United States

Energy Information Administration

April 2000

Kazakhstan

Kazakhstan is important to world energy markets because it contains significant oil and gas reserves. In particular, the Tengiz oil field alone is estimated to contain between 6 and 9 billion barrels of proven oil reserves.

Note: information contained in this report is the best available as of April 2000 and can change.

BACKGROUND

Kazakhstan declared its sovereignty from the Soviet Union on October 25, 1990 and became an independent country on December 16, 1991. Kazakhstan is a constitutional republic with a strong presidency, and President Nazarbayev is the country's central political figure. On January 10, 1999, he was re-elected president.

Kazakhstan's foreign affairs are strongly influenced by its location between two great powers, Russia and China. Political decisions in Kazakhstan are made in consideration of the reactions of both of these countries, and oil and gas companies from both countries have been awarded contracts to develop Kazakhstan's energy potential. Kazakhstan moved its capital in November 1997 from Almaty in the southeast to Astana (formerly Akmola) in the north both for security reasons and in recognition of its ethnic minorities, including a heavily Russian population in the north. In addition, Kazakhstan has worked to increase economic cooperation with neighboring states in Central Asia, the Caucasus, and Turkey.

Kazakhstan has begun to shift its trade away from the former Soviet Union and towards its neighbors in Central Asia, the Causasus, and Turkey. The TRACECA Program (Transport System Europe-Caucasus-Asia, informally known as the Great Silk Road) was launched at a European Union (EU) conference in 1993. TRACECA encourages the development of a transport corridor on an East-West axis from Central Asia, through the Caucasus, across the Black Sea, to Europe. In September 1998, twelve nations (including Azerbaijan, Bulgaria, Kazakhstan, Romania, Turkey, and Uzbekistan) signed a multilateral agreement known as the Baku Declaration to develop the transport corridor through closer economic integration of member countries, rehabilitation and development of new transportation infrastructure, and enhancement of stability and trust in the region. The corridor would include all forms of transport, including air, automobile, pipeline, rail, and sea as well as telecommunications.

ECONOMY

Kazakhstan's economy has been affected by several factors over the past three years, including the Asian economic crisis, the Russian financial crisis, and fluctuations in prices for export commodities such as energy and metals. The 1997-1998 Asian crisis hurt investor confidence in developing markets such as Kazakhstan, and the re-emergence of developing markets as this crisis has eased renewed investor interest in Kazakhstan. The 1998 Russian monetary crisis had a greater effect because Russia is Kazakhstan's largest trading partner, and Russia's devalued ruble discouraged exports to Russia and encouraged imports from Russia. In addition, Kazakhstan's economy was hurt by weak demand and low prices in 1998 -1999 for commodities that comprise its three leading exports - petroleum, steel, and copper. Renewed Russian economic growth in 1999-2000 increased the demand for Kazakh goods. The rise in world oil and metals prices later in 1999 also helped Kazakhstan's economic recovery.

The government of Kazakhstan, especially the President's office, has taken a leading role in directing economic development as Kazakhstan completes its initial transition towards a free market economy. The government has signed into law numerous decrees on banking, bankruptcy, customs, taxes, stock exchanges, insurance, land, accounting, and natural resources. Kazakhstan's privatization program has brought in a number of foreign investors in the largest industrial complexes and energy concerns. Kazakhstan has promised a new Law on Investment that would combine the Law on Foreign Investment and the Law on State Support of Direct Investment into a single law that would: allow private ownership of land and protect investors from seizure of investments, streamline rules on investment, simplify importing foreign labor, improve administration of the tax system.

Between 1993 and 1998, Kazakhstan's foreign direct investment (FDI) was $7.9 billion and concentrated mainly in the oil and gas, electrical utilities, and minerals areas. Foreign direct investment peaked in 1997 at $2.1 billion, followed by $1.2 billion in 1998. At mid-year 1999, FDI was $460 million with $1.2 billion predicted for the year. Oil and gas attracted 47% of all cumulative investment in the five year period, with investments in power generation accounting for 4% of cumulative investment. Several large projects by TengizChevroil, the Offshore Kazakhstan International Operating Company (OKIOC), Tractebel (natural gas distribution), and Ispat (minerals) have investment commitments that have provided about $1 billion yearly in foreign direct investment. President Nazarbayev has estimated that $10 billion in foreign investments have been made in Kazakhstan since its independence, and that $150 billion could be spent developing its oilfields in the Caspian Sea.

US companies have been active in Kazakhstan since 1991, particularly in oil and gas ventures, power generation, mining, and other businesses. Cumulative U.S. investment during 1993-1998 was about $1.5 billion, with about $700 million of that invested in the Tengizchevroil project. Over the 1993-1998 period, the United States was the largest foreign investor in Kazakhstan with a 29% share of FDI.

OIL

Kazakhstan is the second largest oil producer among former Soviet republics after Russia , producing over half a million barrels per day (bbl/d). Almost half of Kazakh production comes from three large onshore fields - Tengiz, Uzen, and Karachaganak. Kazakhstan has been eager to tap its production potential of over 3 million bbl/d, and former Prime Minister Nurlan Balgimbayev (now the head of Kazakhoil) has estimated that Kazakhstan could earn $700 billion in revenues (including taxes) from offshore oil and gas fields over the next 40 years.

