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Abstract

This paper explores the dynamics of state intervention policies in Kazakhstan's petroleum sector between 2001 and 2012. Although the government in this period had become more assertive in relations with multinational enterprises (MNEs), a full-scale nationalisation had not occurred as the state strengthened control over the industry without forcing out oil multinationals. The findings suggest that the increased state intervention in Kazakhstan's petroleum sector was motivated by a rationale of indigenous capacity-building rather than by an exclusively economic rationale of maximising rents. It is often overlooked that the government endeavoured to achieve a greater participation of Kazmunaigas national oil company (NOC) in the domestic energy sector. Contrary to nationalisation, participation doctrine does not prioritise asset expropriation and/or displacing foreign investors. In Kazakhstan, participation strategy facilitated a partnership between the NOC and MNEs with the aim of strengthening local expertise.

Keywords

state intervention nationalisation participation Kazakhstan's energy sector

1 Introduction

The relationships between resource-rich host countries and foreign investors have always been complicated. There have been periods of the foreign direct investment (FDI)-friendly environment when multinational enterprises (MNEs) were mainly seen as drivers of economic growth, and there have been periods of the spread of ‘economic nationalism’, characterised by general hostility towards multinationals. The beginning of the twenty-first century was a period of unprecedented rise in global oil prices but also the period of return of resource nationalisation in many oil and gas exporting countries. It was documented that in the last few decades the global energy industry has witnessed the largest number of expropriations (Click & Weiner, 2010).

Resource nationalisation represents a threat to investments, and it is one of the most significant political risk factors for oil multinationals. For example, assets of international oil companies (IOCs) were the first target of nationalisation decree after the 1917 Bolshevik revolution in Russia (Kobrin, 1985). This paper reviews the period between 2001 and 2012, which was not only a period of unprecedented rise in global oil prices but also the time of resource nationalisations in many countries. Governments of Bolivia, Russia, Venezuela, Ecuador and Chad all engaged in resource nationalisation at different levels. Due to the considerable effect that these events had on the global energy market, studies of motivations behind nationalisations have generated renewed interest (Guriev, Kolotilin, & Sonin, 2011; Vivoda, 2009). Understanding the exogenous and endogenous aspects of this phenomenon is equally important for scholars, policymakers and businesses.

Studies on nationalisation policies in Kazakhstan's energy sector focused on economic goals that the government pursued in renegotiating contracts with foreign investors (Domjan & Stone, 2010; Sarsenbayev, 2011). Without rejecting the economic rationale argument, this paper argues that the desire to extract larger rents during the high oil prices is an incomplete explanation for the greater state involvement. Through amendments in the fiscal regulation of petroleum sector, Kazakhstan introduced more advanced taxation system, which substantially increased budget revenues. However, most of the studies overlook that in parallel with this, the government pursued a developmental mission for Kazmunaigas NOC, achieving much visible state participation in energy projects. Thus, developing local expertise was another imperative motivation for state intervention policies in Kazakhstan.

The doctrine of participation, which was first introduced in the Middle Eastern countries in the 1960s (Jaffe & Elass, 2007; Stevens, 2008), aimed at gradual increasing of the involvement of domestic companies and workers to achieve indigenous capacity-building. Similarly, in Kazakhstan, key agreements with foreign investors remained unchanged, and the expropriation of assets did not take place. Instead, the government amended the regulatory regime to tighten the control over the industry and strived to increase the NOC participation as a partner for MNEs in major energy projects. At the same time, changes to the legislation ensured redistribution of rents according to higher oil prices. These policies proved to be less radical compared to what happened in other oil-rich countries.

Competition for energy resources in Kazakhstan, and more broadly in the Caspian region and Central Asia, received adequate attention in the scholarly literature (Akiner, 2004; Dorian, 2006; Ebel & Menon, 2000; Heinrich & Pleines, 2012). However, most of the studies focused on geopolitical competition between the external powers and adopted realist framework of ‘the new great game’ (Blank, 2012; Stegen & Kusznir, 2015; Zabortseva, 2012), where China, Russia and the U.S. are seen as the main players (Kubicek, 2013; Orazgaliyev, 2017). In particular, China's increased activity in securing energy supplies from the region was well documented (O'Neill, 2014; Swanström, 2005). At the same time, the role of domestic politics and its influence on interactions between governments and foreign investors remain underexplored. Triggers and driving factors behind the increased state intervention deserve closer attention and a broader study of historical events will be helpful to shed light on factors that influenced government policies.

