the United States has surpassed Saudi Arabia to take first place. Russia and Saudi Arabia share second and third place in terms of production level. These two largest oil producers are also in a partnership framework on the OPEC+ platform, which, incidentally, includes Kazakhstan. Therefore, voluntary production restraints also play a role here. This is a coordinated policy of several countries that created this platform at the end of 2016. It must be acknowledged that this association has performed its function quite successfully, namely controlling supply in the global oil market by limiting production in various periods and reducing it by certain volumes when necessary. In essence, OPEC+ controls the price level in the global oil market, preventing prices from collapsing and not allowing speculators to “call the tune” in the oil market.
Oil and product flows, as I have mentioned, are shifting from Russia toward the Global South and the East. For oil producers in Kazakhstan, government bodies, and, of course, the management of the national company KazMunayGas, understanding this trend is crucial. It is not connected with some conjunctural or temporary factor. It is driven by the formation of a new oil market that is already acquiring structural features.
– But today, Kazakhstan is objectively tied to Europe. More than 80 percent of exports go through Novorossiysk and the Druzhba system. Oil is supplied to China via a pipeline with a capacity of 20 million tons, with 10 million tons contracted by Rosneft. As for those markets capable of absorbing large volumes of crude, such as India or Pakistan, Kazakhstan unfortunately has no access. What can be done in this situation?
– It is crucial to act on two levels. The first is tactical, or situational in a positive sense. The European Union’s refusal to purchase Russian hydrocarbons presents a temporary window of opportunity for alternative suppliers, including Kazakhstan, which can capitalize on this. With established agreements in place with Russian transport operators, Kazakhstan is already actively shipping oil through Druzhba, primarily to Germany and other countries.
Kazakhstani export grade KEBCO has proven itself well in the European market. The same applies to CPC Blend, exported via CPC. The main route for Kazakhstani crude remains Southern Europe, where export potential is not yet exhausted.
The second level is strategic. It is necessary to explore new markets and diversify export routes. Primarily, this means China, where demand is stable and solvent. Kazakhstan needs to expand its capacity for eastbound exports while simultaneously developing its domestic refining capabilities. This will enable the country to supply not only crude oil but also higher value-added petroleum products such as motor fuels and petrochemical materials. Such products are transported in smaller volumes but yield significantly higher margins.
– You raised the topic of refining. How realistic is the strategy for Kazakhstan to move from crude exports to the production of petroleum products?
– This is a very relevant area. Kazakhstan needs to transition from crude oil exports to the development of oil refining and petrochemicals. This will make it possible, first, to satisfy domestic demand for fuels and petrochemicals; second, to enter external markets with higher value-added products. This, in turn, will reduce your economy’s dependence on oil price volatility.
Everything related to other, deeper value chains, gas chemicals for example, must also be tied to the development of new export markets. Yes, this is not a simple task; it requires thorough work on trade relations with neighbours, identification of niches, and the building of logistics. However, niche products with higher value-added differ in modes of transport and in demand across various markets, which means they promote diversification of export routes and, overall, can help reduce dependence on crude oil exports.
If we assume that oil as an export commodity will retain its attractiveness, and as we have said, demand is shifting to the southeast, this will require Kazakhstan as well to work through various other export markets that would be linked to diversifying supplies from the oil and gas sector. I will not list all potential markets here, but one market cannot go unmentioned: China. It is the world’s number one economy, which requires ever larger volumes of resources. Accordingly, China is ready to purchase oil and products on a stable, long-term basis.
I would emphasize that China is one of the few economies that is absolutely solvent. There are other neighbours whose solvency, to put it mildly, may raise certain questions. Again, this is a strategy of creating a defined risk contour, where Kazakhstani companies are prepared to take on higher risk and develop relationships with other economies or transit countries. In that case, this strategy can be enriched with different directions. China is considered a minimal risk; at the opposite end are small economies where the population and demand are growing rapidly, yet instability persists, not only economically but also politically. I do not wish to name specific countries in order not to offend.
– The ones who are ready to pay for fuel oil with dried fruit?..
– One can work with them as well, either by finding barter schemes, or by aligning other interests, or by entering businesses on the ground: transit, processing, production, and so on. However, all of this is tied to a risk assessment strategy, which determines whether you are prepared to manage those risks and hedge against them in some way.
