When the USSR collapsed in December 1991, the emerging fifteen new nations scrambled amidst hyperinflation to restructure their economies away from a centrally planned economy directed by Moscow to sovereign, free market ones that could attract desperately needed foreign direct investment (FDI).
The clear winners in this have been two Caspian nations, Azerbaijan and Kazakhstan. While Azerbaijan might have won the initial PR investment race, knowledgeable investors are also closely eying Kazakhstan.
Azeri President Heydar Aliyev, realizing that his nation’s indigenous resources were insufficient to develop the country’s hydrocarbon riches, in September 1994 signed the $7.4 billion “deal of the century” with 11 Western oil companies to develop a number of sites in both onshore and offshore Azerbaijan, including the Chirag and the offshore Guneshli oil fields, with the centerpiece of the infrastructure development being the construction by an international consortium of the $3.6 billion, 1 million barrel per day (bpd), 1,092-mile Baku-Tbilisi-Ceyhan pipeline, which transmits crude from Azerbaijan's offshore Azeri-Chirag-Guneshli fields to Turkey's deepwater Mediterranean terminus at Ceyhan.
In a striking measure of how open Azerbaijan had become for investment, British Petroleum heads the BTC consortium and, besides operating the pipeline, has a 30.1 percent share of the project, exceeding that of SOCAR, which owns 25 percent. Other Western investors include Chevron (8.9 percent), Norway's StatoilHydro (8.71 percent), Turkey's Turkiye Petrolleri Anonim Ortakligi (6.53 percent), Italy's Eni/Agip group and France's Total (5 percent apiece), Japan's Itochu (3.4 percent), the Japanese Inpex Corp. (2.5 percent) and the American Hess Corp. (2.36 percent). Accordingly, Western concerns receive 75 percent of BTC's revenues.
Aliyev’s son and successor, President Ilham Aliyev, created a State Oil Fund to use the massive oil revenues flooding the country.
The wisdom of such policies was shown by the fact that FDI flows to Azerbaijan increased by 600 percent in two years, from $227 million in 2001 to $1.3 billion the following year.
But Kazakhstan has made similar, though less spectacular progress, with FDI, primarily in its energy sector, surging from a paltry $100 million in 1992, the first year of independence, to more than $118 billion by 2010. In a similar measure of the country’s reliability for foreign investors, in September 2002 Kazakhstan became the first country in the former Soviet Union to receive an investment-grade credit rating from a major international credit rating agency.
Building upon these successes, the country is actively soliciting further FDI. In October 2010 Kazakh Prime Minister Karim Massimov stated that Kazakhstan seeks to attract up to an additional $100 billion in investments to the nation’s oil and gas sector alone over the next decade, telling journalists, “We are currently exporting 1.31 million barrels (of crude oil) a day and we aim to take it to 3 million barrels a day. KazMunaiGas (the national oil company of Kazakhstan) cannot do it alone. We are looking for partners for KMG’s projects.”
Kazakhstan has much more of its energy assets to open, as its proven oil reserves are estimated at 30 billion barrels, including both onshore and offshore fields. Oil development is currently concentrated in several major fields – the Tengiz, Karachaganak and Kashagan, the largest outside the Middle East, as well as in the Kurmangazy and Uzen fields, along with other hydrocarbon basins near the Chinese border and around the Aral Sea.
Among foreign energy companies ChevronTexaco, ExxonMobil, BG, Total, Agip and Lukoil have already been in country for many years, while South Korean, Indian and Chinese oil companies are also establishing a presence there. As of 1 December 2010 Kazakhstan held a total of 205 oil and natural gas contracts, including 16 Production Sharing Agreements (PSAs.)
Last but hardly least, the tax regime in Kazakhstan, while complex, is comparatively more favorable than anywhere else in Central Asia and subsoil use rights are among the best in the new high growth markets while the national currency, the tenge, is freely convertible with few restrictions placed on transactions in and out of the country.
But, where does all the oil revenue go? In 2000 Kazakhstan established a sovereign wealth fund to manage its energy income, the Samruk-Kazyna, whose assets now stand at $84 billion.
Seeking to allay concerns about the fund’s management, Kazakh President Nursultan Nazarbayev recently fired his son-in law, Timur Kulibayev, as Samruk-Kazyna chairman and replaced him with Umirzak Shukeyev.
In an interview earlier this week with Russia’s Kommersant business newspaper, Shukeyev elaborated the fund’s shortcomings as a lack of strategic vision, excessive bureaucracy and overstaffing, commenting, "I am personally astounded that there has been no strategy until now," Shukeyev told Kommersant. "Now, it is clearly stated that the main goal of the fund is to increase the market value of the companies that belong to it. But we only reached a level that is considered a baseline for companies listed on international stock exchanges. Our goal by 2015 is to achieve a rating of at least 75 percent."
So, massive energy assets, a liberal tax code, few currency restrictions and a reformist bureaucracy – while Kazakhstan certainly has a number of reforms yet to make, including tackling corruption, the country’s increasing attractiveness to foreign investors should be obvious and can only increase over time.
By. John C.K. Daly of Oilprice.com