In order to develop its production, Kazakhstan has opened its resources to development by foreign companies. International oil projects have taken the form of joint ventures, production sharing agreements (PSAs), and exploration/field concessions. By far the largest of these is the Tengizchevroil joint venture. In April 1993, Chevron concluded the $20 billion Tengizchevroil joint venture to develop the Tengiz oil field, with 6-9 billion barrels of estimated oil reserves. The Tengizchevroil joint venture produced 190,000 bbl/d in 1999, and production could increase to 340,000 bbl/d by 2002. Given adequate export outlets, the Tengizchevroil joint venture could reach peak production of 750,000 b/d by 2010. Tengizchevroil exported about 170,000 bbl/d of crude oil in 1999 through the Russian pipeline system; by barge and rail to the Baltic; and by ship, pipeline, and rail to the Black Sea. Tengizchevroil is also considering using the $100 million upgrade of the Tengiz-Aktau pipeline, which will increase the pipeline's export capacity from its current 60,000 bbl/d to 160,000 bbl/d in 2000.

Kazakhstan projects that its crude oil and gas condensate production will rise to 660,000 bbl/d in 2000, to 750,000 bbl/d in 2001, and to 830,000 bbl/d in 2002. Most of the growth will be provided by the Tengizchevroil venture, the Karachaganak gas condensate field consortium, and from new fields coming on stream: North Buzachi, Sazankurak, Saztobe, Airankol, and others. By 2002, Kazakhstan plans to have other major fields on stream: Alibekmola, Urikhtau, and Kozhasai. In addition, drilling has begun on the offshore Kashagan block being developed by the Offshore Kazakhstan International Operating Company (OKIOC). This project, with estimated possible oil reserves of up to 40 billion barrels, is being closely watched as an indicator of the Caspian region's oil supply potential.

Kazakhstan needs to resolve two major issues in order for it to further increase oil production. Development of the offshore potential of Kazakhstan in the Caspian Sea has been slowed by a dispute over ownership rights. This disagreement ties in with a broader debate between Caspian Sea Region states over how the Caspian Sea should be treated under international law (including environmental issues). In 1997, Kazakhstan signed a communique with Turkmenistan pledging to divide their sections of the Caspian along median lines, and in July 1998 Kazakhstan signed a bilateral agreement with Russia (not yet ratified) dividing the northern Caspian seabed (but not the rest of the Caspian Sea) along median lines between the two countries. Both of these agreements are interim until the status of the Caspian Sea is settled among all of the littoral states.

Pipeline Network

The other major issue is the development of export routes to bring Kazakhstan's oil to world markets. Kazakhstan exported about 340,000 bbl/d of crude oil and condensate in 1998. The majority of Kazakh exports -216,000 bbl/d - were shipped by pipeline, of which about 180,000 bbl/d were transported by the Atyrau-Saransk-Samara pipeline through Russia. In addition, 88,000 bbl/d was shipped by rail, and 36,000 bbl/d was shipped across the Caspian Sea. About half of all Kazakh exports -195,000 bbl/d - was exported to countries outside the former Soviet Union.

Under the former Soviet Union, Kazakhstan's pipeline network was integrated with the Russian pipeline system, and all of Kazakhstan's oil was exported through the Russian pipeline system. Kazakhstan's oil production is concentrated in the west, and two export pipelines transport this oil to refineries and export pipelines in Russia. However, Kazakhstan's urban and industrial centers are concentrated in the east, and because they are not connected to the production centers, they must import oil via an oil pipeline from Siberia. As a result, Kazakhstan's pipeline system is fragmented, consisting of the two export pipelines in the west, the import pipeline in the east, and a smaller internal line in the south.

KazTransOil was created in April 1997 to manage Kazakhstan's pipeline network, with the state owning 100% of its shares. KazTransOil currently transports about 80% of the oil produced in Kazakhstan, but will face competition when the CPC pipeline becomes operational in 2001. Over the next five years, KazTransOil will need $300 million for pipeline modernization and repair, and will invest $1 billion by 2015. Modernization will be financed by the use of higher tariffs. Saudi Arabia's Alsuwaiket group has signed a contract to modernize and expand the oil pipeline network.

Kazakhstan's largest oil export line is the Western Kazakhstan pipeline system that transports oil from fields in Atyrau and Mangistau in the northern Caspian region to Russia. This 1,800-mile pipeline runs from Uzen-Atyrau-Samara, and accounts for 75% of Kazakhstan's oil exports. Although it has a capacity of 240,000 bbl/d, exports have been less because Kazakstan's annual oil export quota through the Russian pipeline system had been as little as 70,000 bbl/d in 1998. The 2000 quota was increased to 170,000 bbl/d, and the pipeline's capacity will be increased to 310,000 bbl/d with the addition of another pumping station. The other export pipeline is the Kenkyak-Orsk line that transports oil from western Kazakhstan to Russia. This pipeline runs from the Aktyubinsk fields to the Orsk refinery in Russia, and has a capacity of 130,000 bbl/d.

