Investigation into the Commercial Prospects of Kazakhstan’s oil industry
In the modern world, natural non-renewable resources power the economy and therefore resource rich developing countries have great opportunities to develop economy and some social aspects but only in case of efficiently management over those resources as otherwise it might be a “resource curse” for a country (Richmond, 2012). However, most of those countries facing different problems such as: attraction of foreign investors and companies to invest in their resource sector as they not able to provide security for those investments, also governments fail to rationally manage those unstable incomes and as result economy and citizens do not benefit from having natural resources (Venables and Vad Der Ploeg, 2017). Fortunately, oil and gas rich Kazakhstan is able to use “god blessed” resources in order to become top 10 of oil exporters by 2020.
Key words: Oil, Gas, Export, Kazakhstan, Kashagan
Introduction
At the first blush for everyone it seems that developing countries with huge capacity of natural resources are blessed and have lots of opportunities to enter the list of developed countries. However, natural resources for some developing countries especially in Africa might be a curse due to the poor management. Looking into the problem deeper, shows the reasons of failing to use the natural resources in order to reach the economy of those countries without natural resources. For instance, one of the reason that causing the adverse effect of natural resources is the price fluctuations on commodity and export, another reason might be explained by the case of the “Dutch disease” when the sector of natural resources helps the local currency to appreciate and therefore reducing the competitiveness of manufacturing exports (Tran, 2015). Research that was conducted by Sachs and Warner in period from 1971-1989 and covering more than 90 countries revealed that poor resource countries economically growing up faster than resource rich countries. However, lately Lederman and Maloney disputed this theory and claimed that natural resources neither bless nor curse as it is a mixed bag of both, in other words some resource rich countries perform well while other do not.
In modern world consumption of energy and fuel is growing very fast and in this regard the importance of availability of natural resources such as oil and gas play strategical role in country’s economy as well as in whole region. A North part of Kazakhstan enfolds the Caspian see and this region is a center of geopolitical and economic interests of the global energy arena due to huge reserves of oil and gas (Jumadilova, 2012). Among former countries of Soviet Union, Kazakhstan is the second biggest oil producer – after the Russian Federation. In 2015, oil production in Kazakhstan exceeded expectations by 0,5% and gas production were 7% above estimates and amounted to 582 million barrels and 45.3 million cubic meters respectively (Levit, 2016). Moreover, in 2016 Mr. Kenzhekhanov (Deputy Director of the Oil and Gas Information Centre of Kazakhstan’s Energy Ministry) and Mr. Bozumbayev (Minister of Energy in Kazakhstan) claimed that it is not a maximum and in 2020 Kazakhstan aiming to produce up to 953 million barrels of crude oil per year and therefor to become one of top ten oil producers and exporters in the world (Mills and Howard, 2014). However, this target is achievable only with direct investments from abroad.
In order to bring the investments to oil and gas sector Kazakhstan’s government created favorable conditions for example: investments over 13 million dollars are exempted from corporate income tax for 10 years and for 8 years from property tax. Also, government promises to recover up to 30 percent of expenditures on construction and development of oil fields (Kononenko, 2014).
Research question
Based on this, the main question of this research – “To what extent can Kazakhstan oil’s Industry be enhanced from commercial prospective?”
Research objectives
This report is designed to evaluate the possible risk and problems that Kazakhstan may face on it is way to top 10 of oil exporters, also this paper provides a deep analysis of location which, contains biggest share of Kazakhstan’s natural reserves. Finally, research shows how oil and gas affect the economy of the country.
The following specific objectives are to be achieved by this research proposal:
1. To access Kazakhstan’s oil industry’s potential from commercial prospects
2. To identify issues associated with Kazakhstan’s oil industry from commercial stand point
3. To provide an understanding of how can Kazakhstan benefit from being among top 10 oil exporters countries
Literature review
Kazakhstan’s Geographical Location and oil reserves
Kazakhstan’s location is beneficial to the country in that it has access to many energy reserves. According to the World Energy Council, the country has vast oil and gas reserves (second richest among former Soviet Union countries) noted to be amongst the ten biggest globally. Therefore, the country has the potential to become the world’s top ten oil producers by 2020 but with the right kind of investment and policies by the government. Even though Kazakhstan is landlocked, it is strategically placed to control all oil and gas flows from East, West, Central, and West Asia. As a result, more than 75% of all oil exports to European countries through the Caspian region and Russia, 17% exports to Asia and Oceana.
Figure 1: Kazakhstan crude exports by destination (EIA, 2013)
Notably as well, there are a number of regions in Kazakhstan that are expected to contribute a lot to oil exports. In 2011, 57.6% came from regions in the Western part of the country. Oil and gas in 2010 contributed to 46.5% of Kazakhstan’s total revenues, which was 75% of the overall FDI. Therefore, it is very clear that Kazakhstan’s economy depends on oil and with the right kind of FDI it will become one of the largest oil producers in the world.
