ASTANA – Kazakhstan, a vast and resource-rich country in Central Asia, is home to some of the world’s largest natural gas reserves. With such an abundance, the country’s gas industry plays a vital role in fueling economic development and energy security, both domestically and internationally. Yet, some critical challenges remain, including meeting domestic demand, export obligations, and connecting the county’s regions to gas.
Kazakhstan has three trillion cubic meters of proven gas reserves, most of which are located in the western part of the country. KazMunayGas, Kazakhstan’s national oil and gas company, has dominated the industry before it transferred its subsidiary QazaqGaz to its majority shareholder Samruk Kazyna Sovereign Wealth Fund for independent implementation of gas projects. The transfer was carried out at the instruction given by President Kassym-Jomart Tokayev at a meeting on industry development in July 2021.
Abundant resources and Kazakhstan’s strategic location at the crossroads of Europe and Asia offer opportunities for the gas industry, particularly in light of the growing demand for natural gas in Europe, which seeks to reduce its dependence on Russian gas.
How much gas does Kazakhstan produce?
In 2022, the volume of gas production in Kazakhstan reached 53.2 billion cubic meters. Production of marketable gas, which refers to the volume of gas available for sale after the processing and purification process is complete, was 27.8 billion cubic meters, a decrease of 5.4 percent or 1.6 billion cubic meters in comparison to the previous year. 19.3 billion cubic metres were supplied to the domestic market, while 4.6 billion cubic meters were exported.
The plan for 2023 is to produce 55 billion cubic meters, including 28 billion marketable gas.
There are around 79 gas production companies in the country, including 23 that sell gas into the gas transmission system to meet the needs of the domestic market and export.
The industry struggles to meet domestic needs
The resources, however, fall short of meeting domestic demand. In 2022, President Tokayev warned of a looming natural gas shortage, as gas consumption is growing nationwide, driven by population growth, booming construction and industrial development.
“Due to the introduction of new industrial facilities and gasification of the country, gas consumption in the domestic market is increasing annually. Over the last ten years, the volume of gas consumption in the domestic market has more than doubled – from nine to 19 billion cubic metres. It is predicted that there will be a gas shortage in the country next year,” said Tokayev at an expanded government meeting in July 2022.
The shortage will not be caused by an absence of gas, which Kazakhstan has in abundance, but by how the gas market operates in the country, with pricing mechanisms presenting the biggest challenge.
Kazakhstan has kept a cap on gas prices for consumers for years to keep fuel prices affordable for its citizens, a practice it inherited from the Soviet Union. However, it is becoming too risky for this to continue. The policy of price containment has been the main constraining factor in the gas industry’s development. Because of price containment, the price of marketable gas sold in Kazakhstan is unprofitable and it is mainly associated with gas from oil extraction in Tengiz, Kashagan and Karachaganak fields, together accounting for 64 percent of the total volume of marketable gas resources.
“Given the low interest of subsoil users in expanding the resource base and due to the prices which do not cover the cost of gas production, it is necessary to take appropriate incentive measures and update the pricing policy. In this regard, replenishment of our country’s resource base by means of stimulating measures for gas projects is very urgent,” said former minister of energy Bolat Akchulakov, who currently serves as Adviser to the President.
These measures are envisioned in a new mechanism – an enhanced subsoil use model contract, which provides regulatory and fiscal preferences for complex oil and gas projects, including exemption from the corporate income tax for ten years from the start date of production, exemption from the export сustoms duty for ten years from the date of production and the right to transfer to alternative tax on subsoil use.
The amendments were signed into the Tax Code in December 2022. The preferences apply from the date of the contract and expire after 20 calendar years from the date of export of hydrocarbons produced under the subsoil use contract. These measures are expected to increase the resource base of marketable gas by an additional 6.7 billion cubic meters by 2030.
Gas pricing mechanism
President Tokayev and experts have repeatedly reiterated the need to reform the current pricing scheme for marketable gas.
Kazakhstan introduced a national operator in 2014 with the preemptive right to purchase gas produced from oil fields. QazaqGaz national company carries out wholesale of marketable gas and dispatching of gas distribution through a unified gas supply system based on purchase prices and tariffs for main transportation.
This scheme allows the state authorities to contain gas prices and maintain a stable gas supply in the domestic market. However, wholesale gas in the domestic market is unprofitable for the national operator, which is subsidized and directly dependent on export revenues. According to the Kazakh Energy Ministry, the national operator subsidized the domestic market by 587 billion tenge ($1.3 billion) between 2015 and 2021.
Liquefied petroleum gas
The volume of domestic consumption of liquefied petroleum gas (LPG) in 2022 reached 1.8 million tons. Compared to 2021, consumption increased by 400,000 tons. However, because of low investment attractiveness for producers, liquified petroleum gas production in 2022 decreased by nearly 400,000 tons.
LPG is widely used in Kazakhstan for household cooking, heating, and fuel. In 2019, Kazakhstan began transitioning to LPG trading through electronic trading platforms before fully transitioning in January 2022, just when an unexpected double hike in LPG prices resulted in protests in the Mangystau Region.
The retail price of liquified gas per liter in Kazakhstan now varies from 50 to 70 tenge depending on the region. It is at least three to four times lower than in neighboring countries.
Gasification of regions
Gasification of the country’s regions, particularly northern and central, which heavily depend on coal, has long been on the national agenda. Yet, not much progress has been made.
In 2022, Kazakhstan implemented 142 gas projects, which provided access to natural gas to 284,800 people or 107 rural settlements. In 2023, the government plans 86 projects to provide gas to nearly 170,000 people or 56 rural settlements.
By the end of 2022, the level of gasification was 59 percent, with 11.6 million people with access to gas. This year, 73.9 billion tenge ($161.8 million) was allocated for 76 projects that will provide gas supply to nearly 160,000 people. Gasification is expected to hit 60 percent by the end of 2023.