The break-up of the Soviet Union resulted in serious financial, transit, management and political problems for its former states. The emerging relationships between its former constituent parts were initially shaped by the unrealistic commercial expectations of the newly-independent governments, hungry for extra budget revenues at a time of political and economic turmoil.
Fortunately, Kazakhstan’s economy regained momentum at the beginning of the 21st century. Since then, rising energy exports have become the engine that drives the country’s economy. Since then, energy wealth has been an important part of Kazakhstan’s economy. Due to the high oil prices, the international reserves and assets in the National Fund grew significantly reaching US$85.5 billion by September 2013. Many world governments have tried to stabilize their domestic oil product prices to mitigate the impact of large and abrupt change. In Kazakhstan, the refining industry is heavily regulated by the Government through direct administrative measures and control of the transport tariffs.
Since 2010, China has been the world’s second largest economy after the United States, with its nominal GDP amounting to US$5,879 billion, a figure totally unthinkable three decades ago. Similar to Kazakhstan, China has undergone transition from Communism to what may be seen as ‘its own’ form of capitalism, what the Chinese call “Socialism with Chinese characteristics”.
In tandem with its economic reforms, China’s real GDP has grown rapidly, with an average annual growth rate of 9.8% during 1978-2007. Apropos of economic structure, industrialization has been the main source of economic growth; in 2010, industry contributed 48.6% of China’s GDP, an increase of 7.3% over 1990.
The Chinese economy has become increasingly integrated into the world economy, particularly since its entry to the WTO in 2001. It is now the world’s second largest exporter, after the United States and before Germany. Also, China is the leading destination for FDI.
The above increases in China’s own domestic consumption and investment, the relocation of many manufacturing processes from other parts of the world to China, and the country’s burgeoning exports have all contributed to the dramatic increase in the production of energy-intensive goods.
Energy policy in Kazakhstan
Kazakhstan, as a newly-independent state, faced several alternatives in the energy policy field. The country could take the road of full nationalization of its extractive industry, as has been usual in the Middle East and other oil producing regions; or, it could transfer some energy assets to the private sector. However, all scenarios posed risks. For example, Kazakhstan could become a “banana republic” – a raw material appendage of Russia or the West; or, it could become internationally isolated and squander its energy potential.
President Nursultan Nazarbayev made a wise decision: he chose a third road. In the interests of exploiting its oil fields, Kazakhstan opted to engage in joint ventures and production-sharing agreements with foreign investors. But, at the same time, Kazakhstan limited the role of foreign capital by tightening its investment law. The Kazakh government preferred to work with internationally recognized companies; i.e. those that showed interest in developing long-term projects and were ready to consider the country’s domestic interests. They were expected to highlight environmental safety programmes, train local staff, and exercise corporate social responsibility. Transnational companies, including Agip/Eni, British Group, ChevronTexaco, ExxonMobil, Impex, Royal Dutch Shell and TotalFinaElf, among others, emerged as the winners in this race.
More recently, Canadian, Middle Eastern and Russian companies have been rapidly establishing a presence in the Caspian region.
China’s need to strengthen its role became more obvious in 2005 and 2006, which saw Russia’s presence on the increase and the American influence on the wane. When Chinese and Indian extractive and financial corporations have entered the scene, the interests of all major world players were represented in the Caspian region. In order to realize the full potential of its oil fields, Kazakhstan had to establish export routes that would guarantee its ability to meet the West’s and China’s demand for “black gold”. Nazarbayev was fully aware that respecting the interests of all of the major players in the Caspian region, namely the West, Russia and China, would improve the stability of the energy sector in Kazakhstan. This approach, as well as promoting a balance of power in the region, kept the major players in check.
Kazakhstan’s energy policy objectives feature in several documents, one of the most important among which – the Development Strategy of Kazakhstan until 2030 – focused on energy as one of the country’s priority sectors and stressed the necessity for a “rapid increase of production and export of oil and gas to receive revenues that would contribute to lasting economic growth and an improvement of the living standard of the people”.
As opposed to the former orientation towards large-scale energy production, heightening the efficiency of energy consumption and energy conservation has become the top priority of the energy strategy. The new structural policy for energy sector development over the next 15-30 years provides for:
– growth in oil production, more efficient oil use, increased domestic consumption and export of oil;
– more efficient natural gas use, increased domestic consumption of natural gas;
– prioritizing the refining and complex use of hydrocarbon raw materials;
– improvement in the quality of coal products through increased volumes of high calorific coals, and stabilization and further increase of coal production rates (mostly by open mining) by introducing ecologically acceptable technologies; and
– intensified development of local energy resources (e.g., hydropower, minor deposits of hydrocarbons), greater use of non-conventional and primarily renewable resources (wind, solar, geothermal energy, mine methane and biogas).