This paper is structured as follows. After reviewing the literature and history of nationalisation in the petroleum industry, this paper examines the events that preceded the switch of the relative bargaining powers in favour of the host government in Kazakhstan. It then focuses on legislative changes and cases illustrating, how and with what purpose, the government exerted greater influence in the petroleum sector. Finally, following the analysis of the expansion of Kazmunaigas in the country's energy sector, the paper draws implications and conclusions.

2 Nationalisation as a major political risk factor for foreign investment

2.1 Nationalisation in the global petroleum industry: Theory

In contrast to the resource-based view (Barney, 1991), industrial organisation scholars emphasise industry-level and country-level risk factors in determining bargaining power variables in MNE–host country relationships (Caves, 1996; Kobrin, 1982). Research on political risk also employed bargaining model for their analysis (Fagre & Wells, 1982; Lecraw, 1984; Vernon, 1971), although, this was mostly limited to studying expropriation risk (Ghadar, 1982; Kobrin, 1980) and the effect of instability on MNE strategies and investment decisions (Brewer & Rivoli, 1990; Kobrin, 1984). These studies asserted that companies might not be able to eliminate risk in their operations, but they can mitigate it by influencing factors that pose risk.

Nationalisation is often defined as one of the categories of political risk. Most of the studies directly link political risk and nationalisation or other interventionist actions by host governments (Brink, 2004; Friedman, 2012; Riches, 2003). For example, Riches (2003, p. 161) presented political risk from the MNE-centred point of view defining it as ‘the possibility that stakeholders’ politically motivated actions could cause an investment to make less money than had been expected when that investment was made’. However, Neil (1974) adopted a broader view of political risk, linking it to the possibility of production interruptions or loss of MNE's property as a result of host government intervention (expropriation, contract violation, change in regulatory regime) or as a consequence of external factors such as war, civil unrest or economic crisis.

Nationalisation and resource nationalism are related but inherently different concepts. Nationalisation is a process, which manifests itself in the transfer of ownership from private companies (foreign or domestic) to state entities. Resource nationalism is a determination of governments to increase or maintain state control over the exploitation of its natural resources. Resource nationalism often drives nationalisation process although it may not express itself in expropriation as it can refer to efforts to prevent or limit foreign participation (Domjan & Stone, 2010, p. 38). By the way of illustration, Mexico and Turkmenistan are examples of states with limited foreign participation in their respective energy sectors.

The phenomenon of ‘resource nationalism’ emerged during the second half of the twentieth century. In the developing world, this coincided with the beginning of decolonisation process, where the movement for independence and obtaining greater control over national resources became an ideology. Newly independent states were keen to end their ‘colonial relationship’ with multinationals, which were usually of the same nationality as the former colonising countries (Kennedy & Tiede, 2011, p. 14). Notably, resource nationalism phenomenon is not only found in developing countries – Australia and Canada, are often mentioned as ‘resource-nationalist’ countries (Stevens, 2008; Uslaner, 1996).

As Stevens (2008) pointed out, resource nationalisation is a cyclical phenomenon, which has a self-feeding nature. The spread of resource nationalisation leads to oil shocks as producing countries limit supplies and/or cease investment in new projects. Slowing global markets weaken the energy demand, which subsequently leads to falling commodity prices. In the period of low oil prices, energy exporting states need capital to develop new fields and to buy technologies, which forces them to turn back to foreign investors starting a new cycle (Stevens, 2008). It was observed that resource nationalisation waves inevitably coincide with boom cycles in international energy market (Vivoda, 2009; Wälde, 2008, p. 518). Numerous studies established a direct correlation between resource nationalisation and fluctuations in oil prices (Click & Weiner, 2010; Friedman, 2006; Guriev et al., 2011). Others argued that it may be erroneous to directly link nationalisation to commodity prices, and it can even be the other way around – nationalisation policies often trigger oil price shocks (Kennedy & Tiede, 2011).

The balance of bargaining powers (Fagre & Wells, 1982; Vernon, 1971) between national governments and MNEs also changes in a cyclical manner. A sustained period of low oil prices gives an advantage to foreign investors in contract negotiations with host governments, while rising commodity prices give an advantage to the latter (Bremmer & Johnston, 2009). Humphreys, Sachs, and Stiglitz (2007, p. 323–324) pointed that inability of some governments to consider the cyclical nature of the oil industry results in radical policies such as nationalisation. Governments conclude contracts, which provide adequate revenues at the time of the agreement but fail to establish equally fair conditions in the event of price fluctuations. For example, in the Former Soviet Union countries, MNEs managed to get lucrative deals because the crude price was at its lowest cyclical point during 1990s (Orazgaliyev, 2018). With the peaking oil prices in the new millennium, the countries attempted to renegotiate contracts, which is not uncommon in the history of the international petroleum industry.

