Kazakhstan is a small power that faces significant strategic challenges on its door step.
Creating a unique identity as an independent country that is able to operate autonomously
and influence its environment is indeed a challenge given the competing narratives for Eurasia
that the previous chapter presented. To achieve this, Kazakhstan has, according to former
Prime Minister, Imangali Tasmagambetov, moved from a ’strategy of survival to a strategy of
prosperity’, via a period of rapid privatisation and by riding the wave of an investment boom.166
Today there are many strategic choices that are available to the state, and yet the myriad daily
decisions taken to construct the reality of this prosperity narrative sit in the gap between action
and rhetoric, restricted by the strategic choices of structures, actors and ideas contained within
the microcosm of the political landscape. The Soviet legacy is still visible in the decision-
making processes of government; high-level corruption and a revolving door of leadership
between National Oil Company (NOC) and government positions compromising the search
for an ‘authentic’ Kazakh state.This balancing act between state and industry, development
and identity, is not unique to Kazakhstan, but its choices are. NOCs control ninety percent of
the world’s oil reserves and two thirds of world oil production. This mass nationalisation of the
oil fields came about through the desire to not only unlock the profit of the oil fields for the host
nation, but also to reveal the technological secrets of the processes, technology and personnel
that were encased within the industry and yet each NOC operates entirely differently. Norway’s
Statoil and Russia’s Gazprom are both highly profitable organisations but they fulfil entirely
different functions within the industry and with their relationship to their home countries, crafted
by entirely opposite strategic cultures at state and industry level. The political processes that
led to their creation are evident in their modern functions; Statoil is overseen by multiple
166Imangali Tasmagambetov, ‘Kazakhstan: From a Strategy of Survival to a Strategy of Prosperity’,American
Foreign Policy Interests: The Journal of the National Committee on American Foreign Policy, Vol.27, No.1, (2005) p.33.
committees and total separation between the regulator, the state and the firm, whilst Gazprom
operates as a wing of the state in matters of domestic and foreign policy. KazMunaiGas
(KMG), the Kazakh national oil firm is just as unique, shaped by the powerful geographical
and cultural forces that led to its creation and it is through understanding these relationships
that we can begin to understand the everyday mechanisms and moments of strategic culture
that are meeting the ideational narratives of the leadership. This is as much driven by forces
external to the government as it is to the individuals operating from within, and this chapter
aims to identify these actors and events that are creating the current climate knowledge.
Building governance is more than merely creating structure. It is the fluid, dynamic processes
and strategy that multiple actors engage with in order to steer, control and organise the
practises of the state operating together.167 Crucially there is not ideal or ultimate model of
governance, no singular definition of ‘good governance’, and therefore, measuring the
normative qualities of state governance is not a useful pursuit. More useful, is understanding
the practical manifestations of marginality through the governance strategy of the state. How
is marginality being achieved through strategic practises in Kazakhstan, and what role does
governance play in the formation of positive marginality?
To answer these questions, this chapter examines the relationship between the state and the
energy industry. Using a framework for understanding governance developed by Victor, Hults
and Thurber, it creates a systematic analysis of the many relationships and audiences that
are present in the Kazakh system of oil governance.168Using their method of analysis , we are
able to identify key features of the Kazakh industry; historical legacy, government
relationships, International Oil Company (IOC) contracts, strategy, and prospects for reform.
167J. Pierre and B. Peters,Governance, Politics and the State(Basingstoke: Macmillan, 2000), p.5.
168David Victor, David Hults & Mark Thurber,Oil and Governance: State-owned Enterprises and the World
The chapter focuses upon the internal dynamics and mechanics of the project for marginality
rather than the wider geopolitical relationships which are addressed in the following chapters.
This is a study of the development of the Kazakh industry in its own right, rather than being
viewed through the lens of another state, and generates the basis for understanding how the
Kazakh state has responded to and negotiated its relationships with power states and retained
independent process.
The chapter begins by providing a brief overview of the industry to provide context, before
explaining the strategy of the state oil company. The purpose of the chapter is to dissect and
disentangle the web of relationships between the local population, the state oil company, the
government and the International Oil Companies (IOCs). Doing so provides a complete picture
of the governance style and features that are in place, but more than that it allows us to identify
the practical steps that have been taken by the state to develop the industry. Who defines the
objectives of the NOC, if indeed there are clearly defined objectives at all? Who are these
goals attempting to satisfy; the domestic population or political elite? Finding answers to these
questions creates a study of the Kazakh oil industry that is immediately applicable to wider
research on the global oil and gas industry. The chapter will conclude by contrasting the results
of the Victor, Hults and Thurber study on governance to contextualise these findings against
the industry norms.
Introduction to Kazakh Energy Industry
Key features of the modern Kazakh industry are defined by its geography. As a littoral state
on the Caspian, large portions of its 30 billion barrels of proven reserves are on disputed
Turkmenistan. Its climate makes oil extraction exceedingly difficult through a combination of
offshore rigs and extreme summer/winter temperature swings and regularly impacts upon
production and development. Getting oil to market requires a combination of tankers, trains
and pipelines from this central point on the Eurasian landmass to the consuming countries
around the edge of the continent which further causes a bottleneck in export capability.
