The role of oil and gas in Kazakhstan's foreign policy: Looking east or west?

Abstract

This study examines the role of oil and gas in the making of Kazakhstan's foreign policy. It argues that Kazakhstan has been following a multi-vector foreign policy in relation to its oil-led development and the geopolitics of exporting oil from this landlocked region. The significance of geopolitical considerations and the resulting pragmatism of Kazakhstan's leadership only allow a limited role for national identity and internal political dynamics in the making of its foreign policy. Kazakhstan's geopolitical imperatives force the country to keep good relations with Russia and China as well as with the US and the EU, as counterbalancing partners.

Acknowledgments

The author would like to thank the two anonymous reviewers for their comments on an earlier draft of this article and Hasan Ali Karasar and Paul Williams for their help in revising the article.

Notes

¹The trans-Caspian pipeline has been planned to be built underwater from the port of Kirik located 76 km from Aktau, Kazakhstan, to the Azerbaijani terminal at Dyunbendi, near Baku.

²‘According to the last Soviet census, taken in 1989, Kazakhs constituted 39.5% of the population, while Russians were 37.7%. Combining Russians with the Ukrainians (5.4%) and the Belorussians (1.1%), the Slavs constituted 44.2% of the population, when also combined with the largely Russified Germans (5.8%), non Kazakhs formed a bare but absolute majority in the republic’ (Cummings 2003, p. 145).

³UN Industrial Development Organisation (1996, p. 12); Economist Intelligence Unit (1997, pp. 10 – 27).

⁴Author's interview with two diplomats in the Ministry of Foreign Affairs, 22 February 2002, Astana, Kazakhstan.

⁵The Treaty of Turkmanchai (21 February 1828) established that the land boundary between Russia and Persia would end at the Caspian Sea, thus implying that the sea was not subject to delimitation at the time. Article 8 of the treaty also established freedom of navigation on the Caspian for merchant vessels of both sides, but reserved for Russia the sole right to deploy warships there. The Soviet – Persian Treaty of Friendship (26 February 1921) established freedom of navigation for all Soviet and Persian ships on the Caspian. The Treaty on Trade and Navigation between the USSR and Iran (25 March 1940) reiterated the freedom of navigation rights of the 1921 treaty. Moreover, a 10-nautical-mile offshore fishing zone was recognised.

⁶The Offshore Kazakhstan International Operating Company (OKIOC) was formed in September 1998 to explore the Caspian shelf under a production sharing agreement signed in Washington in November 1997. Italy's Agip, British Gas (BG), Shell, a BP(UK)/Statoil (Norway) alliance, Mobil (US), Total (France) and Kazakhstan's KazakhCaspiShelf founded the consortium, each with a one-seventh interest. KazakhCaspiShelf sold its stake to Inpex Nord Ltd of Japan and Phillips Petroleum of the US in the autumn of 1998. British Gas also decided to sell its 16.7% share of the field. Only recently after drawn-out negotiations, consortium members decided to redistribute BG's share, giving half to themselves and half to Kazmunaigaz. As of May 2006 the consortium members of Agip Kazakhstan North Caspian Operating Company (Agip KCO) (formerly OKIOC) are: Agip (operator), Total, ExxonMobil and Shell (18.52%), ConocoPhillips (9.26%), Kazmunaigaz (8.33%) and Inpex (8.33%).

⁷For a discussion of Russian ‘involuntary disengagement’ see Jonson (1998, pp. 6 – 25 & 69 – 75).

⁸ Nezavisimaya Gazeta, 28 April 1998.

⁹Author's interview with a senior officer at Kazakhoil, Division of External Economic Affairs, 20 February 2002, Astana, Kazakhstan.

¹¹‘Nazarbayev says USA will Help Kazakhstan if Borders Threatened’, BBC Summary of World Broadcasts, 22 February 1994, available at: http://web.lexis-nexis.com/universe, accessed August 2002.

¹⁰For example, Kazakhstan had an estimated 1,410 warheads and 104 SS-18 intercontinental ballistic missiles (Smith 1992). In November 1997, an agreement was signed between the US and the Kazakhstan governments on the safe disposal of nuclear material from the Aktau reactor; and the US government pledged $10 million to help improve security at the storage site, which was located some 200 miles from Iran (Associated Press, 18 November 1997).

¹²For Kazakhstan's economic growth see Pomfret (2005).

¹³Author's interview with a specialist in production sharing agreements at the Ministry of Energy and Mineral Resources, Department of Oil Industries, 20 February 2002, Astana, Kazakhstan.

¹⁴The Tengiz oil field is the largest oil discovery in the world since the 1970s, with proven high-quality reserves of 6 – 9 billion barrels.