2.2 Nationalisation in the global petroleum industry: History

Due to the cyclical nature of the oil industry, perceptions towards foreign investment in energy-producing countries also changed. Iran showcased one of the earliest cases of resource nationalisation in 1951, when the Prime Minister Mossadegh convinced the Parliament to nationalise Anglo-Persian Oil Company (APOC). Iran expropriated APOC's assets and cancelled the oil concession agreement, which was initially concluded for 80 years (1913–1993). In response, international sanctions were applied against Iran. Following this, the Iranian government was overthrown in a coup in 1953, while Mosaddegh was imprisoned (Roosevelt, 1979). Shortly after this the foreign consortium was re-established and operated until the Shah revolution in 1979.

Although the Middle Eastern countries hesitated to follow Iran's example in early 1950s, Saudi Arabia was one of the first Arab countries, which attempted to rebalance the domination of MNEs in the domestic energy sector in the late 1960s. Rejecting radical proposals for immediate nationalisation, the Saudi government introduced the doctrine of ‘participation’ in 1967. Saudi Aramco NOC was de facto fully nationalised only in the 1980s, although expatriates remained in the company for almost another decade. The government retained foreign workers in the management of the company to build the capability of local personnel (Jaffe & Elass, 2007). Through gradual nationalisation or ‘participation’, Saudi government aimed to achieve training of the local workers at all levels in the company. The outright nationalisation was not a rational option in Saudi Arabia since the local personnel lacked project management and engineering expertise.

The negotiations between Arab governments and MNEs produced the General Agreement on Participation, which was signed in 1972. The agreement gave Saudi Arabia, Kuwait, Abu Dhabi and Qatar twenty-five percent equity stake in local companies, which was projected to rise to fifty-one percent by 1982 (Stevens, 2008, p. 16). Subsequently, the events related to the Arab–Israeli conflict of 1973 accelerated the pace of nationalisation. In September 1973, Libya announced nationalisation of fifty-one percent of all consortiums operating in the country, including the subsidiaries of Exxon, Mobil, Texaco and Shell (Sampson, 1975, p. 313–314). Other Middle Eastern governments followed the case and launched nationalisation campaigns. In the events preceding the energy market shocks of 1973 and 1975 the oil-producing Arab countries closed their doors for multinationals and attempted to set the oil prices on their own.

The situation reversed once again in the next decade with the collapse of oil prices in 1986, which marked the starting point for the retreat of resource nationalisation. The debt crisis of the 1980s pushed resource-rich countries to turn to foreign investors, indicating the beginning of another favourable period for MNEs. With the demise of the Soviet Union, the post-communist countries embraced market-friendly reforms to facilitate FDI inflows. Referring to the events of that period, it was pointed out that resource nationalisation had ‘practically disappeared’ (Morse, 1999). Some scholars went as far as to proclaim that the obsolescing bargain theory (Vernon, 1971) has outlived its applicability (Eden & Lenway, 2001) and that the outright nationalisation is an increasingly rare event (Minor, 1994). Nevertheless, a new wave of resource nationalisation in the 2000s refuted this point.

With the upsurge in oil prices in the 2000s, the industry faced a come-back of large-scale resource expropriations. The price of oil increased from just $12.21 per barrel in 1998 to $111.67 per barrel in 2012 (BP, 2014). Amongst the most critical factors that influenced this rise are growing global economy and rising consumption from emerging markets such as India and China. Political upheavals in the Middle East and the Arab revolutions in the beginning of 2010s also contributed to high oil prices. Technology had become more easily available for developing countries, and the emergence of NOCs and service companies increased industry competition. Not surprisingly, many countries including Russia, Venezuela, Bolivia and Kazakhstan adopted stringent policies to regain control over their energy resources.

3 Government–MNE interactions in Kazakhstan's energy sector

3.1 The shift in the bargaining powers

Being the ninth largest country in the world, Kazakhstan is endowed with a large territory and vast natural resources such as oil, gas, uranium and copper. The country's proven reserves of oil amount to about 30 billion barrels, which places it amongst the ten largest owners of world hydrocarbon reserves (BP, 2014). Kazakhstan's vast hydrocarbon reserves attracted ‘big-name’ oil multinationals including the U.S.-based Chevron and ExxonMobil, and European firms, namely BG Group, Royal Dutch Shell (UK–Netherlands), Total (France) and Eni (Italy). Amongst non-Western international companies operating in Kazakhstan are Russian Lukoil and Chinese CNPC. Apart from large multinationals, several smaller oil companies such as Hurricane Hydrocarbons (Canada) and Central Asia Petroleum (Indonesia) obtained licences for subsoil operations in Kazakhstan.