Domestic consumption is high, around similar levels to that of Russia, but it is nowhere near
the efficiency of western European countries, or the extreme inefficiency of China and Saudi
Arabia.169The onshore fields Tengiz, Karachaganak, Aktobe, Mangistau, Uzen and off shore
fields Kashagan and Kurmangazy generate the majority of Kazakhstan’s oil, and is supplied
to Italy, China, Netherlands, Austria and France as the main consumers of Kazakh oil. In this
sense, geography is determining Kazakhstan’s geopolitical tools rather than its strategy,
technique or goals.
The Kazakh oil strategy has catapulted it into the top 12 oil producers in the world and as of
2011 it has tripled its exports compared to its Soviet-era production rates. This has not been
achieved in isolation, and there are a great many international oil companies that have helped
to develop the sector including KMG, Eni, ExxonMobil, Shell, and Total. When the ‘supergiant’
Kashagan field eventually reaches fruition, Kazakhstan will be in the top ten of world oil
producers. The national oil company KazMunaiGas is an integral part of the industry and
operates as an integrated oil company (meaning it has operations in exploration, development,
refining, transportation, distribution and servicing through a series of subsidiary companies).
KMG holds a 50% stake in all production-sharing agreements which are the favoured contract
format of the Kazakh government. It has only been established a relatively short while, since
169For more information about comparative rates of consumption the US Energy Information Administration
has a wealth of easily accessible data. See for example US Energy Information Administration, ‘International Energy Outlook 2014’, (Washington DC: US Department of Energy, 2014).
a 2002 merger between Kazakhoil and Oil and Gas Transportation, and according to
Transparency International’s report on the national oil companies, it is making progress
towards international standards even if there is still considerable work left to achieve.170 It
publishes comprehensive audited reports, which includes its subsidiary companies, and in
theory reports on revenue generation and collection as well as the full disclosure of the
management financial interests in the oil and gas industry. However, this does not translate
into full disclosure of transparent communication between the state and the public and has
provoked fatal riots between KMG management and communities in West Kazakhstan.
Development of the Industry 1991- Corporatism
With its first commercial production occurring in 1911, Kazakhstan has a long if not always
profitable place in the history of world petroleum. Production began in the Soviet era, when
the Republic of Kazakhstan was the Kazakh SSR, but inefficient production methods and low
oil prices meant that it was very underdeveloped compared to the Urals-Volga region until the
1990s. Its potential was known, but development was always seen as a future project. When
independence arrived overnight in1991, and Kazakhstan became the republic it is today, the
state did not expect to be in charge of its own industry and did not have sufficient funds to
170Relative to other states in the region and more established and developed countries, Kazakhstan has made
more efforts towards transparency although the industry can still be considered corrupt. Kazakhstan scored 13% for reporting on anti-corruption programmes (industry average 43%). This is based upon the reporting of Kazakhstan on the anti-corruption programme UN Global Compact Reporting Guidance on the 10thPrinciple
Against Corruption. KazMunayGas scored 75% for organisational disclosure (industry average 63%). Organisational disclosure means reporting the organisational structure, operations, partnerships and standards used for financial accounts. This can be explained by the higher levels of accounting required in order to participate on the LSE by KMG and its subsidiaries. Kazakhstan does not feature at all for country level disclosure because it does have sufficient overseas operations to be included in this section of analysis. For the full report see Revenue Watch & Transparency International, ’Promoting Revenue Transparency; 2011 Report on Oil and Gas Companies’,Transparency International Secretariat, Berlin, 2010.
develop the industry which was so essential to the country’s growth. As a result there was
confusion in these early years.
The first NOC was Kazakhstanmunaigaz, based upon Rosneft, and was plagued by struggles
within the government ministries. President Nazarbayev responded by disbanding the Soviet
era Ministry of Energy and ensuring that Kazakhstanmunaigaz would not be subordinated to
a ministry again, creating a centralised decision-making process, but failing to prevent further
political struggles for control.171 This consolidation of power was as much about the
continuation of the president as it was about the continuation of the industry. Wojciech
Ostrowski proposed that the early history of the Kazakh oil industry could be divided into three
distinct phases; Corporatism, Privatisation, and Post-Privatisation.
The early years, 1991-1994 are characterised by a phase of ‘corporatism’.172This refers to the
series of formal networks of interested parties which allowed power structures to be generated
from below. The early Kazakh oil men benefited from the lack of a legal framework between
public and private ventures. This ill-defined mixture resulted in key positions in the industry
being allocated to formal institutions in the industry on the basis of personal relationships,
using them as intermediaries between the central power structures and the branches of the
industry. This was particularly apparent in the early Tengiz projects, when those who were not
involved in this project began to challenge the authority of the state, and take part in the battle
for control of KMG.173 The partial privatisation via the local elites only served to create
opportunities for politically interested groups to become powerful and challenge the
presidency, and ultimately the stability of the industry, resulting in Nazarbayev’s decision to
171Wojeciech Ostrowski,Politics and Oil in Kazakhstan(London: Routledge, 2010). 172ibid., pp.32-42
temporarily abandon this wave of privatisation in favour of a series of client-patron
relationships.