– You mentioned the OPEC+ agreement, where Kazakhstan and Russia are partners, but over the past year and a half Kazakhstan has been chronically exceeding its production quotas. This is particularly related to the completion of the Tengiz expansion project. Nine years ago, when Kazakhstan decided to join the agreement, it was viewed from Astana as a reputational project within a prestigious global club. No one anticipated that the agreement would, first, last this long, and second, that Tengiz would ramp up production so strongly. The government, as you understand, has limited leverage over the major operators at Tengiz and Kashagan.
In this regard, I would like to hear your opinion: what will happen to this agreement next? Will it eventually collapse because not all participants are fulfilling their obligations, or will it continue in a sluggish form?
– I was among the experts who, at the time of the agreement’s signing, considered it not very viable. In December 2016, when it was concluded, I said that there were more factors working against this deal than for it. Nevertheless, life and the market proved otherwise. The OPEC+ platform has demonstrated resilience, despite experiencing several crises, including the pandemic year of 2020, when it effectively disintegrated following Saudi Arabia’s suspension of participation. Despite this, the platform continues to shape the situation in the oil supply segment.
Kazakhstan is in a complex position. The Kazakh upstream sector can be conditionally divided into two parts. The first consists of mature fields, which the government controls through its national oil and gas company. As for new, developing fields, these are generally operated by international consortia. With such projects, both legally and practically, it is difficult to comply with production limitation strategies.
Kazakhstan undoubtedly needs to increase production at new fields, because otherwise the industry will not develop. Achieving a target production rate is naturally linked to the expansion of export potential, since these volumes are not in demand within the domestic economy. Therefore, these two segments inevitably create a certain level of turbulence for Kazakhstan within the OPEC+ framework. Whether to withdraw or not is not for me to judge; this is a matter for the relevant ministries and agencies of Kazakhstan. But I believe an effort should be made to balance the situation in some way. For example, a schedule could be drawn up for bringing new production volumes online, including Tengiz, and this schedule could then be coordinated accordingly. In other words, it would be worthwhile to create an internal equivalent of OPEC+ within Kazakhstan.
– Setting Kazakhstan aside, in your opinion, has the OPEC+ agreement exhausted itself, or will it continue?
– Let us say it has fully justified itself. At this stage, we are witnessing a strategy that involves a gradual increase in production among the participating countries, which is beneficial for oil-producing states. It is a good agreement. Why? Because the counterpart of this platform is the United States. For a long time, Western analysts, environmental organizations, and banks imposed on oil-producing countries the notion of a so-called backward paradigm. In other words, the oil and gas sector was part of a stagnant, obsolete segment. You remember the expression “a gas station country” and so on.
Recall the dot-com bubble, when people said that real business no longer had value, that it was secondary to the internet and to all those financial and stock instruments. But that bubble burst, as many others did, and the real economy continues to develop.
Donald Trump is an active lobbyist for the resource sector, because that is his electoral base: Republicans, Texans, and residents of other states that are traditional oil-producing regions. Today, the United States has fully reconciled its philosophy with its undisputed leadership in the production of energy resources, both oil and gas. Remarkably, the entire vector and media narrative have changed. No one calls the United States a gas station or an oil rig country. And, oddly enough, they feel no embarrassment about it. No one reproaches them by asking how they can live off resource rent.
I believe that if nothing catastrophic happens in the market, the United States, with its current pace of technological advancement and the growing financing of the extraction sector, may reach 15 million barrels per day by the end of Trump’s presidential term, given all the incentives in place. This would be a record level for global oil production. While OPEC+ removes part of the supply from the market, creating an upward price trend, American shale producers are actively occupying market niches. The task of OPEC is to deflate the American oil bubble by lowering prices to a level critical for U.S. shale producers. For countries participating in OPEC+, this is an essential instrument, as they would not be able to withstand this complex confrontation individually.
– Finally, what is the key lesson Kazakhstan should draw from the current situation?
– The lesson is very clear. Europe remains an important direction, but strategically, its role will decline. The main opportunities lie in Asia. Kazakhstan should capitalize on short-term opportunities in Europe while preparing a strategic pivot toward the East and the South. Only in this way will the country be able to maintain and strengthen its position within the new global oil market architecture.