Following the privatisation reforms in the 1990s, Kazakhstan's economy prospered, and between 2000 and 2007 the annual GDP growth was consistently above nine percent. This remarkable economic growth was attributed to increased oil exports, which coincided with high oil prices. Oil production doubled within ten years from under 0.8 million barrels per day in 2000 to just over 1.6 million bpd in 2011 (EIA, 2012). This was due to the progress in the development of the two largest fields, namely Tengiz and Karachaganak. However, the increasingly large part that revenues from oil exports constitute in the country's budget, created an alarming dependence from MNEs. The government realised that this dependence is potentially harmful to the country and, therefore, the state had to assert its sovereignty over its natural resources.¹

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Personal interview (GOV3), Astana, Kazakhstan, September 2016.

The beginning of the new millennium was the breaking point in the shift of the bargaining powers from MNEs to the government. The public discourse about the need to restore the balance of interests between the state and MNEs had been pervasive. Chairing the session of the Foreign Investors Council, in 2001 President Nazarbayev signalled the change of the dynamics by saying that ‘the balance between the interests of the state and businesses’ should be observed (OGK, 2001). The former Prime Minister and at the time head of the Kazakhoil NOC Nurlan Balgimbayev reflected the same rhetoric by stating in the same year ‘[w]e were called upon to ensure the balance of power in relations with foreign partners and to protect state interests’ (Ostrowski, 2010, p. 53).

Subsequently, the government attempted to revise legislation aiming to strengthen its control over the sector. In 2004–2005 it passed amendments to the existing legislation governing the energy sector: the Law on Petroleum, the Subsoil and Subsoil Use Law² (hereafter Subsoil Use), and the Law on Production Sharing Agreements (PSA Law). Amendments allowed the state to exercise pre-emption rights on any oil assets put up for sale in the country. The pre-emption rights allowed Kazmunaigas to purchase stakes in major energy projects in Kazakhstan. For example, Kazmunaigas bought 33.3% of the PetroKazakhstan company and 50% of shares of Mangistaumunaigaz and Karazhanbasmunay companies. The law also stipulated that Kazmunaigas now would have at least 50 percent share in all new oilfield development projects.

In 2010, the government introduced the new Law on Subsoil and Subsoil Use. This legislative act replaced the Law on Petroleum, the Subsoil and Subsoil Use Law, and the PSA law.

In the period of 2004–2005, the legislator passed amendments to the Tax Code. Some of the changes specifically targeted oil companies. For example, a floating rent tax for oil exports was introduced, which was calculated based on current oil prices. At the same time, royalty payments increased from 0.5% to 2%–6%, whereas the excess profit tax corridor was raised from 0%–30% to 15%–60% (The Code of the Republic of Kazakhstan, 2001). Oil revenue tax was increased from 65% to 85%, although the new provision was applied only to new contracts concluded from January 2004. The new Tax Code entered into force in 2009, which replaced royalties with natural resource extraction tax. The law also introduced excess profit tax, which was due for payment after corporate tax payments. Although the new Tax Code abolished the existing PSA taxation regime, it recognised tax stability provisions in agreements, concluded prior to the introduction of the new legislation.

In the sphere of environmental protection, Kazakhstan also tightened regulation by introducing several changes to the existing legislation. Environmental organisations reported on the increased pollution levels and health problems of the citizens living in the oil production areas (Urbaniak, Gerebizza, Wasse, & Kochladze, 2007). In 2004, flaring of natural gas was banned and the requirement to move sulphur storages indoors was introduced. According to the 2010 version of the law ‘On Subsoil and Subsoil Use’, oil companies were obliged to utilise associated gas. To some extent, the government used the ecological concerns as leverage to put pressure on MNEs (Kennedy & Nurmakov, 2010, p. 9). This is because according to initial PSA contracts the government could intervene and unilaterally cancel agreements in circumstances almost exclusively in cases when oil operations threaten health and safety of local citizens.