Creating a national oil company is not the only way to manage a national oil and gas industry,
so why should Kazakhstan choose this model in the post-privatisation years? Nolan & Thurber
effectively demonstrate the role of risk in the decision of the state to determine the role of the
IOC and the NOC in development of an oil industry.174 As discussed in the literature review
the decision to seek partnerships with IOCs is often the result of a risk assessment to ascertain
the level of exposure that the state is comfortable with. In the case of Kazakhstan, it was near
bankruptcy on the part of the Kazakh state that prompted the movement to create partnerships
with IOCs, and IOCs prefer the local knowledge provided by an NOC where applicable. There
were other models that the Kazakh state could have pursued. It need not have opted to create
its own national oil company and instead have developed a regulatory industry, made slow
and deliberate tenders to increase or decrease exploration, enforced local content quotas and
created a consortium of IOCs with strict production quotas. The UK government, for example,
has little connection to British Petroleum but it does retain a tight regulatory role over the
production of North Sea Oil. In the early days of a new state such as Kazakhstan, weak,
powerless and easily bullied, the terms of trade are difficult to negotiate in the states favour.175
174Peter Nolan and Mark Thurber, ‘On the State’s Choice of Oil Company: Risk Management and the Frontier of
the Petroleum Industry’, 10 December 2010, Program in Energy and Sustainable Development, Stanford University.
175The one key advantage that the NOC model has over the regulation model is in the long term benefits. Once
the NOC has learnt from the IOCs it has partnered in the development of the local industry it can begin to apply this knowledge to overseas production, and increase its revenue beyond its own reserves. Kazakhstan production requires a very complex extraction process that few companies in the world had the capability and R & D budget to develop, will soon be able to cast its eyes around the world as a developing partner in other projects. And, as the new projects are increasingly hostile conditions, frontier exploration in offshore and artic locations, so technological capability will increasingly be what secures project contracts. Kazakhstan is not yet in a position to ‘go out’ as it does not yet have the requisite competencies or competitive edge in the market, but with political will this is an opportunity for the future.
1994 – Privatisation
In order to compete with Azerbaijan and undo the power of the local elites, Nazarbayev began
a program of privatisation in 1994. As Martha Brill Olcott notes, the presidential elections were
looming and the president’s popularity was beginning to wane as those who has not benefitted
from the privatisation sought to gain advantage.176 In order to rectify this Nazarbayev
appointed his family members to key positions and in a less than transparent set of moves,
allocated key figures to industry positions, essentially as clients of the president. A new Prime
Minister, Kazhegeldin, oversaw the transition and a new generation of young technocrats was
ushered in, above the positions occupied by the old generation of oil men who were openly
criticising the president. Localakims and intermediaries were used to keep an eye on these ‘oil men’ and were kept wealthy, but away from the seat of power.177Foreign investors at this
time were weary. The president was able to change the constitution and issue decrees at the
drop of a hat and there was no rule of law with which to stabilise their investments, making
some of the president’s more strident contractual demands unrealistic.
2000s Post- privatisation
From 1997 onwards there marked a new period in the industry – the end of privatisation. No
new contracts were allowed to be signed as Nazarbayev declared it was time to think about
the third generation of Kazakhs and make sure there was something left for them. In 2002
KMG was established in order to create a unified state policy and a single authority with which
to present to foreign companies as a partner on the Caspian shelf. This would allow KMG to
take the lead on projects, and create a more authoritative bargaining power in negotiations.
Once again, all the leading figures were close to Nazarbayev. Assets that had once been
owned by international companies were slowly bought by local elites. For example Nelson
176Marthe Brill Olcott, ‘Central Asia’s Second Chance’, p.138. 177Wojeciech Ostrowski, ‘Politics and Oil in Kazakhstan’, p.52.
Resources once owned a northern Mangistau field and began buying up assets across the
region. It was later revealed that the leadership figure of this company was Timur Kulibayev,
a local elite with close family ties to the president.178The extent to which this process occurred
across the region is made harder to understand because of the myriad off-shore holdings.
2010s – Redefinition
This next phase has been characterised by renegotiation and redefining the role and contracts
of the foreign IOCs, the modernization of the industry and the wave of participation by Chinese
firms. A more robust policy with the international firms has begun to shape the industry and
the government has not been shy to push the role of KMG to the front of negotiations, whether
that’s insisting upon the majority shares in new projects, or the first refusal of KMG to purchase
any new holdings that become available. China has had an enormous impact upon the Kazakh
market both as a market for Kazakh oil through the opening of new pipelines, or as a large
partner in the Kashagan field, and also through the billions of dollars for infrastructure that
accompany each move by CNPC into the Kazakh market. It has also been a time in which the
IOCs have come under increasing scrutiny by the state as ENI discovered when it was
removed from the leading partner position at the wealthy Kashagan plant because of a poor
record on deliverables.
Explaining KMGs Strategy and Performance
As it stands today, JSC NC KazMunayGas is a large fully integrated oil company that has