China’s energy security strategy
China’s energy security was not a popular issue until 2000, when the country’s oil imports doubled and the bill tripled. A search of the “China Economic News” library of China Infobank, a Chinese periodicals database, revealed that the term ‘energy security’ appeared in only 41 publications between 1994 and 1999; but, for the period 2000 to 2007, 1,862 mentions of the term were noted. Daniel Yergin, the author of The Prize, reads the objective of energy security as “to assure adequate, reliable supplies of energy at reasonable prices and in ways that do not jeopardize major national values and objectives”. Thus, one dimension of energy security for China is access to sufficient energy supplies to protect the leadership’s core objectives of continued economic growth, the prevention of Taiwan’s independence, China’s continued emergence as a global power, and the survival of the Chinese Communist Party.
In the case of China, energy security policy overwhelmingly focuses on oil, because oil is the only form of energy that can meet China’s demand for massive net imports. Some sources suggest that the country has achieved the first half of Deng Xiaoping’s plan for “letting some people get rich first”. To complete the second half, that is “all of us become well-off later”, the country has drafted a strategy aiming to quadruple the 2000-level GDP by 2020. To achieve this, it is commonly agreed that the country needs to ensure an adequate and reliable supply of energy, particularly oil, at reasonable prices so as to meet the energy needs of the booming domestic economy.
However, this task is proving increasingly difficult. China became a net importer of oil in 1993; today, almost half of its oil has to be imported due to stagnation of the domestic output and skyrocketing oil demands.
Secure delivery of energy imports is unarguably another part of China’s energy security; but, there are a number of energy import-related problems that Chinese leaders feel uneasy about. For example, more than 80% of total oil imports have to be shipped through the Strait of Malacca, a very narrow, busy chokepoint threatened by frequent pirate activities. China does not have sufficient maritime power to move against the U.S. if the latter’s Navy ‘selectively’ seals off the sea lane between the oil-producing countries and China’s coastline. More than 90% of oil imports by sea are shipped by non-China-flagged vessels.
The Chinese government and the national oil companies agree that the key to enhancing oil security lies in the diversification of oil suppliers and transport routes. In terms of oil suppliers, they have sought not only to expand the number of countries from which China imports oil, but also to decrease China’s dependence on the Persian Gulf, which in 2005 provided almost half of China’s crude oil imports. Chinese and international energy experts expect that the country’s reliance on the Persian Gulf will remain substantial because of the region’s large oil reserves.
China has achieved considerable success in diversifying the sources of its oil imports. In 1995, the Persian Gulf and the Asia Pacific regions supplied almost 90% of China’s oil imports, with Indonesia alone accounting for 31%. Over the past decade, China’s oil imports from the Persian Gulf have hovered just below 50%; at the same time, growth in the share of supplies from Africa and Russia has offset a dramatic decline in the contribution of the Asia Pacific region to China’s oil import mix. In 2005, the Persian Gulf and Africa accounted for more than three quarters of China’s crude imports. Russia, China’s fourth largest supplier of crude oil, provided 10%.
Two factors explain the diminishing role of the Asia Pacific region and the increasing importance of Africa in meeting China’s oil import requirements. First, the excess of oil demand over supply in the Asia Pacific region has increased over the past ten years. For example, Indonesia, the region’s second largest oil producer (behind China) and once China’s largest supplier, is now a net oil importer. Consequently, countries throughout the region are seeking supplies elsewhere. Second, in contrast to the growing oil deficit in the Asia Pacific region, Africa’s oil surplus has grown over the past decade; and, the light, sweet crudes of West Africa are well-suited to China’s refineries.
In terms of transportation routes, both the government and the National Oil Companies (NOCs) want to reduce China’s reliance on the sea lines of communication through which approximately 90% of the country’s crude oil imports are transported due to their vulnerability to disruption on the high seas by various modern navies and by piracy.
Other factors contributing to the lack of reliability of China’s oil imports through the Malacca Strait are piracy attacks and potential terrorist attacks. Both have the potential to endanger China’s oil security because they may lead to enforced closure of the Malacca Strait, an action that could well decrease China’s oil imports through the shipping lane as well as dramatically increase the shipping costs of China’s oil imports.
Energy production, consumption and trade
Kazakhstan’s combined onshore and offshore proven hydrocarbon reserves have been estimated at between 9 and 40 billion barrels (comparable to APEC members Algeria on the low-end and Libya on the high-end). The Reserves and Production ratio in 2007 was 73.2, which means that even if no added proven oil reserves are found, Kazakhstan can uphold the current crude oil production level for 73.2 years.
