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National oil companies (NOC’s) are playing a growing role in the global energy market. Although far smaller than the seven NOC giants, the size of Kazakhstan’s oil and gas reserves alone make Kazakhstan’s national oil company, Kazmunaigaz (KMG), a worthy topic of study for anyone interested in the NOC’s development. While estimates of Kazakhstan’s hydrocarbon reserves vary significantly, at minimum they are as large as those of Algeria, and at maximum could be equal to those of Libya, making it a potential producer of considerable influence.
When Kashagan and Tengizchevroil reach full production in the middle of the next decade, it hopes to produce over 3 million barrels of oil a day, making it a larger producer than Norway, and just behind Mexico and Iran. Even today Kazakhstan is an oil producer of consequence, producing 1.29 million barrels a day. And virtually anyone interested in investing in Kazakhstan is forced to work, in one form or another, with NC KMG.
KazMunaiGaz is very much a work in progress; one of the world’s youngest national oil companies, it could turn into something of a model for other evolving national oil and gas countries, especially those in the former U.S.S.R.. This is one of the goals of Kazakhstan’s government, which would like NC KMG to become a Central Asian version of Statoil, the Norwegian national oil company, and Kazakhstan’s National Fund, which receives a large portion of the national share of the country’s oil income, is directly modeled after the Norwegian fund.
Nonetheless, NC KMG has some features in common with other NOC’s formed in post-Soviet states, such as Russia, Azerbaijan, and Turkmenistan. But the Kazakh government has defined a much more aggressive developmental mission for NC KMG than has the Azerbaijani government for SOCAR, and certainly than the Niyazov government did for the various iterations of its national oil and gas companies.
Unlike in Russia, where there are two NOCs Rosneft and Gazprom, with sometimes competing interests, Kazakhstan has opted to consolidate its holdings in a single company. Nonetheless, NC KMG has features in common with both Gazprom and Rosneft. Its degree of vertical integration resembles that of Gazprom. Rosneft, meanwhile, while lacking the same transportation and refining capacity of KMG or Gazprom, shares another equally important similarity with the Kazakh Company: both are seeking to introduce western management styles in order to create international investor confidence. Yet one very large difference remains between these two companies. Unlike Rosneft, whose chief oil-producing asset is Yuganskneftegaz, which was bought at auction after seizure from Yukos, virtually all of NC KMG’s assets were obtained in a pretty straightforward fashion. They were either acquired by purchase or by the transfer of a state held license to the company (directly or by the consolidation of smaller state-owned companies).
NC KMG is expected to help the government of Kazakhstan achieve the country’s main economic development goals, as stated in Kazakhstan-2030, and in legislation relating to Caspian sector development, focused on the oil industry. The company is intended to evolve into a publicly held corporation, and 40 percent of the shares of KMG Exploration and Production, which owns most of the company’s oil and gas wells, is already being publicly traded.
The government hopes to insure the protection of state interests through the transferring its shares to a larger holding company, Samruk—which’s name is the Kazakh translation of the golden phoenix— created in 2006. Samruk, now chaired by former BAE chairman Sir Richard Evans is also charged with increasing the transparency of corporate practices in the state sector.
The ultimate success of NC KMG will depend upon whether the company introduces full transparency in all of its upstream, downstream and associated activities and on whether it helps foster an atmosphere of competition in the service sectors that are associated with its primary operations. This requires an exercise of will to become transparent by the top ranks of the Kazakh ruling elite, as President Nazarbayev’s son-in-law Timur Kulibayev is the number 2 person at Samruk, and so it will fall to him to both define and see through this project.
Martha Brill Olcott
Senior Associate
Read the full report on “KAZMUNAIGAZ: Kazakhstan’s National Oil and Gas Company” here.
Comments
On March 20 at 11:43, Ben commented:
Very interesting post. There are several important considerations here in my opinion.
I am not so sure whether KMG’s assets will be obtained in a pretty straightforward fashion in the future as well.
Sakhalin-II and several other “buy-outs” in Russia could hint at a potentially similar trajectory for Kazakhstan (as I’ve recently suggested on neweurasia).
Despite the Kazakhstani government’s ambitions, Statoil might not be the most appropriate reference point for KMG. Again, a closer look at Russia is rather telling:
Gazprom faces severe challenges in upgrading its facilities - and output at the three main gas facilities is beginning to fall while new projects are continuously stalled.
As far as corporate governance is concerned: While privatisation of the oil and gas industry in Russia couldn’t have been more opaque, the likes of Yukos etc. have at least not been as bad in terms of asset stripping as their state-owned counterparts.
On a related note, I am not so sure whether Sir Richard Evans is the best man when it comes to “increasing the transparency of corporate practices in the state sector” (as argued here).
All in all, a very intruiging topic that deserves a lot more research. Thanks again for sharing your insights.