Figure 2: Kazakhstan is strategically placed to export oil to the rest of the world
Also, it is mentioned by Ministry of Oil and Gas that with the same amount of oil production as now oil reserves in Kazakhstan will last for 70 years.
Figure 3: Oil production in Kazakhstan (million tonnes) (Ivanstova, 2015)
As it shown on the table above since the beginning of the twenty first century Kazakhstan doubled it is oil production from 39.9 million tonnes in 2001 to 80.8 million tonnes in 2014. However, in previous years it was expected to have bigger oil production from 2014 due the launch of the biggest oil field in the country – Kashagan with unproved reserves of 50 billion barrels of crude oil. The oil production on Kashagan last only for one month due to gas leakage in a pipeline. For the June 2017, the oil production is still suspended (Elliot, 2017).
Factors that Affect Oil Output
Although future prospects with regards to oil and gas is positive for Kazakhstan, there are certain risks that can lead to the failure of the country towards achieving its goal. These risks are connected to failure to increase FDI, oil prices, and the country’s foreign policies. If the country does not get these three factors right, it will be hard for it to become top 10 oil producers of the world. There are a number of studies that show the benefits that come with Foreign Direct Investment (FDI) to home countries. These studies reveal that FDI can improve the economy of the host country and at the same time increase globalization. The study by Kaynak, Yalcin, & Tatoglu (2006), for instance, did look into the impact of FDI on the countries of Georgia and Kyrgyz. According to the results, FDI activities were market-seeking as they focused on attractions that are location specific. However, there were a number of issues identified that impeded development: inefficient labour force, different business practices, and excessive bureaucracy (Kaynak, Yalcin, & Tatoglu, 2006). Poland is a country that recently transitioned itself into a market economy after disengaging from the former USSR. Torrisi et al. (2009) study on Poland’s FDI determinants examined its dependency on macro-economic variables. The results of the study showed that market growth/size, openness of trade, and strength of the dollar improved the attractiveness of the host country. The government should take steps to improve FDI by engaging in tax reforms, for instance.
Notably, there are several studies that have explored Kazakhstan’s foreign policy that focus on FDI. Ipek (2007), for instance, studies how Kazakhstan’s Foreign Policy (FP) is connected to oil and gas. This is a study that is descriptive in nature. Besides oil and gas, matters of national identity, internal politics, and leadership have a huge role in shaping the country’s FP. Hanks (2009) digs deeper to study how Kazakhstan’s FP has been evolving ever since the 1990s plus its economic integration with the countries of Belarus and Russia. He shows that there are a number of strategic considerations that have shaped such integration and FP. Besides these two countries, Kazakhstan’s FP is also shaped by the relations it has with the EU, the US, and China. Many of these studies show that Kazakhstan’s FP is shaped by the relations it has with Russia, neighbouring countries, the EU, and the US as well (Hanks, 2009). Most importantly, these literatures acknowledge the multi-vector model on the country’s FP especially when it comes to security, oil, and trade policies. These dimensions are very complex in nature and they are interconnected in one way or the other.
Other researchers have explored the impact of the price of oil on the exchange rate of a country. Korhonen and Juurikkala (2009) established that an increase in the price of oil increases or appreciates the domestic currency of a country. Nonetheless, another study by Chen and Chen (2007) finds the opposite. Taking into consideration Russia and Kazakhstan, using oil price shocks to explain exchange rate movements is negligible. Moving closer to this analysis, Kutan and Wyzan (2005) look into the vulnerability of Kazakhstan as a country to what is referred to as the Dutch Disease especially after estimating the exchange rate equation to oil price increase. The study establishes that any change in the price of oil affects the real exchange rate movement especially an increase in the price of oil increases the exchange rate. The explanation given is that an increase in oil price improves the nation’s terms of trade, which then increases export revenues.
Figure 4: The figure above shows fluctuations of oil supply due to price change.
Notably though, there are a few studies that have looked into the impact of the price of oil on the economy of Kazakhstan specifically. Korhonen and Mehrotra (2009) look at the impact of oil price shocks on the exchange rate and GDP of Kazakhstan. Their results show a positive impact of the price of oil on the country’s GDP. However, Gurvich, Vakulenko, & Krivenko (2009) do not find any. Studies on the impact of the price of oil on exchange rate are also conflicting. According to Korhonen and Mehrotra (2009), oil shocks do not lead to a huge change in exchange rate. Results by Kutan and Wyzan (2005) show that oil price changes affect exchange rate movements. Therefore, this shows that more evidence is needs to show the effect that oil prices have on Kazakhstani economy.
