Oil and gas industry of Kazakhstan. Prospects, trends, and a look into the future

The oil and gas industry has been a cornerstone of Kazakhstan's economy for the past 30 years of its independence. In 2022 alone, the sector contributed nearly 9 trillion tenge to the National Fund, republican, and local budgets. This substantial financial injection supports three critical areas: social assistance and security, healthcare, and education.

Throughout its history, the National Fund has received over $200 billion from oil taxes, enabling the reinvestment of funds into diverse sectors of the economy. This has facilitated infrastructure development and fulfilled the country's social obligations.

Turning the clock back to 1991, the industry faced a challenging landscape. Following the dissolution of the USSR, Kazakhstan embarked on its initial journey into the realm of major oil production. While the country inherited explored deposits and promising areas, it grappled with a lack of technology and, significantly, the means to develop these valuable resources.

At the end of 1991, the state balance sheet contained about 2.9 billion tons of recoverable oil. Production was at the level of 22 million tons per year. Free gas reserves were estimated at 1.9 trillion m3, gas production - about 8 billion m3

At the dawn of independence, great attention was paid to the formation of the oil and gas industry. Thanks to the efforts of the country's political leadership and the effective work of geologists, new deposits were discovered, strategic partners and investments were attracted, and the introduction of new technologies for prospecting, exploration, and production began.

Increased investment in geological exploration and the discovery of new fields allowed Kazakhstan to rise to 12th place in the world ranking of oil-producing countries.

As of January 1, 2023, the state balance sheet includes 307 oil fields with recoverable reserves of 4.4 billion tons
Over the span of 30 years, Kazakhstan has remarkably increased its oil production by almost 3.8 times, reaching an annual output of 84.2 million tons. The majority of this production is attributed to three major oil and gas projects: Tengiz, Karachaganak, and Kashagan.

Today, in its commitment to decarbonization and emission reduction, the Government of Kazakhstan confronts formidable challenges. The utilization of coal in energy production must be gradually diminished. This reduction can be achieved through the adoption of new technologies designed to minimize atmospheric emissions or by transitioning to a more environmentally friendly fuel source, such as gas.

As of January 1, 2023, the State balance sheet includes 171 free gas fields with recoverable reserves of 1.6 trillion m3 and 242 fields with reserves of gas dissolved in oil in the amount of 2.1 trillion m3

The production of free gas has surged by 2.6 times since 1991, reaching 21.1 billion m3 in 2022. Additionally, gas dissolved in oil production amounted to 32.1 billion m3 during the same period.

Gas has emerged as a global economic trend, with a 35% increase in consumption over the past 7 years, as reported by the Ministry of Energy of the Republic of Kazakhstan. Despite this, the exploration of new gas fields in the country is deemed unprofitable due to the low market value of gas.

In response to this challenge, the Ministry of Energy and NC QazaqGaz JSC in Kazakhstan have implemented incentive mechanisms. They have also devised and endorsed a new gas purchase price formula, introduced two new consumer categories, and established several preferences. These measures are anticipated to render gas production financially attractive in the foreseeable future.

Major oil-producing organizations rely heavily on gas for electricity generation for their own operations. Considering the burgeoning development of renewable energy sources (RES) and the abundant wind and solar potential in the west and south of Kazakhstan, the Ministry of Energy proposes a noteworthy strategy. This involves replacing a portion of gas generation with RES, thereby freeing up gas volumes for the country's needs. The market price of gas should, ideally, offset the costs incurred by companies in adopting renewable energy sources and, in the long run, may even yield profits. An illustrative project is the planned Hybrid plant at the Uzen field, spearheaded by JSC NC KazMunayGas and Eni. This facility aims to generate electricity through a combination of gas, solar, and wind sources.

The introduction of renewable energy sources in large oil and gas fields will free up up to 3 billion m3 per year, which can be used for the needs of the country (preliminary data)

The current situation is further complicated by the rapid decline in production within fields developed since the Soviet period, in addition to the challenges mentioned earlier. Annually, production in several oil-bearing regions experiences a nearly 1-million-ton decrease. This decline poses a significant threat to the entire country, as it will adversely impact almost all sectors of the economy, with potential risks of an oil and petroleum product shortage.

The Head of State has emphasized the urgent need to replenish the mineral resource base, requiring the swift identification of new deposits and reserves. It is crucial to recognize that the economic benefits of new exploration projects will only materialize 6-9 years after their initiation, as highlighted by the Head of State on multiple occasions.

In depleted fields, it is necessary to employ modern production methods to increase the recovery rate and extend the life of the fields. This requires tax breaks and preferences with conditions for reinvesting savings in new technologies.

Studying the prospects of deep-seated subsalt deposits in the Caspian region and the South Turgai basins will provide Kazakhstan with unique information about the structure, formation, and migration of oil, ultimately leading to an increase in hydrocarbon reserves. An example of this is the Eurasia project, the first phase of which has already been completed.

To implement ambitious plans, it is necessary to actively attract investors. This will provide financial support and facilitate the introduction of advanced technologies. Simultaneously, it is crucial to establish clear 'rules of the game' that are understandable to everyone. Furthermore, there is a need to develop explicit requirements and guidelines for conducting geological exploration. Equally important is the issue of developing a classification of hydrocarbon reserves and resources that is universally understandable. This classification forms the basis for both state planning and the assessment of investment potential.

Geological exploration is a strategic direction that determines the future of the country's extractive industries and should undoubtedly be given priority.

S&P Global states that Kazakhstan needs deeper policy reforms to better compete for exploration and production finance in a global capital-constrained future.

The next thing is the development of oil services and mechanical engineering. The expansion of large oil and gas projects, as well as the exploration and development of new fields, will provide jobs for the citizens of Kazakhstan and reduce dependence on imports by establishing our production of equipment for the oil and gas industry.

Active exploration of deep horizons and new promising areas on land and at sea can also contribute to this. For these purposes, a system of “improved model contracts” has been introduced, which provides many preferences of both a regulatory and fiscal nature for investors.

Promising areas also include the development of unconventional hydrocarbons, such as shale oil, coal bed methane, and natural bitumen, as well as the possibility of extracting precious metals and rare earth elements from produced water in oil and gas fields. Effective involvement of previously untapped resources in economic circulation will make it possible to obtain additional benefits through the use of existing infrastructure.

In Kazakhstan, prospects for shale oil have already been identified, which are estimated at 200 million tons. They are now being studied in detail.

The geographical peculiarities of Kazakhstan, coupled with its lack of access to the open sea, and its extensive territory, present promising opportunities for the development of an oil and gas transportation system. This system serves the dual purpose of facilitating the export of products abroad and ensuring a stable supply to the country's domestic market. Looking ahead, efforts will persist to diversify export routes, thereby ensuring economic security for Kazakhstan.

At the dawn of independence, Kazakhstan exported about 7.3 million tons of oil. Today, the annual export volume is 64.3 million tons of oil.

The prospects for the oil and gas industry in Kazakhstan are substantial, yet its full potential remains untapped. The ongoing development of the industry is poised to introduce new technologies and competencies to Kazakhstan, attract investments, establish additional production facilities, enhance Kazakhstan's political influence, and bolster its negotiating position.

Author: Farkhat Abytov, executive director KAZENERGY Association.


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