Oil is imported via the Eastern Kazakhstan and Central Asia pipeline system that transports oil 1,268 miles from Russia to southern Kazakhstan. The pipeline has a capacity of 460,000 bbl/d, and brings Siberian oil to the Pavlodar refinery in Kazakhstan. The other major pipeline transports oil from the Kumkol fields in central Kazakhstan to the Shymkent refinery in southern Kazakhstan.

Export Options

Russia is Kazakhstan's primary export outlet, with Kazakh oil transiting Russia via Kazakhstan's two export pipelines and by rail en route to world markets. Tengizchevroil shipped oil by rail to Finland and the Ukrainian ports of Odessa and Feodosia, and Embamunaigaz shipped oil by rail to Poland and Finland. Kazakhstan's usage of Russian routes is projected to increase with the expansion of the existing Atyrau-Saransk-Samara export pipeline through Russia to 310,000 bbl/d.

In addition, oil from the Tengizchevroil joint venture will be exported by the Caspian Pipeline Consortium (CPC) to world markets via a 900-mile, $2.3 billion oil export pipeline connecting to the Russian Black Sea port of Novorosiisk. The pipeline is expected to be commissioned in 2001 with a first phase capacity of 564,000 bbl/d, but it will not reach its full capacity of 1.34 million bbl/d until about 2015. Chevron has estimated that during its 35-40 year expected life, the pipeline could bring in $8 billion in taxes for Kazakhstan, and development of the Tengiz field and operation of the pipeline would earn about $150 billion for Kazakhstan and Russia. With the completion of Phase I of the CPC line in mid-2001 and the expansion of the Atyrau line, Kazakhstan will have about 1 million bbl/d of pipeline export capacity.

Other oil export pipeline options from the Caspian Sea region are also being explored. Trans-Caspian oil pipelines could be built that would connect with other export pipelines, such as the proposed Main Export Pipeline from Baku (Azerbaijan)-Ceyhan (Turkey). Mobil, Shell, and Chevron are conducting a feasibility study on building a pipeline from Aktau in western Kazakhstan to Baku, Azerbaijan that would traverse the Caspian Sea bed from north to south. Capacity at Kazakhstan's Aktau seaport was increased to 160,000 bbl/d in 1999. Kazakhstan has also discussed shipping oil from its Kumkol field to Turkmenistan's Caspian port of Turkmenbashi, with talks focusing on tariff rates. Oil and gas swaps with Turkmenistan are also a possibility.

Several proposed routes for Kazakhstan could bring oil towards markets in Asia instead of to European markets. One proposed pipeline would bring Kazakh oil via Turkmenistan to outlets in Iran and the Persian Gulf. Kazakhstan and Iran could also continue their arrangement for oil swaps between the two countries, where up to 40,000 bbl/d of Kazakh oil would be delivered by tanker via the Caspian Sea to refineries in northern Iran in exchange for the delivery by Iran of a similar value of crude to Kazakh clients via the Persian Gulf. In addition, the proposed Central Asia Oil Pipeline would bring oil from Kazakhstan to Pakistan and to other customers via the Arabian Sea.

Kazakhstan is also considering the Chinese market. Kazakhstan exported 50,000 bbl/d to China via rail in 1999 and Tengizchevroil has made test deliveries to China by rail. Aktobemuniagaz, which is 60% owned by China's CNOOC, exported about 9,000 bbl/d of oil to China in 1999, with the total expected to increase to 10,000 bbl/d in 2000. The oil is exported via rail to the refinerey at Urumchi, China. Kazakhstan has been building ties with China, and in June 1997, the China National Petroleum Corporation signed an agreement with Kazakhstan for a proposed $3.5 billion 1,800-mile pipeline to China . Under this agreement, China is responsible for financing the project. A feasibility study was undertaken, but the study was halted near its completion date. Kazakhstan has stated that if China would not undertake the project, Kazakhstan would turn its attention to other projects.

Kazakhstan has said that it would not make a decision on another main route for its oil exports until it received the results of test wells in its sector of the Caspian Sea, and had a better idea of its export potential. By 2010, it is likely that only 3 or 4 large projects will be producing oil - Tengiz, Karachaganak, Uzen, and possibly OKIOC's Kashagan project.

Privatization

Kazakhstan has undertaken a number of reforms in order to develop its potential, including privatizing a number of existing energy concerns. In April 1997, Kazakhstan sold a 60% stake in its largest oil producer, Mangistaumunaigaz, to Central Asia Petroleum (Indonesia) for $248 million, which in turn sold its stake to US and Russian companies.

In mid-1998, Kazakhstan transferred public stakes in its remaining production and refining companies to state oil and gas company Kazakhoil in preparation for a possible privatization. However, Kazakh President Nursultan Nazarbayev signed a law mandating that Kazakhoil would be a closed joint stock company with 100% of its shares under government control. The law also made Kazakhoil responsible for monitoring foreign oil company activities in Kazakhstan, as well as mandating Kazakh companies to buy Kazakh equipment and services whenever possible. In addition, Kazakhstan's Prime Minister Kasymzhomart Tokayev told Parliament that Kazakhstan would strengthen state control over the fuel and energy sector, including the production and sale of oil products.

