Over the past 10 years, investments in geological exploration in Kazakhstan have significantly decreased, a worrying signal. This could lead to a decline in oil production. This conclusion was drawn by participants of the panel session “Investment Opportunities in the Oil and Gas Sector of Kazakhstan” at the Dialogue Investment Forum held in Astana.
What initiatives do oil and gas companies expect from the government, which projects are foreign investors betting on, how do oil prices affect the drilling speed, and what will be the future of the country’s key industry? Read more here.
Oil and Gas Chemistry – The Future
“The growing popularity of electric vehicles poses a threat to oil producers, including in Kazakhstan. In response, the sale and consumption of hydrocarbons are dynamically shifting towards the oil and gas chemical industry – the main beneficiary of oil and all its products in the future,” says Darment Sadvakassov, managing partner of Dasco Group, one of the forum’s organizers.
According to the President’s Advisor and former Minister of Energy, Bolat Akchulakov, climate change affects the future of the industry, altering its structure. Kazakhstan’s doctrine in this regard is to achieve carbon neutrality by 2060. This means that by this time, hydrocarbons will no longer be used in the energy system.
“In the context of the shift towards green energy, the development of renewable energy sources, and climate change, many are starting to wonder whether we should even be using hydrocarbon raw materials at all. As a result, many are ceasing to invest in the search for and exploration of new fields,” says Akchulakov.
He reminds that all reserves are finite if they are not replenished. Kazakhstan may face not only an energy deficit: “We will be without basic household items and electrical appliances, since these are products of oil and gas chemistry.”
“We Have No New Discoveries”
The CEO of the KAZENERGY Association, Zhandos Nurgambetov, noted that many oil and gas companies today face serious challenges, despite the widespread belief in the financial well-being of the sector. “We are not investing in geological exploration, which could lead to a decline in oil production,” he emphasized, pointing to the need for investment activity.
Kazakhstan ranks 78th out of 112 in the S&P Global ranking of the oil and gas sector’s investment attractiveness. To restore the interest of foreign investors, changes in regulation and taxation approaches are necessary.
“It’s clear that the state’s costs are rising, and as the main donor, we are trying to impose higher taxes on the oil and gas sector. At the same time, this could lead to problems in the sector in Kazakhstan,” commented the head of KAZENERGY.
According to him, without significant new discoveries of fields, the country may face a substantial drop in production. While $1.2 billion was invested in geological exploration in 2013, by the end of 2023, this amount had decreased to $320 million. At the same time, Nurgambetov said, “these investments in geological exploration are funds for existing projects and additional exploration wells, but we have no new discoveries.”
The Era of Easy Oil Is Coming to an End
In 2023, the total volume of purchases in the oil and gas sector amounted to 6.4 trillion tenge, which is 16% higher than the 2022 figure (5.5 trillion tenge). Currently, Kazakhstan has more than 130 oil-producing companies. Purchases can be divided into three main categories depending on the share of local content, says Nurlan Zhumagulov, Executive Director of Energy Monitor: “The largest share of purchases belongs to large companies – TCO, CPC, and NCOC, which account for 71% of all sector purchases. KazMunayGas accounts for 18%, and private companies – 11%.”
Based on the analysis of the top 20 purchased categories, it is noted that local content exceeds 50% only in the fuel and energy segments. Among the categories with low local content are spare parts (3.9%), IT products (1.7%), and compressors, electric motors, and generators – 0%!
“Kazakhstani manufacturers can supply products to the largest oil and gas companies at a VAT rate of 0%. However, amendments to the Tax Code are needed to simplify VAT refunds for factories operating in this sector,” comments Zhumagulov.
Another conclusion is that historically, the volume of drilling in Kazakhstan is directly dependent on fluctuations in oil prices. For example, in 2013, when the oil price was $106, 1,865 wells were drilled, while in 2023, with the price of oil at $82, only 829 wells were drilled. The average depth of a well is 1,425 meters, and the cost of one well is 747 million tenge.
“The era of easy oil is unfortunately coming to an end in Kazakhstan, and companies and investors are drilling deeper and deeper,” noted Zhumagulov.
Not Just Energy Balance
To strengthen Kazakhstan’s economic sustainability and enhance energy security, KazMunayGas is developing the Trans-Caspian export route, says Aisha Turbayeva, Director of Strategy and Investment Project Portfolio Management at the national company: “This project will diversify export flows and strengthen Kazakhstan’s ties with the global oil and gas markets.”
According to her, the development of oil and gas chemistry, the transition to green energy, and improving export routes are priority areas for KazMunayGas until 2031. “Of course, this is a challenge – balancing between traditional business, oil and gas chemistry, and green projects. Financially, it’s also a challenge,” comments Turbayeva.
From 2022 to 2031, Kazakhstan plans to extract 240 million tons. The goal is to further increase the resource base: “We have priority rights to subsoil use sites and offer international partners joint participation in exploration projects. In 2023, 4 fully national projects and 7 joint projects with international partners were launched,” she said.
By 2030, Kazakhstan plans to fully meet its needs for basic polymers and nitrogen fertilizers. Several productions have been launched, with a total value of more than $12 billion. Plans include import substitution of the most in-demand oil and gas chemical products: polypropylene (500,000 tons per year), polyethylene (1.25 million tons per year), urea (1.1 million tons), and PET (735,000 tons).
According to Bolat Akchulakov, oil and gas should not be dismissed prematurely, as in the long term, oil and gas chemistry is based on a solid resource base:
“You cannot build factories based on small reserves and hope that ‘maybe we’ll find something tomorrow.’ It doesn’t work that way,” says the former Minister of Energy.
He assured that Kazakhstan would strive for carbon neutrality, but this energy transition would take more than 30 years (the average life span of a small field). And this does not mean that hydrocarbons will cease to be raw materials for the oil and gas chemical industry by that time. Akchulakov noted that, in addition to the energy balance, another balance needs to be established. “The Constitution of the country states that the subsoil belongs to the people, and we must take social aspects into account, namely the fair distribution of income between private investors and the state,” he concluded.
