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EIA Lowers World Oil Demand Forecast Again

The US Energy Information Administration…

Global Risk Insights

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Kazakhstan Moves Towards Becoming A Top 10 Oil Producer

Recently, a group of oil companies led by Chevron announced a $36.8 billion investment deal for the development of Kazakhstan’s Tengiz oil field. The sizable new investment is virtually unprecedented in the prevailing low-priced oil economy. For Astana, only a small number of major projects have been cemented in recent years — and this is the largest of the year so far.

As ambitious and daring as this investment is for oil companies, it also brings a great deal of risk and opportunity for Kazakhstan. Increased production and exportation will influence relations with its powerful neighbors, and in turn become a key component of the developing trans-Asiatic trade environment.

Astana has increased its oil output annually over the last 3 decades, increasing from 59.5 to 81.8 million tons per year between 2004 and 2014 alone. This increase is a part of Kazakhstan’s plan to reach 130 million tons per year by 2020, though infrastructural issues have slowed growth.

Kazakhstan and the oil economy

In 2014 Kazakhstan was the world’s 15th largest producer of oil, and this year’s investment will bring it substantially closer to the top 10. The country will continue to become a more important source of global oil, as its proven reserves totaled 30 thousand million barrels in 2014. This will increase energy competition with Russia and the Middle East, while also forcing Kazakhstan to contemplate its dependence upon other countries’ oil purchases.

62.3 percent of Kazakhstan’s economy is accounted for by crude and refined petroleum. By far its biggest customer is China, whose 2014 purchases accounted for roughly 25 percent of Kazakhstan’s oil economy. As the world has seen through the interdependence of Russia and Europe’s energy economies, asymmetric dependence can have substantial effects on policy.

Implications for Kazakhstan’s trade strategy

This presents both a risk and an opportunity for Kazakhstan, which stands to gain a great deal from China’s One Belt One Road initiatives, but must also protect its economic independence throughout Asian economic shifts.

The state of relations with China has not gone unnoticed by the Kazakh government, which developed policies such as the 2050 strategy to properly navigate shifts like One Belt One Road and development of the Silk Road. The true test will be whether Kazakhstan is able to balance both political and energy relations with China, which could wield its economic influence in Central Asia for political motives. On the other hand, Kazakhstan’s considerable borders with China and Russia will continue to be a major pathway for the coming Silk Road, providing a very strong position in overall East-West relations. Related: How Much Does The U.S. Spend Per Day On Petroleum Products?

Kazakhstan’s geographic location will become an increasingly important factor as the Silk Road develops from East Asia through Central Asia and the Middle East to Europe. Roadblocks in Kazakh-Chinese relations could prove detrimental to trade with the West, which would be subject to any new trade tariffs or taxes in Central Asia.

Increased investment into Kazakhstan may also place a focus on Kazakh-Russian relations. Kazakhstan is the second largest oil producer of the former Soviet Union, and relations between the two are historically stable. Kazakhstan tends to be predicatively pro-Russian, but as it gains its own economic might and independence, it risks aggravating its Northern neighbor. Russia benefits, and will continue to benefit, from Kazakhstan’s economic growth, so long as Kazakhstan retains its amicable relationship.

Looking Forward

To properly interpret the Kazakh-Russian relationship, it will be important to watch the growth and expansion of both countries’ energy sectors. Both have developed complex relations with China and remain heavily dependent upon its purchases.

The further rise of Kazakhstan’s production may become a roadblock in relations with Russia, depending upon how the Kazakh government utilizes its growing influence. The potential for economic competition between the two countries will increase, as the two wrestle for clients in Asia, Eurasia and Europe.

Therefore, as the coming investment unfolds, risks and rewards lie within Kazakhstan’s relations with its large neighbors — as well as its geographic placement in the future of trans-Asiatic trade. Kazakhstan lies at the crossroads of many influences. Its success in economic diversification with the coming oil boom will be instrumental to both its own independence, as well as the fluidity of trade in the region.

By Jonathan Hoogendoorn via Global Risk Insights

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