In other privatizations, the Chinese National Petroleum Corporation (CNPC) received a 60% interest in Aktyubinskmunaigaz in June 1997. CNPC will develop three fields with total estimated oil resources (proved plus possible reserves) of 1 billion barrels. As part of the $4.1 billion investment expected over the next 20 years, CNPC proposed building an oil pipeline to China. However, work on the feasibility study on the pipeline was halted because Kazakhstan would not be able to commit the minimum flows needed to make the pipeline viable for at least 10 years. In addition, CNPC won a tender in 1997 to jointly develop the Uzen field. CNPC has since pulled out of the project, leaving development of the Uzen field to Uzenmunaigaz. CNPC's other involvement in Kazakhstan is a proposed project to build an oil pipeline from Kazakhstan to Iran.

In March 1997, Triton-Vuko Energy Group won a 94.5% stake in Karazhanbasmunai for $90 million. In addition, Hurricane Hydrocarbons (Canada) bought 89.5% of Yuzneftegaz in November 1996, and took over operation of the Kumkol oilfield. Since the takeover, Hurricane has been engaged in a well publicized dispute over pricing with the Shymkent Refinery, which is the only outlet for this oil. Hurricane plans to invest $280 million over the next six years in this project.

Refining

Kazakhstan has three major oil refineries supplying the northern region (at Pavlodar), western region (at Atyrau), and southern region (at Shymkent). The refinery at Pavlodar is supplied mainly by a crude oil pipeline from Western Siberia, the Atyrau refinery runs solely on domestic crude from northwest Kazakhstan, and the Shymkent refinery currently uses oil from Kazakh fields at Kumkol, Aktyubinsk, and Makatinsk, but utilization is only 60% because it is unable to process other oils. Because their pipeline networks are interconnected, Russia and Kazakhstan plan to swap 50,000 bbl/d of oil. Kazakhstan will deliver oil to Russian refineries on the Atyrau-Samara pipeline and Russia will deliver oil on the Omsk-Pavlodar pipeline for processing at Kazakh refineries. Oil refining output fell during early 1999 because of an inability to pay for oil imports, resulting in a shortage of oil products that affected industrial production.

The Atyrau refinery became 29.5% owned by Fixoil as Switzerland's Telf AG reduced its holdings in the refinery. The Atyrau refinery will undergo an upgrade by Japanese firms led by Marubeni. Marubeni plans to invest $400 million for what Kazakh officials termed a 80% rebuilding to begin in 2003.

The Shymkent refinery (now Shymkentnefteorgsintez, or Shnos) was purchased by Vitol (Switzerland) in August 1996, but was sold to Kazakommertsbank in July 1998 after accusations of impropriety had led Kazakhstan to threaten that it would oust Vitol. The refinery plans to invest $150 million for modernization over the next five years, including a new catalytic cracking unit. Shnos signed a protocol in April 1999 for a merger with Hurrican Kumkol Munai (HKM), a subsidiary of Hurrican Hydrocarbons Limited (Canada) that would give Shnos guaranteed supplies from HKM's Kumkol field, and give HKM a guaranteed customer. However, HKM has had disputes with the refinery, and stopped shipping oil to the refinery in September 1999 before resuming shipments later in the fall.

The American company CCL has managed the Pavlodar refinery since 1997. An interdepartmental commission recommended that legal action be taken to terminate the contract and transfer it to KazakhOil because of allegations that the contract was illegally awarded, and that CCL did not comply with contractual provisions. On May 27, 1999, the Supreme Court of Kazakhstan ruled that the property should be transferred, and the rest of the property should go to other companies. Mangistaumunaigaz, which is 60% owned by Indonesia's Central Asian Petroleum, acquired part of the refinery's assets from CCL. However, CCL is appealing the decision because of the contract that Mangistaumunaigaz signed with the refinery, and the government will make a final decision on the transfer of the refinery.

NATURAL GAS

More than 40% of Kazakhstan's reserves are located in one field, the giant Karachaganak field in northwest Kazakhstan that is an extension of Russia's Orenburg field. In 1997, an international consortium signed a $7 - $8 billion final production sharing agreement to develop the field for 40 years, with a planned investment of $4 billion by 2006. Development of the field has been hampered because the former Soviet Union intended for this gas to be processed at nearby Orenburg in Russia, and exported via pipelines from Russia. However, the Orenburg plant has accepted only a fraction of Karachagnak's potential output. Although Russia's Gazprom had originally agreed to take a 15% stake in the consortium in exchange for processing and exporting the gas, it has left the project.

Because of the difficulties in processing output at the Orenburg plant, a new $600 million gas processing plant at Karachagnak has been planned to process the condensate with a target date of 2005. Liquids production is expected to exceed 300,000 bbl/d by 2006, with the output to be exported using the CPC pipeline, and gas output should reach over 883 billion cubic feet (Bcf) annually. Kazakhoil, Kaztransoil, British Gas, Lukoil, AGIP, and Texaco have signed an agreement to construct a new 285 mile pipeline to transport the condensate from Bolshoy Chagan (southwest of Karachagnak) to Atyrau, where it will connect with the CPC pipeline. The pipeline will have an initial capacity of 140,000 bbl/d, rising to 240,000 bbl/d, and cost $440 million.

