Sale of Kazakh State Oil Shares Said to Serve Interests of Elite

While the management of the KazMunayGaz state oil and gas company, which currently extracts 25 per cent of Kazakh oil, says that the intended sale of the company’s shares will raise money for new exploration projects, opponents of the initiative fear that this might provide the prospective buyer of the shares with unlimited control over the whole of the Kazakh oil exploration industry and leverage on Kazakhstan’s domestic and foreign policy. Some believe the sale of shares will benefit the interests of a certain Kazakh elite while others say this will help Chinese oil extracting companies become more influential on the Kazakh market. Correspondent Amina Zhalilova also questions why protests against the sale of shares, counter to government policy on state involvement in new oil projects, are being raised only now, five months after the decision was officially announced. The following is an excerpt from article entitled: “The interest curve”, carried by the Novoye Pokoleniye newspaper website on 2 September 2005; ellipses as given throughout; subheadings inserted editorially:

Soon 49 per cent of shares in the Kazakh state oil extracting company [KazMunayGaz] will be put up for sale at the London Stock Exchange. How can Kazakhstan’s aspiration to lose half of one of the largest extracting enterprises be explained? This runs counter to the government’s current policy of involving the state in large oil projects.

Official reasons for selling shares

Kazakhstan, which has received significant profits thanks to its natural riches, is lately trying to regain control over the oil exploration industry. The country has adopted legislative amendments by which the government, first of all, has received a preferential right to purchasing (at a market price) shares of investors who decide to leave this or that project; and, second, the KazMunayGaz national company gets a 50-per-cent share in all new projects. In this way the state is trying to control all extraction and it does not intend to be content with taxes any longer while all the rest of the profit is received by transnational companies. This aspiration is visible, natural and even laudable no matter how indignant foreign investors become. But, given all this, the intent to sell half of the KazMunayGaz Exploration Extraction national company, which is currently the second largest extracting company after Tengizchevroil, appears strange. Zhakyl Marabayev, general director of the KazMunayGaz Exploration Extraction company, says that the company stands at the threshold of serious investment projects and that is the reason why it needs to step out into international capital markets. The leadership of KazMunayGaz has repeatedly said that the main objective of the Exploration Extraction subsidiary company was to increase output volumes. However, this task is not a simple one because the oil deposits which the KazMunayGaz company works with (it has 44 of them in Atyrau and Mangistau regions) are mostly at the final stage of exploitation and it demands great efforts to extract oil there. Currently the company is undertaking exploration work at several new units and plans to buy some assets. It has not yet been said which ones, it could be Kazakh or foreign deposits. Also additional money is needed to develop the Caspian shelf. The need for Western money is justified by the above.

Besides, entry into the London Stock Exchange is prestigious and this is another point added to Kazakhstan’s international image. The world-renowned stock exchanges trade in shares of only those issuers who are quite transparent and trustworthy. The Ernst and Young Kazakhstan company has held an audit of the KazMunayGaz subsidiary before the former issued its securities and this too is evidence of its transparency.

Company’s statistics

[Newspaper insert] The KazMunayGaz Exploration and Extraction shareholding company is developing 44 deposits in the west of Kazakhstan. The residual balance reserves of oil at the deposits which were being developed as of the beginning of 2004 were 1.2bn tonnes, extracted volumes amounted to 269m tonnes, residual reserves of natural gas were estimated at 34bn cu.m. whereas reserves of condensate amounted to 2.9m tonnes. In the period of January to July 2005 the KazMunayGaz national company extracted 5.4m tonnes of oil and gas condensate. It plans to extract 9.3bn over the whole year. KazMunayGaz’s share of oil extraction in Kazakhstan is about 25 per cent.

[Newspaper text continues] However, not everyone in Kazakhstan is happy with the news. The Asar party’s political council wrote an open letter to Prime Minister Daniyal Akhmetov, saying that the sale of the KazMunayGaz Exploration Extraction company’s shares runs counter to Kazakhstan’s long-term interests. The need for KazMunayGaz to attract additional funds raises serious doubts on the part of the Asar party. “The sale of shares cannot be related to the company’s lack of means for development. The shareholding company’s income is growing constantly both from its primary and commercial activities. For the period from January to June 2005 the KazMunayGaz national company received income to the amount of 266bn tenge [about 2bn dollars], which is 25.4 per cent higher than the indicators for January to June 2004. The total income in 2005 is forecast at an amount of 581bn tenge [about 4.3bn dollars],” the letter says.

Asar party warns against foreign investor

The Asar party fears that the arrival of a foreign investor will influence the whole oil and gas industry, not only the work of the extracting “daughter company” of KazMunayGaz: “Whoever buys 49 per cent of shares will receive not only a share in quite an effective company but literally certain levers on the whole oil and gas industry and, therefore, on the domestic and foreign policy of the country. There is no certainty that the views of the new shareholders would coincide with the interests of our state.” The authors of the letter hint at the personal interests of certain circles in the sale of half of the company (“the issue of the fate of KazMunaygaz cannot be settled by lobbying with only criminal interests of individual corrupt circles being behind this”) and urge for this issue to be settled in parliament.

Indeed, the extracting subdivision of KazMunayGaz controls a quarter of all oil produced in the country. According to official data, the KazMunayGaz shareholding company is the largest tax payer in the country. Only last year the company paid in over 100bn tenge (almost 800m dollars) to the budget and its tax payments have grown by 39.5 per cent. Income from its main subsidiary companies, and above all the KazMunayGaz Exploration Extraction, has boosted the growth.

Besides, as we know, all symptoms of the Dutch disease have been present in Kazakhstan lately. Too much money is invested in the oil and gas sector in the country. Is there any sense in attracting more investments without sound reasons for this as long as these investments are not directed into processing industries which currently need support? There was such an outcry several years ago because of the 5 per cent in Tengizchevroil and one was also saying at that time that one needed to earn money and then it turned out to be a mistake. And now they are selling half of the state company\

Chinese influence

Analyst Sergey Smirnov thinks that one of the reasons for selling 49 per cent in the KazMunayGaz Exploration Extraction company may lie in the aspiration of part of the Kazakh establishment to legally register ownership of the company’s shares. Therefore, one can expect that one of our own will purchase these securities through a fake legal entity. An assumption is made that this initiative is aimed at supporting China’s burst into the Kazakh oil and gas industry. Having purchased assets of PetroKazakhstan [Canadian- owned oil company] and half of the KazMunayGaz Exploration Extraction company, China will obtain limitless power on our market.

Petr Svoik, an opposition leader, points to another important aspect related to selling the shares. He says that the data obtained by geologic exploration are of more value than the oil itself. [Passage omitted: the KazMunayGaz company undertakes intensive exploration work and hopes to drill in 17 wells in Atyrau Region.] Also one should not forget the fact that KazMunayGaz Exploration Extraction participates in several projects together with foreign companies, for example the Tupkaragan and Atash where it is currently undertaking exploration together with LUKoil [Russian oil and gas company]. Will the partners of the company like this?

The only thing which confuses one in this uproar around the sale of shares in the KazMunayGaz Exploration Extraction shareholding company is the belated reaction of opponents [of the idea]. The intention to place securities on the London Stock Exchange was officially announced for the first time on 15 March 2005. Why the critics of this initiative did not express these arguments at that time and why are letters addressed to the prime minister and round tables springing up only now?

There is one more remark. The mineral resource deposits of KazMunayGaz and the power which co-ownership of the state company brings cannot but attract investors. If this process is not stopped now, then the company’s shares will find a buyer as soon as they are put up on the international market.