By any measure, the global economy is in a fragile state. Growth and confidence were already weak before the decision by the UK to withdraw from the European Union, which added to the uncertainty.
This shock has increased instability in markets far beyond Europe. Investment decisions across the world are being delayed, which, in turn, may have a further damaging impact on long-term growth.
It is against this sombre background that the decision July 5 to go ahead with the $37 billion expansion of Kazakhstan’s Tengiz oilfield was such good news. It was a remarkable vote of confidence by U.S. oil giants Chevron, ExxonMobil and their Kazakh partners in the oil industry, in our country and in the global economy.
When you talk about the scale of the decision, you quickly run out of superlatives. It is the largest investment by private sector oil companies this decade. When fully operating, its 260,000 barrels a day will be the equivalent of Libya’s entire oil production. Taken together with the oil expected from the giant Kashagan offshore field due to come on line later this year, it will boost Kazakhstan’s daily output to two million barrels pushing the country up the list of main producers.
The development, which is expected to see the first additional commercial oil in 2022, will be a massive operation. Accommodation for thousands of construction workers and engineers is already being put in place. It is investment which will give a big boost to the Kazakh economy immediately in terms of jobs and work for local suppliers.
As the Wall Street Journal put it, the decision is also a powerful indication that “oil’s deep freeze might be thawing.” It has been made despite a dramatic slump in crude prices which remain less than half what they were two years ago.
The collapse in prices and demand has forced the industry – including Chevron itself – to slash capital spending severely. Analysts say the industry’s expected spending between 2014 and 2020 has been cut by around $1 trillion. The go-ahead for expansion at Tengiz bucks this trend but suggests that the industry believes it is not all dark times ahead.
It certainly demonstrates, too, how central Kazakhstan is seen to the future of the global industry. Kazakhstan already accounts for nearly a fifth of the global crude that Chevron, America’s second largest oil company, produces. It is pushing ahead not only because it believes overall demand will rebound but because it knows the oil, which is high quality and rich in gasoline, will find willing buyers. This makes it economic to develop even at current low prices.
Expansion at Tengiz will in the years ahead provide a major boost to Kazakhstan’s public finances. Not only does KazMunayGas own a 20 percent stake in the company developing the field but Energy Minister Kanat Bozumbayev has predicted that the extra oil would provide $120 billion in additional tax payments by 2033.
It underlines the huge benefits from the way the country opened itself to inward investment and partnership from its earliest days of independence. Chevron signed the agreement to create the joint company to first develop Tengiz as far back as 1993. As well as providing billions of dollars in tax revenues and a huge boost to the economy through contracts with local suppliers, nearly nine out of ten of its employees are Kazakh citizens.
The oil industry will remain, as the Tengiz investment shows, crucial for Kazakhstan’s future for decades to come. But the revenue, as well as the high-tech firms it helps develop, are also vital to ensure the economy continues to be modernised and diversified.
Continued investment in improving transport infrastructure so Kazakhstan can make the most of its position as a route between East and West and North and South is vital. So, too, is the drive to harness the country’s rich potential for developing sustainable energy and to build a genuinely high-skilled knowledge economy.
Achieving these goals will ensure Kazakhstan remains strong and prosperous even when the world no longer runs on fossil fuels. It is why the announcement of this huge investment is so important for Kazakhstan’s short and long-term future and for the global economy as a whole.