3.2 Increasing government intervention

The shift in bargaining positions enabled the government to exercise its relative bargaining power against some foreign investors. For instance, starting from 2003 Kazakhstan pressured Canadian company PetroKazakhstan bringing lawsuits for price-fixing and violation of environmental regulation norms. Unable to settle the dispute, the investor company announced the sale of its shares to CNPC. By offering a deal directly to the Chinese firm, PetroKazakhstan circumvented the plans of the government to purchase a stake in the company. The Ministry of Energy (MoE) pointed out that the deal will not be approved. Although some politicians in Kazakhstan called for the cancellation of the contract with the firm and forced expropriation of its assets, the government adopted the softer approach and issued a law, which was specifically designed to tackle the situation. The new law granted the government a pre-emptive right to purchase not only energy assets in Kazakhstan but also equity stakes of energy companies operating in the country (The Law on Subsurface and Subsurface use, 2010). Using this legislative norm, MoE negotiated with CNPC the transfer of 33% shares of PetroKazakhstan and 50% stake in the Shymkent oil refinery to Kazmunaigas.

One of the major disputes broke out in 2010 when the government accused Karachaganak Petroleum Operating B.V. (KPO) in several tax and environmental violations. In response, KPO brought an arbitration case against the host government, claiming that the claim of export duties was illegal. Later, the arbitration was suspended as the parties started negotiations on an amicable settlement of the issue. After lengthy negotiations, the parties came to an agreement in 2011 with Kazmunaigas acquiring 10% shares in the project in exchange for $2 billion in cash and $1 billion non-cash payment (Tengrinews, 2011). Samruk-Kazyna Sovereign Wealth Fund acted as a guarantor for the NOC in securing the payment.

Foreign investors perceived increasing government intervention as the beginning of an aggressive nationalisation and heavily criticised the government.³ As a reaction to the changing regulatory framework, Western oil multinationals attempted to pressure Kazakhstan directly and through their home governments. For example, in 2002, the ambassadors of the U.S., Canada and some of the EU countries sent a joint letter to the government of Kazakhstan requesting to ease pressure on foreign investors (Ostrowski, 2010, p. 110). In another case, MoE warned Italian company ENI regarding the consequences of delays in Kashagan field in 2007. Shortly after this, Italian Prime Minister Romano Prodi visited Astana, ‘to restore confidence but also to take on a number of commitments’ (Guliyev & Akhrarkhodjaeva, 2009). In response to these concerns, the government tried to reassure foreign investors in that the state will not unilaterally change the contract terms, while Prime Minister Massimov attested that ‘resource nationalism is not the policy of Kazakhstan’(Asia_Society, 2008).

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Personal interviews (MNE2,4,6; EXP1,4; GOV3,8), Astana and Almaty, Kazakhstan, July–August 2016.

The MoE had also become more demanding in pursuing foreign investors to implement corporate responsibility and social programmes. For example, when CNPC sought to restructure its personnel by firing the local workers in Aktobemunaigas, the government intervened, persuading the company management to retain the workers by reabsorbing them into several newly established firms (Luong & Weinthal, 2001). Nevertheless, the government struggled in attempts to encourage foreign investors to invest in local capacity-building programmes. In 2001, President Nazarbayev publicly urged multinationals to support the government's local content initiative:

I have called, and once again calling on all investors working in Kazakhstan to fully help Kazakhstani enterprises, otherwise, why have we invited you here? <…> I think that we should not use any sanctions against each other because there is no need to do so (cited in Ostrowski, 2010, p. 114).

The amendments to the Subsoil Law introduced in 1999 reinforced the requirement for operating companies to purchase local equipment, materials and products as well as the services of local subcontracting companies. The legislation binds foreign investors to comply with local content requirements to buy at least fifty percent of materials from local producers (The Subsoil and Subsoil Use Law of the Republic of Kazakhstan, 1996). The regulation stipulated that services of foreign countries should be used only in case of lack of local suppliers and approval of local authorities is necessary for such procurement. It also contained a provision that the regulator can unilaterally terminate contracts with firms that fail to comply with local content requirements. Although very few IOCs fulfilled this requirement (Ospanova, 2010), no contract terminations occurred.⁴ The weak enforcement of local content rules was explained by the lack of such requirements in the original PSAs with major oil multinationals (Brainina & Chentsova, 2003). Contract stability clauses enabled multinationals to restrain from meeting requirements set by the new legislation.

Personal interviews (NOC2, NOC6), Astana, Kazakhstan, September 7–12, 2016.

4 Increasing state participation in energy projects

4.1 Government's struggle to participate in Kashagan project

The changes to legislation regulating the sector gave the government a leverage to actively pursue national interests in negotiations with foreign investors. A good illustration for this is Kashagan case, where the government fought for an increase of the stake of Kazmunaigas NOC. The initial PSA was signed in 1997 between the government and a consortium of companies, including KazakhstanCaspiiShelf, Agip, BG, Mobil, Shell, Total and BP/Statoil. According to the agreement, each company held 14.28% equity stake in the project. During the financial crisis in September 1998, Kazakhstan sold its stake in the consortium to Philips Petroleum and Inpex. As the economy and prices recovered, the government was keen to reacquire an interest in the project.