Kazakhstan's other significant producing areas include the Tengiz, Zhanazhol, and Uritau fields. In addition, rising associated gas production at the Tengiz field will result in Tengiz becoming the second largest producing field for natural gas in Kazakhstan. The undeveloped offshore areas are also believed to hold large amounts of gas. While some of these fields are near the Russian gas pipeline system, they are not currently linked to it, and Russia's Gazprom is a potential competitor with Central Asian gas on world markets. Kazakhstan must either negotiate to connect its fields with the existing Russian gas pipeline system, or develop new ways of getting gas to markets.

Kazakh gas production has been hampered by the lack of infrastructure, with many oil producers flaring the gas instead of using it. Kazakhstan had considered constructing a network of pipelines linking gas fields with consuming centers at a cost of over $1 billion. Other investment needs include capturing previously flared gas, appraisal work for gas fields located near consuming areas, meter installation at cross-border locations, and environmental rehabilitation and protection. In order to reduce the flaring of natural gas, Kazakhstan passed a new law in August 1999 requiring subsoil users (such as oil companies) to include gas utilization projects in their development plans.

Distribution Network

In general, the Kazakh gas sector faces a lack of infrastructure, especially pipelines. Although six gas pipelines connect Kazakhstan to other Central Asian republics and Russia, gas producing areas within Kazakhstan in the west are not connected to consuming areas such as the populous southeast and industrial north. As a result, Kazakhstan has two separate gas pipeline networks, with Kazakhgaz responsible for distribution in the west, and Alaugaz responsible for distribution in the southeast. Construction of an internal pipeline to transport gas from Kazakhstan's western field to all oblasts in Kazakhstan is under consideration.

Kazakhstan exports its gas production from the west to Russia, and imports 40% of its natural gas consumption needs from Turkmenistan and Uzbekistan. In October 1999, Uzbekistan agreed to renew exports to Kazakhstan, subject to adherence to a plan to pay $1.5 million in debt for past deliveries. Kazakhstan cut off gas supplies to Kyrgyzstan for lack of payment in 1999. Kazakhstan also imports a small amount from Russia, and Kazakhstan has considered an old Soviet plan to import natural gas from West Siberia. However, Uzbekistan stopped deliveries in 1998 because of unpaid bills.

Tractebel (Belgium) received a concession to the gas supply system in Almaty in 1996, and in July 1997, Kazkahstan awarded Tractebel a 15-year contract to manage the western Kazakhgaz and southern Alaugaz distribution systems as well. Tractebel pledged to invest $1.0-$1.5 billion in Kazakhstan on investment, repair, construction, and planning costs, including a $150 million gas line in southern Kazakhstan to bypass Kyrgyzstan . However, Tractebel was being investigated for a payment of 50 million euros to three Kazakh businessmen, and the Kazakh government planned to review the terms of the company's concessions for the gas distribution networks.

Export Options

Kazakhoil and Phillips, two of the partners in the Offshore Kazakhstan International Operating Company (OKIOC), have agreed to conduct a feasibility study on the construction of a proposed $500 million gas liquefaction plant at Atyrau. The proposed plant would be built by 2004, and liquefied gas would be transported to consumers by rail. Conoco is moving forward with a plan to ship 1.5 million metric tons of LNG/year from Kazakhstan and Turkmenistan across the Caspian to Baku, where it would then be shipped by rail to Georgian ports en route to Turkey and other Mediterranean customers. Conoco has set up a joint venture with Georgia's Ajargazi railway and a Turkish partner, and has also spent $600,000 to install facilities at the Georgian port of Batumi.

Alternatively, other gas export pipeline options from the Caspian Sea region are being considered. One option is a proposed 5,000 mile China Pipeline that would bring 1 Tcf of gas from Central Asia annually to China; this line would pass through Kazakhstan. Another alternative is to export gas westwards to Turkey and other European markets. A preliminary feasibility study of this route was conducted by Exxon, Mitsubishi and CNPC. In December 1998, Royal Dutch/Shell, Chevron, and Mobil signed an agreement with Kazakhstan to conduct a feasibility study for twin oil and gas pipelines that would pass across the Caspian Sea from Kazakhstan to Baku.

ELECTRICITY

During the first few years of Kazakhstan's independence, the country's electricity sector was operated by state-run Kazakhstanenergo. Non-payment by domestic customers used to forgiveness of debt has been a problem for Kazakhstan's power sector, and Kazakhstan has had frequent power shortages since 1992 because of a lack of a reliable power network. As part of Kazakhstan's move to a market-based economy, Kazakhstanenergo was divested of its power generation facilities on July 14, 1997, and renamed the Kazakhstani Electricity Grid Operating Company (KEGOC). However, Kazakhstan's history as part of the former Soviet Union has resulted in KEGOC's transmission and distribution system being connected to separate networks: to the Russian network in the northwest (to European Russia) and north (to Siberian Russia), and to the Central Asian network in the South (Kyrgyzstan and Uzbekistan). In the summer of 1998, Kazakstan's grid was split into northern and southern parts as part of an agreement between Kazakhstan and Kyrgyzstan. KEGOC cooperates with RAO ES (Russia) in the western and northern parts of Kazakhstan and with the national energy companies of Kyrgyzstan, Turkmenistan, Tajikistan, and Uzbekistan in the south.

