Trouble on the steppe
Major new investment in Tengiz cannot mask deeper problems in Kazakhstan
AS a vote of confidence in the Kazakh oil sector it is hard to beat. On 5 July, Chevron and its partners in the 0.6m-barrel-a-day Tengiz project in the Caspian sea said they would spend another $36.8bn to add another 260,000 b/d of output from the field by 2022. Forget the oil-price slump, the project is one of the largest to be sanctioned in the past 10 years. After years of troubled progress and mixed deadlines at Kazakhstan's other major oil project, Kashagan, the Tengiz news was especially welcome in Astana. Yet for all the fanfare around the Tengiz announcement, Kazakhstan is in a state of flux, and its politics dangerous.
The central Asian state, which holds the world's eleventh largest oil reserves, was the scene of another violent insurrection in June. The government first blamed the incident - which claimed almost two dozen lives - on Islamist foreigners out to destablise the country. Then it said it was an attempted coup by a local businessman. Either way, it's a sign of wider problems.
A group of young men attacked two firearm shops on 5 June in Aktobe, located 100km from the Russian border, and tried to carry out an attack on a military base to seize arms. Thirteen attackers, five police officers and three soldiers were killed in gunfights. Authorities imposed a curfew on the city and authorities shut down the public transport and leisure facilities. Residents complained about problems with mobile and internet services.
After three days of silence, President Nursultan Nazarbayev blamed the attacks on "followers of radical pseudo-religious currents", who "received instructions from abroad". Skirmishes continued in the days after the incident. Then the authorities made the sensational announcement that a "coup attempt" had failed. They identified the chief conspirator as Tokhtar Tuleshov, the owner of one of the country's biggest breweries. Tuleshov, who owed a state bank $100m, was probably a patsy.
Kazakhstan is experiencing its worst economic crisis since the late 1990s, with social unrest growing as the economy reels from low oil prices
Nazarbayev has repeatedly warned against "colour revolutions" during land protests that engulfed the country in April and May. Protests against the land reform, which started in the western oil city of Atyrau on 24 April and quickly spread to other cities, were also pinned by authorities on "third forces" abroad.
Some analysts have argued that the recent unrest in Kazakhstan could have been sponsored by Russia or China - both have wide interests in the country. But Moscow and Beijing have their own economic problems and can hardly be interested in cultivating a new zone of instability on their borders. Accusations labelled at Islamic terrorists don't really hold up either. More likely, the blame for the attacks lies with local clans unhappy with Nazarbayev's ambitious privatisation programme and reform of land rights aimed to stimulate investment into the agriculture sector.
The broader context is plain. Kazakhstan is experiencing its worst economic crisis since the late 1990s, with social unrest growing as the economy reels from low oil prices. The country may enter recession this year while a 50% depreciation of the national currency against the dollar has resulted in inflation doubling to 17%. The Tengiz deal will inject income, but not quickly. Its significance is greater for the partners' equity production than for the Kazakh economy, at least until the new oil flows sometime next decade.
The relaunch of Kashagan, the second-largest field in the world with recoverable reserves estimated at 11bn barrels, is part of a government plan to increase oil production, and offset some of the loss in oil revenue. But production from ageing oilfields is now unprofitable. The government expects total production of 74m tonnes this year (around 1.5m barrels a day) if the oil price averages $30 a barrel and 77m tonnes at $40/b. Production was 80m tonnes of oil in 2015 and 81m tonnes in 2014.
Kashagan's foreign shareholders - Eni, Shell, Total and ExxonMobil - are anxious for the project to restart three years after a leak halted production. But $100/b may be needed to cover the development costs of the production-sharing agreement, which have more than quadrupled to $45bn.
State-controlled oil and gas company KazMunayGas (KMG), in charge of Kashagan, has its own problems. It has offered to buy out minority shareholders of its London-listed subsidiary, Kazmunaigas Exploration and Production (KMG EP), as part of a move to tighten control. But independent directors want shareholders to reject the proposal, believing it undervalues the firm. Upstream-focused KMG EP is sitting on a cash pile of more than $3bn while the indebted parent narrowly averted default last year thanks only to a $4bn bailout from the central bank. The offer goes to a vote on 3 August.
Whatever the real reason for the recent violence, members of government are rattled. Nazarbayev is 76 on 6 July, and a transition of power will have to be fixed in the near term. Nazarbayev's daughter, Dariga, is a deputy prime minister and regarded by some as a possible successor. But the succession is not clear-cut.
"I don't think the market is pricing geopolitical and security risks in Kazakhstan," says Tim Ash, emerging-markets strategist at Normura International. "While Nazarbayev is a spritely and healthy 76-year old my sense is the issue of the succession is coming to the fore."