¹⁵The oil in the Tengiz field is located very deep, at a high temperature and pressure, with high hydrogen sulphide content, making it relatively expensive to extract and refine.

¹⁶Chevron, company press release, 18 July 1995.

¹⁷Russia's President Boris Yeltsin and Kazakhstan's President Nursultan Nazarbayev signed a protocol on the construction of the CPC on 27 April 1996 (Thoenes 1996b). The final agreement was signed between eight oil companies and three governments on 6 December 1997. The stakeholders were as follows: Russia (24%); Kazakhstan (9%); Oman (7%); Chevron (15%); Lukoil (12.5%); Rosneft – Shell (7.5%); Mobil (7.5%); Agip (2%); British Gas (2%); Kazak Munaigas (1.75%); and Oryx (1.75%) (Freeland & Thoenes 1996).

¹⁸ Petroleum Finance, 5 May 1997.

¹⁹In 1997 Lukoil signed a production sharing agreement with AGIP, BG, and the Kazakhstan government.

²³‘National Press Club Afternoon Newsmaker, President Nursultan Nazarbayev of Kazakhstan’, Federal News Service, 20 May 1992.

²⁰For details of Azerbaijan preferences see Ipek (2004).

²¹The national companies of Kazakhoil and Transportneftigaz (TNG) merged into a single closed joint-stock company called KazMunaiGaz (KMG) National Company by a Presidential Decree, signed in February 2002.

²²Author's interview with a senior officer at Kazakhoil, Division of External Economic Affairs, 20 February 2002, Astana, Kazakhstan.

²⁵Author's interview with an ex-officer of Mobil on 29 January 2002, in Almaty, Kazakhstan.

²⁴‘Kazakh Uses America to Enhance His Stature’, New York Times, 25 October 1993, p. A2; Corzine (1997); Kononovich (2004); Kazakhstanskaya Pravda, 19 February 2005.

²⁶‘Kazakhstan's Economy: The Pushy Partner’, Alexander's Gas and Oil Connections, 10, 21, 10 November 2005, available at: http://www.gasandoil.com/goc/history/welcome.html accessed 17 May 2006.

²⁷For example, KazMunaiGaz must now own at least half of any PSA and will act as contractor in all new offshore PSAs in Kazakhstan. Also, the introduction of a new tax structure in January 2004 included a so-called ‘rent tax’ on exports, a progressive tax that increases as oil prices grow. The new amendment to Kazakhstan's tax law has raised the government's share of oil income to a range of 65 – 85%, and it has removed a clause guaranteeing investors a static tax rate throughout the duration of the contract. The new structure includes an excess profit tax, and limits foreign participation to 50% in each offshore project with no guarantees of operatorship. The other 50% will belong to KazMunaiGaz.

²⁸For China's energy policy, see Zweig and Jianhai (2005).

²⁹The Aktobe field in the northwest, which the CNPC acquired in 1997 and the Kumkol field that the CNPC bought from PetroKazakhstan in March 2006 will feed oil to the Kazakhstan – China pipeline. Initially, half the oil pumped through the new pipeline will come from Russia because of insufficient early output from these fields.

³⁰Costing approximately $29 billion to develop, the Kashagan field has presented particular challenges for the Agip KCO. Kashagan contains a high proportion of natural gas under very high pressure, the oil contains large quantities of sulphur, and the offshore platforms require construction that can withstand the extreme weather fluctuations in the northern Caspian Sea area.

³¹When in March 2003, British Gas reached an agreement with China's CNOOC and Sinopec to sell them each a half of its share in Agip KCO, most of the partners in Agip KCO exercised their rights of pre-emption, whereby they were entitled to purchase BG's stake at the same price offered by the Chinese (‘The Dragon Tucks In—Chinese Companies Abroad’, Economist, 2 July 2005, pp. 67 – 69). Thus, Western oil companies demonstrated a commitment to the east-to-west energy corridor by stopping Chinese participation, which might divert oil volumes into the Kazakhstan – China pipeline.

³²The two branches of the Central Asia – Centre (CAC) gas pipeline, the main gas export pipeline from Central Asia, particularly from Turkmenistan, meet in the south-western Kazakh city of Beyneu before crossing into Russia at Alexandrov Gay and feeding into the Russian pipeline system.

³³For Kazakhstan's oil production see Energy Information Administration, Country Analysis Briefs, Kazakhstan, October 2006, available at: http://www.eia.doe.gov/emeu/cabs/Kazakhstan/Full.html, accessed March 2007.

³⁴In 2002 Kazakhstan joined the PfP Planning and Review Process (PARP).