Between 1990 and 2010, Kazakhstan’s oil production almost doubled from 26.1 million tons to 46.8 million tons, making the country the world’s 19th largest crude oil producer and the second largest after Russia among the former Soviet republics. Over the next 15 years, Kazakhstan can reasonably expect crude oil and liquid production to increase more than threefold and reach between 3.0 and 3.5 million barrels per day (Mb/d). At 3.0-3.5 Mb/d oil production, Kazakhstan is expected to be one of the world’s top 10 producers, behind the Gulf States and Russia but on a par with North Sea production at its height.
According to BP, in the first decade of the millennium, Kazakhstan’s proven reserves of natural gas amounted to 1.9 trillion cubic meters (tcm), figures that are comparable to those of Canada and Kuwait. Domestic natural gas production increased over six times from 162.4 billion cubic feet (bcf) in 1999 to 1,201.2 bcf in 2010. Since Kazakhstan’s gas production has been hampered by the lack of infrastructure, for some time, leading oil producers have had to flare gas instead of using it. The Kazakhstan Government forecasts the gross production of natural gas will reach 106.1 billion cubic meters (bcm) by 2015. However, much of this gas will be re-injected into the ground, to help oil extraction by maintaining wellhead pressure.
Kazakhstan is also one of the top ten coal producers in the world. Its reserves and mines are the third largest in the CIS, and its income from coal mining per capita is the largest in the CIS. With proven coal reserves of some 34.5 billion tonnes of mostly high quality anthracitic and bituminous coal, Kazakhstan has the eighth largest reserves in the world, amounting to four per cent of the world’s coal, the most valuable of which are energy-rich and coking coals.
Approximately 0.5% of world’s fossil energy resources are found in Kazakhstan, equal to 90 billion tonnes of oil equivalent (toe). This amount includes 70% coal, 22% oil and oil condensate, and 8% gas. In addition, the largest uranium reserves – amounting to 29% of the world’s reserves – are found in Kazakhstan, with 16,000 tonnes of uranium extracted per year. And, while prospective oil- and gas-bearing areas comprise 62% of the entire country’s territory, to date only approximately half of them have been explored. Energy resources are unevenly distributed over the territory of Kazakhstan: major coal deposits are located in the northern and central regions; oil and gas deposits in the western region and minor resources of gas and coal in the southern region. Hydropower resources are found in the eastern and southeastern regions.
The increase in China’s domestic consumption and investment, the relocation of many manufacturing processes from other parts of the world to China, and burgeoning exports all underpin the dramatic increase in the production of energy-intensive goods. The growth in China’s oil consumption has accelerated remarkably since the 1990s in response to a corresponding dynamic growth in the country’s industrial and transport spheres.
China’s oil demand in 1990 was only about 25% higher than it was in 1978. In 2010, China’s oil consumption reached 390.5 Mt which is approximately four times the 1978 level. Industry and transport have together shared 77% of China’s total end-use demand.
China’s demand for natural gas has also increased remarkably from 15,250 Mcm in 1990 to 69,523 Mcm in 2007. As a result, its natural gas imports have also increased sharply. China imported liquefied natural gas (LNG) 950 Mcm for the first time in 2006; subsequently, it reached 1,200 Mcm in 2010. It is projected that China’s natural gas imports will reach 2,800 Mcm and 12,800 Mcm in 2015 and 2030 respectively.
China’s oil production, however, has seen slow growth.
China, the largest coal producer in the world, reported coal proven reserves of 114,500 Mt at the end of 2007; that is, approximately 13.5% of the world’s proven recoverable reserves with an R/P ratio of 45.
A country’s demand for energy mirrors the size of its economy. China’s primary energy consumption increased rapidly, faster than its primary energy production in the same period. Due to the above, the balance of overall energy in China has been reversed. Because the country’s demand for energy grew more quickly than it could produce, China’s self-sufficiency in overall energy could no longer be sustained post 1992. Its rate of self-sufficiency in overall energy dropped significantly from 105.3% in 1990 to 87.8% in 2012.
Thus, Kazakhstan’s priorities, including economic development, enhancement of political independence, and maintaining geopolitical balance, have significantly been promoted in the Central Asian region due to rich reserves of its hydrocarbons.
As for China, Kazakhstan, along with its role of supplier of energy resources, is also very much important in political terms. Priorities of China, along with energy security, include facilitation of bigger political influence in Central Asia and stabilization of the situation in its western regions with the help of Kazakhstan.
Usen Suleimen, Ph.D is an ambassador-at-large at the Ministry of Foreign Affairs of Kazakhstan in Astana. Gulnara Baikushikova, Ph.D is a professor at Al Farabi Kazakh National University in Almaty. This article is written with the support of the “Samruk-Kazyna” Sovereign Wealth Fund.