Overall, national power consumption has declined annually since 1990, with 1998 demand little more than half of 1990 levels, primarily because of a drop in Kazakhstan's industrial electricity demand as its industrial output fell following the collapse of the Soviet Union. Although Kazakhstan currently generates enough electricity to meet most of its demand, the separation of networks has resulted in Kazakhstan becoming both an exporter and importer of electricity in accordance with regional needs. Imports from Russia and Kyrgyzstan account for over 10% of domestic consumption, with Uzbekistan also exporting small amounts of power to Kazakhstan. Payment for imported power has been an issue, and Russian suppliers have cut power several times to encourage payment of unpaid bills. Kazakhstan owed Kyrgyzstan over $20 million for electricity by mid-1999. Kazakhstan would like to become more independent in power generation in order to reduce the power curtailments and to reduce the need for relatively costly imported power.

Kazakhstan has 54 fossil-fuel powered plants, five hydroelectric power stations, and a nuclear plant at Aktau. Much of Kazakhstan's generating equipment is old, inefficient, and lacking in modern pollution controls. Over 90% of gas turbines, 57% of steam turbines, and 33% of steam boilers have been in place for 20 years or more. Kazakhstan's industrialized north consumes about 70% of the country's electricity, and most of Kazakhstan's electricity is generated by coal-fired plants concentrated in the north that burn a dirty high-ash coal. Kazakhstan has not taken full advantage of cleaner sources of power such as hydroelectricity, and only 10% of the country's hydroelectric potential of 60 terawatt-hours has been developed.

Plans have been made to construct five new combined heating and power stations: the 150 MW Uralskaya TETS, the 450 MW Aktyubinskaya TETS, the 300 MW Mainakskaya GES, the 1280 MW Yuzhno-Kazakhstanskaya TETS, and the 500 MW Zapadno-Kazakhstanskaya TETS-1. In addition, Kazakhstan plans to build a new nuclear power station near Lake Balkash, with three units of 640 MW costing $2 billion each. The first unit is expected to come online by 2005, and the last by 2012. The nuclear plant will supply Almaty and export power to China and other central Asian states.

Transmission and Distribution

Kazakhstan incurs large energy losses during transmission and distribution over its 285,000 miles of distribution lines. KEGOC needs $258 million to reconstruct its electricity networks and overhaul its switching equipment in order to improve the reliability of its electricity supply, and to develop the power market through a power pool and improved access to the transmission network. On December 22, 1999 The International Bank for Reconstruction and Development (part of the World Bank) agreed to extend a $140 million loan to the government of Kazakhstan and KEGOC toward this electricity transmission rehabilitation project. Additional financing will be provided by KEGOC ($62.4 million) and the European Bank for Reconstruction and Development ($56 million). A $378,000 technical grant was awarded by the US Trade and Development Administration (TDA) to KEGOC to support the World Bank-financed component of this rehabilitation Project.

Non-payment of electricity bills, an inadequate collection system, and the lack of market-based transportation tariffs have been obstacles to further large-scale investment in Kazakhstan's transmission and distribution sector. Under the former Soviet system, Kazakhstan utilized a system of fixed electricity tariffs that were unrelated to production costs and investment needs. Kazakhstan's State Anti-Monopoly committee is working to bring electricity tariffs in line with those in other countries and to allow the market to determine transmission tariffs. In addition, the US Agency for International Development is also assisting Kazakhstan to develop a power pool for the regional distribution companies.

Kazakhstan is considering building a 560 mile (900 kilometer) transmission line to export power from Ekibastuz to Urumqi (China) in order to increase its electricity exports. The attraction for exporting power for Kazakhstan is that the wholesale electricity price in China is 5-10 times higher than Kazakhstan's current production cost, with Kazakhstan's costs to drop further with the completion of its planned new generating facilities. Negotiations have proceeded on initial annual exports of 150 million kilowatt-hours beginning in 2000, with the power to be supplied by the planned new nuclear power station near Lake Balkash.

Privatization

Kazakhstan was one of the first Caspian states to open its domestic electricity market to foreign investors. After Kazakhstanenergo was divested of its power generation facilities in 1997, Kazakhstan privatized all of its major generating stations, and virtually all of its generating capacity is now in private ownership. Kazakhstan reached a preliminary deal in 1999 to transfer ownership of a 51% share of the Ekibastuz State Regional Power Station 2 - the last power station not to be privatized - to Russian utility UES as payment for a $249 million electricity debt.

Kazakhstan also plans to privatize the electricity distribution system. KEGOC has the responsibility to manage the overall grid network. ABB Brown Boveri (Sweden/Switzerland) was given a 25-year contract to manage the national power grid, but in July 1997 the contract was abruptly cancelled. Privatization of the regional distribution networks has moved slowly as well, and only a few are under private management. The first two to be run privately were Almatyenergo (by Almaty Power Consolidated, a Belgian company), and Karagandaenergo (by National Power of the UK, and Ormand). In July 1999, AES (US) was also awarded management rights for 15 years to manage the Ust-Kamenogorsk and Semipalatinsk distribution companies that are close to the three power plants that AES operates.