When BG announced the sale of its stake in the consortium in 2003, MoE expressed an intent to purchase an interest. The government argued that since the country is an ultimate owner of subsoil rights, it has a first buyer right to acquire the stake. As an agreement with BG was not reached, the existing legislation was modified granting the NOC a pre-emptive right to purchase any energy project stake put for sale in Kazakhstan. The amendments to the Law on Subsoil and Subsoil Use, introduced in December 2004, stipulated that the state has a priority right to a legal entity possessing the right to acquire stakes in energy projects put for sale (The Subsoil and Subsoil Use Law of the Republic of Kazakhstan, 1996). This legislative clause allowed Kazmunaigas to enter the project purchasing 8.33% of Kashagan stake from BG in 2005.

Two years later, Kashagan was again in the centre of attention due to problems with timely implementation of the project. In 2007, the project operator ENI announced a consecutive delay of commercial production for another four years (until 2012) and a further increase in expenditure costs to $135 billion (Akzhaiyk, 2013). The government openly expressed its disappointment with the delay, particularly with cost overruns, since this meant that the consortium would not pay rents until such investments were reimbursed. The first reaction was the suspension of works in the oilfield for three months due to environmental violations. Following this, the government adopted amendments to the legislation in November 2007, empowering itself to change or terminate subsoil use contracts, which pose a threat to the national interests of the country. This indicated the government's determination to take harsh measures against foreign investors.

Dissatisfied by constant delays in the commercial production, the government decided once again to increase its control through greater participation of Kazmunaigas in the project. The government fined the consortium members and obliged them to pay a compensation of $5 billion. After a negotiation period, which lasted until January 2008, the foreign members of the consortium agreed to sell part of their shares. In addition, the IOCs agreed to provide additional training for local workers (Cutler, 2012, p. 3). As a result, the NOC increased its stake in the project from 8.33% to 16.81% for $1.78 billion to be paid after the start of the commercial production in the field. The commercial production at Kashagan began in September 2013 and was relaunched in 2016 following the disruption. In the end, the government managed to rebalance interests in the project as a reaction to the failure of IOCs in project development according to the initial PSA agreement.

4.2 Kazmunaigas and its role in the domestic petroleum sector

The concept of ‘national oil company’ was first introduced in Kazakhstan in 1999, with the revision of the Law on Subsoil Use. Dispersed state-owned companies were consolidated in 2002 when Kazakhoil and OGT merged to form a unified Kazmunaigas NOC. The most commonly stated reason for the founding of the NOC was that the petroleum sector is traditionally perceived as a strategic sector of the economy where the intervention of the government is necessary.⁵ As it was illustrated by cases in previous sections, the government had the determination to enhance the role of Kazmunaigas in major oil projects. In the words of one of the interviewed government officials, ‘in the long-term thinking, this will bring Kazakhstan more benefits’.⁶

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Expert survey conducted by the author, Astana, September 2016.

Personal interview (GOV1) with a government official, Astana, Kazakhstan, June 12, 2016.

By 2014, Kazmunaigas consolidated within itself 251 companies, participating directly in equity of 38 energy companies in Kazakhstan and abroad. The company's reserves of 1 billion tonnes of oil and 475.5 bcm of natural gas make it the largest integrated oil company in Central Asia (Kazmunaigas, 2014). The NOC helped the government to build a hydrocarbon production value chain, which is not only limited to upstream production and exports but also includes downstream operations. As such Kazmunaigas owns exclusively or jointly three domestic refineries (Atyrau, Shymkent, and Pavlodar). Through its subsidiary KazTransOil, the NOC participates in most of the oil transportation and oil export operations.

The organisational structure of Kazakhstan's petroleum sector is designed to separate regulative, policy-making and commercial functions. Similar to the Norwegian triangle model (Al-Kasim, 2006), Kazmunaigas was designed to focus solely on commercial objectives, the government being the policy-maker, whereas the MoE is the main regulator of the industry. The company shares are jointly owned by Samruk-Kazyna and the National Bank. The central government provides political support for Kazmunaigas, whereas Samruk-Kazyna and the National Bank provide the necessary capital to invest in various projects. It was announced that some of the Kazmunaigas shares will be sold on IPO market, which will bring additional capital for the company and will contribute to the improved transparency of the enterprise (Forbes, 2016).