³⁵For detailed information on Kazakhstan's socioeconomic problems and political unrest see Luong (2000, pp. 94 – 98).

³⁶The inflation rate reached 70% during the first two months after the introduction of the national currency ‘Tenge’ in Kazakhstan in 1994 (Kiyanitsa 1994).

³⁷‘Supplement on Kazakhstan’, Financial Times, 17 June 1998, p. 2.

³⁸For a detailed discussion of ethnic problems in Kazakhstan, see Olcott (2002, pp. 51 – 86).

³⁹For detailed information on the shift of more power to the President see Olcott (2002, pp. 112 – 23) and for the leading reference guide to the elite in Kazakhstan see Ashimbaev (2001).

⁴⁰There have been three periods of opposition in Kazakhstan since 1991. In the early 1990s nationalist, communist and liberal were small opposition groups that had little support within both the Elder Clan and emerging business groups. The second period, starting in 1996, included some high-ranking government officials. However, they had almost no support from the business elite, which prospered under the patronage of President Nazarbayev. Prime Minister Akezhan Kazhegeldin (1994 – 97) was the exception. He made his personal fortune from privatisation and founded the Republican People's Party of Kazakhstan in 1999. Kazhegeldin later was exiled and prosecuted for corruption. The third period started in 2001 when the Democratic Choice of Kazakhstan was established. The movement split into radical and moderate opposition. In January 2002 the moderates (Oraz Zhandosov, Alikhan Baimenov and Bulot Abilov) formed the Ak Zhol (Bright Path). The opposition of Ak Zhol became questionable when Oraz Zhandosov was appointed as presidential aide in January 2003. The radicals were Galymzhan Zhakiyanov and Mukhtar Ablyazov who were jailed in late 2002 on charges of corruption.

⁴¹For details of Kazhegeldin's close ties to Russia see Olcott (2002, pp. 161 – 63).

⁴²For example, although the head of the Kazakhstan Centre-Right Atameken Party (KPPP) Yerzhan Dosmukhamedov argued that Kazakhstan should align its foreign policy with the US and the other Western powers and abandon its current strategy of balancing the influence of Russia, China and the West, he did not directly criticise the president. Kazakhstan-based analysts, in fact, emphasised that the new party enjoys government backing and it is unlikely to grow into a serious opposition group. The KPPP was established in January 2007 by four political groups (the right-wing Atameken, the Sootechestvennik Party, the Alash People's Party and the National Federation of Kazak Farmers which were not registered officially in the party system). The new party headed by Yerzhan Dosmukhamedov, an advisor to Timur Kulibayev (the president's son-in-law) and a former vice president of KazMunaiGaz, explained that the party's philosophy is based on ‘the market economy and consequently democracy’ rather than other personality-centred political parties in Kazakhstan (Kucera 2006; ‘Second Big Political Alliance Emerges’, Institute for War and Peace Reporting, 16 January 2007).

⁴³See, for example, the views of Erlan Akin, a political analyst, in the newspaper Respublika, 24 February 2006, and Bakhtiyar Sagandykov in the bulletin of the political news agency APN, 26 February 2006. See also Kimmage (2006a).

⁴⁴Concerns have been aggravated by Chinese oil companies using the lack of qualified oil specialists as an excuse to bring large numbers of Chinese workers to work in Kazakhstan. The Kazakhstan Migration Agency cannot provide accurate numbers of how many Chinese live in Kazakhstan illegally in the cities of Pavlodar, Aktobe and Semey. Furthermore, President Nazarbayev does not want to see a higher degree of social intercourse between Kazakh Dungans (Chinese-speaking Muslims are called Dungans in Central Asia) and China.

⁴⁵For example, in October 2006 Alikhan Baimenov, head of the Ak Zhol (Bright Path) Party, who was a presidential candidate in the December 2005 election, opted to be in the parliament. His preference to be a parliament member reversed the course of his party since the Ak Zhol refused to be in the parliament after the 2004 parliamentary election to protest the flawed polls. In fact, the Ak Zhol party split and the faction called themselves Nagyz Ak Zhol (True Bright Path) Party which takes a more sceptical stand against the president. Furthermore, in July 2006 the pro-presidential Asar Party led by Dariga Nazarbayeva (the president's elder daughter) merged with President Nazarbayev's Otan (Fatherland) Party and changed its name to Nur-Otan Party. Similarly in December 2006, the other pro-presidential Civic Party and Agrarian Party voted to join Nur-Otan Party (Lillis 2006; Kennedy 2007). These developments further suggest that rather than establishing an independent power base, influence groups and clan elites articulate their interests in the current regime and promote a single party model reinforcing Nazarbayev's authoritarian power in domestic politics.