AES Corporation is the largest foreign investor in Kazakhstan's power generation sector, and serve 10% of electric customers in Kazakhstan. AES invested $150 million in Kazakhstan from 1996 to 1999, beginning with the August, 1996 purchase of the Ekibastuz GRES-1 coal-fired power plant in northern Kazakhstan, the largest power plant in Kazakhstan with a total production capacity of 4,000 megawatts, equivalent to over 20% of the country's power generating capacity. AES's existing businesses in Kazakhstan also include a 20-year concession on two hydroelectric stations in eastern Kazakhstan (AES Ust-Kamenogorsk GES - Tau P 2, AES Shulbinsk GES -Tau P), and four combined heating and power stations. AES Silk Road is also the manager of four energy retail marketing companies (AES Irtysh Power & Light, AES Sogrinsk TETS, AES Leninogorsk TETS, AES Semipalatinsk TETS).

Uranium

Kazatomprom produced and exported about 1,250 metric tons of uranium in 1998 to Russia, Western Europe and South Korea. In December 1998, Kazatomprom signed a contract with Bush Wellman and General Electric to export uranium, and Kazatomprom also reached a preliminary agreement with General Electric to process US uranium waste into uranium powder. The export agreement also calls for a resumption of beryllium exports, as Kazatomprom plans to reinstate its beryllium production, which had been idle since 1992. Kazatomprom's future plans also call for it to be privatized in the near future.

COAL

Kazakhstan is a major coal producer, consumer, and exporter, with output centered in the Karaganda and Ekibastuz basins. Karaganda has 13 mines that are high cost because they are primarily underground mines that produce high quality coking coal. Ekibastuz is the largest producing area in Kazakhstan and the third largest coal basin in the former Soviet Union, and has three strip mines that produce mainly brown (sub-bituminous) coal for use in power plants.

Kazakh coal production declined from 143 million short tons (Mmst) in 1991 to 77 Mmst in 1998 as domestic demand declined by over 60% during this period. Coal production for the first eight months of 1999 declined by 30% over the same period in 1998, in large part because of nonpayment by customers and the lack of incentives to export to Russia because of the high rail tariffs for transporting coal within Russia. This decline is significant because coal has accounted for about half of all primary energy consumption in Kazakhstan during 1991-1998. In addition, net exports to other former Soviet republics declined by two-thirds from 1991 to 1995 before beginning a modest recovery from 1996 to 1998. This decline in markets resulted in the halving of both coal production and the number of mines in Karaganda from 1991 to 1997. However, the three strip mines in Ekibastuz remained open, as they are competitive and have been largely privatized.

Despite the drop in net exports, Kazakhstan was the largest exporter of coal to the other former Soviet republics in 1997, accounting for almost half of the coal shipments among the republics. Russia remains the largest recipient of Kazakh coal at 16 Mmst, followed by Ukraine at 6 Mmst. The Russian utilities Sverdlovskenergo and Chelyabenergo continue to be major consumers of sub-bituminous coal from the Ekibastuz basin in Pavlodar Oblask in Kazakhstan. Sverdlovskenergo should continue to import coal from Kazakhstan, as it acquired two mines (Severny and Bogatyr No. 9) in 1996 as payment for unpaid debts for power supplied to Kazakhstan. Kazakhstan has also arranged to export coal to Kyrgyzstan in exchange for water, with 1999 shipments to equal 560,000 tons. However, no coal was shipped for months during the first half of 1999, resulting in cuts in water supplies.

COUNTRY OVERVIEW

President: Nursultan Nazarbayev

Prime Minister: Kasymzhomart Tokayev

Independence: December 16, 1991; National holiday - Day of the Republic October 25, 1990 (date on which Kazakhstan declared its sovereignty)

Population (Mid 1999): 16.8 million

Location/Size: Central Asia, bordering the Caspian Sea, Russia, Turkmenistan, Uzbekistan, Kyrgyzstan, and China/1,052,100 sq. miles (slightly less than four times the size of Texas)

Languages: Kazakh, Russian (both official)

Ethnic Groups (1996E): Kazakh (Qazaq) 46%, Russian 34.7%, Ukrainian 4.9%, German 3.1%, Uzbek 2.3%, Tatar 1.9%, other 7.1%

Religions: Muslim 47%, Russian Orthodox 44%, Protestant 2%, other 7%

Major Cities: Almaty; Astana (capital); Karaganda; Shymkent

ECONOMIC OVERVIEW

Currency: Tenge

Exchange Rate (04/13/2000): $1 U.S. = 42.34 Tenge

Gross Domestic Product, Nominal (1999E): $17.5 billion

Real GDP Growth Rate (1999E): 1.7%; (2000E): 2.5%

Official Unemployment Rate (1999E): 3.7%

Inflation Rate (Change in Consumer prices, December 1998 - December 1999): 17.7%; (2000E): 10.0%

Current Account Balance (1999E): -$221 million

Merchandise Exports (1999E): $5.8 billion

Merchandise Imports (1999E): $5.6 billion

Major Exports: oil, metals, chemicals, grain, wool, meat, coal

Major Imports: machinery and parts, industrial materials, oil and gas, consumer goods

Major Trading Partners: Russia, Ukraine, US, Uzbekistan, Turkey, UK, Germany, South Korea, Netherlands, China, Italy