The existing legislation vested the NOC with a right to acquire at least fifty percent stake in any new hydrocarbon development project. In conformity with this objective, the state bounded IOCs to enter into the ‘strategic partnership’ with Kazmunaigas. Thus, any foreign investor in Kazakhstan's oil and gas sector was ‘forced to work in one way or another’ with the NOC (Olcott, 2007, p. 2). By doing this, the government facilitated the ‘forced cooperation’ of the company with foreign multinationals. Furthermore, Kazmunaigas’ role in relation to MNEs is not univocal since it cooperates and at the same time competes with them. MNE representatives interviewed do not see Kazmunaigas as a competitor and tend to emphasise mutually beneficial partnership relations between multinationals and NOC.⁷

Personal interview (MNE3) with MNE manager, Almaty, Kazakhstan, July 8, 2016.

The partnership with multinationals was designed to facilitate the development of local engineering and management expertise as well as to upgrade technical and project management capabilities of the company. In many joint energy projects, Kazmunaigas is a link between the government and MNEs as the NOC ‘does not represent its own interests but represents interests of the country’.⁸ Therefore, mediating is one of the most important of its roles, which helps Kazmunaigas to influence stakeholders. Moreover, interviewees stated that the company reduces the adverse effect of information asymmetry because it is directly involved in the development of energy projects.

Personal interview (NOC1) with Kazmunaigas manager, Astana, Kazakhstan, September 16, 2016.

Kazmunaigas has an ambitious development strategy as the company plans to become one of the world's top 30 oil companies by 2022, and one of the 500 Fortune-ranked companies.⁹ Inspired by the examples of many successful NOCs (such as Statoil and Petrobras), the company aims to become an ‘international national oil company’. In 2007, Kazmunaigas started international expansion with the purchase of 75% of Rompetrol oil company (based in Romania) for $3.6 billion and further acquisition of the remaining 25% of the company in 2009. Rompetrol engages in oil refining, marketing, and trading and also runs a petrochemical complex, which produces and exports polyethene and polypropylene for the European market (Kazmunaigas, 2014). This acquisition gave Kazmunaigas a base in the European market and access to trade routes in the Black Sea.

Personal interview (NOC5), Astana, Kazakhstan, September 20, 2016.

5 Summary and policy implications

Kazakhstan's persistence to extend the participation of the national oil company in oil operations is not a novelty in international practice. Norwegian state-owned company Statoil followed a similar route in early years of development. In the 1970s, Norway rejected proposals to establish a holding-type non-operational oil company, and instead, facilitated Statoil's co-operation with BP and other major IOCs to ‘speed-up the learning curve’ (Al-Kasim, 2006, p. 46). Similarly, Kazakh government claims to follow the ‘Norwegian model’ in managing its petroleum sector, although there are policy considerations and drawbacks associated with increased government role in the sector.

The efficiency of state-owned companies had often been widely criticised, and Kazmunaigas is not an exception.¹⁰ The cause of inefficiency in state-owned companies is seen in their limited capability to balance commercial and national interests, which is a classic dilemma for any national oil company (Tordo, 2011). Although according to Kazmunaigas's Development Strategy for 2012–2022 the company's main mission may seem to be commercial (Kazmunaigas, 2017), it also inevitably bears the so-called ‘national mission’ of providing financial and other assistance to the government in the implementation of state programmes. The ‘national mission’ sometimes comes in conflict with the corporate goal of shareholder value maximisation. Therefore, managers at the company acknowledged that the challenge for the company is to balance between commercial and national interests.¹¹

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Personal interview (GOV5) with a retired civil servant, Astana, Kazakhstan, August 7, 2016.

Personal interviews (NOC1, NOC3) at Kazmunaigas, Astana, Kazakhstan, September 12–15, 2016.

When the government of Kazakhstan launched series of legislative reforms to influence the balance of bargaining powers with multinationals, foreign investors expressed their concerns about the legislative changes. MNEs diagnosed cooling of the investment climate claiming that the returns will not be enough to cover risks associated with oil operations. However, others disagree with this opinion, arguing that multinationals would have left the country if their activities proved unprofitable.¹² According to Planform non-governmental organisation report, IOCs operating in Kazakhstan still aim to receive about forty percent of the long-run profits from the major projects, whereas the host country will receive sixty percent (Muttitt, 2007). In OECD countries and in the Middle East the share of the state is much larger, for instance, the same ratio in Norway is 20%–80% (Palazuelos & Fernández, 2012). With high oil prices, (e.g. above $40 per barrel), even in high-risk projects such as Kashagan, oil firms will continue to receive profits, despite investment and cost overruns.

Personal interviews (CIT2, CIT4, CIT5), Astana, Kazakhstan, August 2016.