ENERGY OVERVIEW

Minister of Power, Industry, and Trade: Vladimir Shkolnik

Chairman, Kazakhoil National Oil & Gas Company: Nurlan Balgimbayev

Proven Oil Reserves (1998E): 10.0-17.6 billion barrels

Oil Production (1999E): 578,000 bbl/d, of which 528,000 bbl/d is crude oil

Oil Consumption (1998E): 220,000 bbl/d

Net Oil Exports (1998E): 306,000 bbl/d

Crude Oil Refining Capacity (1/1/2000): 427,093 bbl/d

Natural Gas Reserves (1998E): 53-83 trillion cubic feet (Tcf)

Natural Gas Production (1999E): 0.25 Tcf

Natural Gas Consumption (1998E): 0.47 Tcf

Net Natural Gas Imports (1998E): 0.28 Tcf

Coal Reserves (1997E): 38 billion short tons

Coal Production (1998E): 77 million short tons (mmst)

Coal Consumption (1998E): 64 mmst

Electric Generation Capacity (1999E): 19 gigawatts (installed capacity)

Electricity Generation (1998E): 49.3 billion kilowatt-hours (Bkwh)

Electricity Consumption (1998E): 48.8 Bkwh

ENVIRONMENTAL OVERVIEW

Minister of Ecology and Natural Resources: Serikbek Daukeyev

Total Energy Consumption (1998E): 1.9 quadrillion Btu* (0.5% of world total energy consumption)

Energy-Related Carbon Emissions (1998E): 37.1 million metric tons of carbon (0.6% of world carbon emissions)

Per Capita Energy Consumption (1998E): 120.3 million Btu (vs U.S. value of 350.7 million Btu)

Per Capita Carbon Emissions (1998E): 2.4 metric tons of carbon (vs U.S. value of 5.5 metric tons of carbon)

Energy Intensity (1998E): 76,900 Btu/ $1990 (vs U.S. value of 13,400 Btu/ $1990)**

Carbon Intensity (1998E): 1.5 metric tons of carbon/thousand $1990 (vs U.S. value of 0.21 metric tons/thousand $1990)**

Sectoral Share of Energy Consumption (1997E): Industrial (58.3%), Transportation (35.7%), Residential (6.0%)

Sectoral Share of Carbon Emissions (1997E): Industrial (62.1%), Transportation (31.7%), Residential (6.3%)

Fuel Share of Energy Consumption (1998E): Coal (44.9%), Oil (24.6%), Natural Gas (25.5%)

Fuel Share of Carbon Emissions (1998E): Coal (56.8%), Oil (24.6%), Natural Gas (18.6%)

Renewable Energy Consumption (1997E): 70 trillion Btu* (11% decrease from 1996)

Number of People per Motor Vehicle (1997): 11.9 (vs U.S. value of 1.3)

Status in Climate Change Negotiations: Non-Annex I country under the United Nations Framework Convention on Climate Change (ratified May 17th, 1995): Signatory to the Kyoto Protocol (March 12th, 1999)

Major Environmental Issues: Radioactive or toxic chemical sites associated with its former defense industries and test ranges are found throughout the country and pose health risks for humans and animals; industrial pollution is severe in some cities; because the two main rivers which flowed into the Aral Sea have been diverted for irrigation, it is drying up and leaving behind a harmful layer of chemical pesticides and natural salts; these substances are then picked up by the wind and blown into noxious dust storms; pollution in the Caspian Sea; soil pollution from overuse of agricultural chemicals and salination from faulty irrigation practices

Major International Environmental Agreements: A party to Conventions on Biodiversity, Climate Change, Desertification, Ozone Layer Protection and Ship Pollution

* The total energy consumption statistic includes petroleum, dry natural gas, coal, net hydro, nuclear, geothermal, solar and wind electric power. The renewable energy consumption statistic is based on International Energy Agency (IEA) data and includes hydropower, solar, wind, tide, geothermal, solid biomass and animal products, biomass gas and liquids, industrial and municipal wastes. Sectoral shares of energy consumption and carbon emissions are also based on IEA data.

**GDP based on EIA International Energy Annual 1998

ENERGY INDUSTRY

Organization: Kazakhoil state oil and gas company; Kazakhgaz national gas distribution company (west), Alaugaz (southeast); KazTransOil state oil pipeline company; Kazakhstanugol Corporation coal company; Kazakhstan Electricity Grid Operating Company (KEGOC)

Major Oil and Gas Fields: Tengiz (mostly oil), Karachaganak (mostly gas), Uzen, Korolev, Tenge, Uritau (gas), Zhanazhol

Major Oil Ports: Atyrau and Aktau on the Caspian Sea

Oil Export Pipelines: Uzen-Atyrau-Samara (Russia); Kenkyak-Orsk (Russia) line that transports oil from the Aktyubinsk fields to the Orsk refinery

Major Oil Refineries (crude oil refining capacity): Pavlodar (162,666 bbl/d); Atyrau (104,427 bbl/d); Shymkent (160,000 bbl/d)

Major Power Plants (capacity): Ekibastuz No.1 (4,000 megawatts or MW), Yermak (2,400 MW), Dzhambul (1,230 MW)

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Sources for this report include: U.S. Energy Information Administration; CIA World Factbook; U.S. Department of Commerce's Business Information Service for the Newly Independent States (BISNIS); Eastern Bloc Research; Interfax; PlanEcon; WEFA; WorldTrade Executive.

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File last modified: April 13, 2000

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