Furthermore, it has been argued that changes to the taxation legislation have not substantially affected major oil multinationals in Kazakhstan's energy sector. For example, in 2008, the government imposed an oil export duty of $109.91 per tonne of oil,¹³ which was floating according to oil price. However, this did not greatly affect most of the MNEs since the duty was not applicable to production sharing agreement (PSA) contractors. For example, in 2008 the Ministry of Finances announced that thirty-eight companies would be liable for payment of oil export duty. Most of the companies listed were local firms with only a few foreign companies including Chinese CNPC and U.S. company CaspiNeft (KBM, 2008). Due to falling oil prices, the domestic enterprises struggled to pay the export fee, and the oil export duty was cancelled from January 2009.

Export duty rate in Kazakhstan was relatively mild, considering that the global financial crisis forced many countries to adopt harsh measures to gain additional revenue for the budget. For instance, in 2007 Russia imposed an export duty of $275.4 per tonne.

In the end, major oil multinationals such as Chevron, ExxonMobil and Royal Dutch Shell successfully resisted state intervention. Most of the MNEs continued to operate under an altered regulatory regime with greater state involvement. Furthermore, it is likely that the government will not discourage future foreign investments in the country's economy. Since access to capital and technology will remain crucial in developing hydrocarbon deposits (Nolan, 2001), the country will seek to maintain commercial relationships with MNEs. Considering technological challenges in developing fields such as Tengiz and Kashagan, MNEs cannot be replaced outright from the local energy sector. As a landlocked country, Kazakhstan will also seek to maintain positive diplomatic relations with geopolitical powers in the region as well as with multinationals in order to ensure the security of oil and gas exports (Orazgaliyev, 2017).

6 Conclusions

As the paper discussed, in the period between 2001 and 2012, Kazakhstan had become more assertive in relations with MNEs in the petroleum sector. It has been suggested that the desire of the government to play a more pervasive role in the industry was predetermined by the strategic importance of energy sector for the economy. The state amended legislation on subsoil use and taxation, ensuring increased rents from crude exports. However, as the oil price follows the cyclical model (Stevens, 2008), the goal of increasing the rents appears to be of less importance than the aim of developing the local expertise. In Kazakhstan, participation strategy facilitated a closer partnership between the NOC and MNEs with the aim of strengthening local expertise. As our findings suggest, Kazmunaigas plays an increasingly active role in the country's energy sector as a partner or a single operator in most of the major projects.

As the strategic goal of the policymakers was to upgrade the domestic company to an internationally competitive level, this paper argued that the increased state intervention in Kazakhstan's petroleum sector was motivated by a long-term capacity-building rationale rather than exclusively by the economic rationale of increasing rents. Contrary to nationalisation, participation doctrine does not prioritise asset expropriation and/or displacing foreign investors. Building on our findings, this paper asserts the participation doctrine as the more relevant framework for analysing government intervention policies in Kazakhstan at the beginning of the new millennium.

Conflict of interest

No conflict of interest.

Acknowledgements

The author would like to express his gratitude to Prof. Siddharth Saxena (University of Cambridge) and Prof. Colin Knox (Nazarbayev University) for their comments on earlier drafts of this paper. The author also would like to thank anonymous reviewers and the managing editor of the Journal of Eurasian Studies, Dr. Boram Shin for their valuable feedback and guidance.

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State intervention in Kazakhstan's energy sector: Nationalisation or participation?

Abstract

Keywords

1 Introduction

2 Nationalisation as a major political risk factor for foreign investment

2.1 Nationalisation in the global petroleum industry: Theory

2.2 Nationalisation in the global petroleum industry: History

3 Government–MNE interactions in Kazakhstan's energy sector

3.1 The shift in the bargaining powers

1 Personal interview (GOV3), Astana, Kazakhstan, September 2016.

3 Personal interviews (MNE2,4,6; EXP1,4; GOV3,8), Astana and Almaty, Kazakhstan, July–August 2016.

4.1 Government's struggle to participate in Kashagan project

4.2 Kazmunaigas and its role in the domestic petroleum sector

5 Expert survey conducted by the author, Astana, September 2016.

10 Personal interview (GOV5) with a retired civil servant, Astana, Kazakhstan, August 7, 2016.

Conflict of interest

Acknowledgements

References

1
Personal interview (GOV3), Astana, Kazakhstan, September 2016.

3
Personal interviews (MNE2,4,6; EXP1,4; GOV3,8), Astana and Almaty, Kazakhstan, July–August 2016.

5
Expert survey conducted by the author, Astana, September 2016.

10
Personal interview (GOV5) with a retired civil servant, Astana, Kazakhstan, August 7, 2016.