Benefits of Becoming Top Oil Producers
By being top ten oil producers, the country will benefit by increasing its economic activities and thus help Kazakhstanis become even richer. There are a number of studies that have talked about the connection between oil exports and economic growth. Specifically, the connection between the price of oil and a country’s economy is different depending on the country that exports the oil. On the one hand, literature shows that oil prices affect the economic activity of a country that exports the commodity. According to studies done by Ghosh, Varvares, & Morley (2009), there appears to be a negative correlation between increasing oil prices and the economic downturns of the nation that exports it. On the other hand, Korhonen and Mehrotra (2009) established that there is a positive correlation between an increase in oil price and high economic activities for the countries that export the oil.
These studies looked at the relationship between oil price and growth rate of countries such as Russia, Norway, Iran, Kazakhstan, and Venezuela. The connection between the price of oil and economic activity, therefore, appears to be asymmetric because it loses significance when the price of oil goes down (Korhonen & Mehrotra, 2009). These literatures suggest that the asymmetric impact of the price of oil on GDP is common in countries that have oil for export. Macroeconomic literature shows a number of routes that depict the asymmetrical connection between the price of oil and GDP. These routes include demand composition, the effect of investment pause, and sectoral shifts.
Figure 5: The figure above shows how Kazakhstan has to benefit from FDI to improve its oil and gas market.
Methodology
This part of research explains the different methods that were applied to this study. It contains an explanation of the sample size, sampling methods and the philosophy. This section additionally pays attention on reliability and validity concerns of the study, ethical aspects, data origin and information gathering tools. Furthermore, this chapter provides a discussion of restrictions faced by researcher.
Research Philosophy
The chosen research philosophy for this study was based on pragmatism. A critical analysis of Kazakhstan’s abilities to become one of top ten oil exporter in the world requires researcher to collect data from specialist in oil and gas sector as well, as from specialists in economy and finance. In order to provide a clear analysis of study field it is necessary to use mixed methods. This approach includes both research techniques: deductive and inductive. Collected data might be divided in two types: qualitative and quantitative, hence the advantage of this approach is reduction of the weakness of using either approaches separately (Creswell, 2006).
Research setting
This study involves individuals, who works or has experience of working in oil and gas sector in Kazakhstan and other different countries, a number of participants specialize in finance and economy and are able to share with adequate opinions, and students studying oil and gas management
Population and sample size
The target population for a research relates to all the components that fulfill the criteria for being involved in the research (Creswell, 2012). This assumes that to understand the potential of Kazakhstan to become one of the major players on oil export market, requires population to be as big, as it possible including individuals from different organizations. On the other side, it is very important for researcher to choose a small an adequate sample of 50 participants for this study as it helps to avoid inadequate, useless results and reduce time consumption on data collection and analysis (Denzin & Lincoln, 2010). Therefore, researcher decided to use purposive method of sampling to pick experts in different areas related to the study.
Data source
Researcher will gather data through both types of sources: primary and secondary. The key purpose of including both primary and secondary research is to collect adequate data and make the study more reliable.
Data collection
Primary data will be collected through two different instruments: questionnaires and interviews. Due to the fact that all the participants will be chosen by purposive method and some of them located in different regions of Kazakhstan, while even some participants are in different parts of the world, researcher plans to upload questionnaire on online resource “Surveymonkey” and ask 50 individuals to complete the survey. As for interviews, researcher will conduct it both physically face-to-face and online via skype with rest 10 individuals from population sample, also some of them will be asked to complete the pre-test in order to outline strengths and weaknesses of survey or interview questions (Hale, 2010). According to Kimmel (2007), hosting of surveys and interviews online allows to reduce the cost of research and time by avoiding travelling needs.
Limitations
Due to complexity of the study it will face some limitations related to data collection. For example: It will be quite difficult to find individuals in UK with good knowledge about Kazakhstan. Therefore, majority of participants will be chosen from Kazakhstan, who mostly works there in oil companies. In order to collect reliable data interviews as well, as questionnaires will be conducted on English, because using Kazakh and Russian languages during translation phase may result in misunderstand of questions. Another limitation that researcher probably will face is difficulty to arrange the interviews due to different time zones and a need of Skype.
Data analysis
In this research, both qualitative and quantitative techniques will be used to analyse gathered data. A quantitative method of analysis will be applied to analyse numerical data, in the same time to analyse non-numerical data researcher will use a qualitative technique (Saunders and Lewis, 2012). Quantitative method of analysing will include the usage of SPSS (The Statistical Package of Social Science), which helps to sort and analyse numerical data.
Also, researcher will use ATLAS.ti a special program that allows easily and faster analyse descriptive data by creating codes, searching relationship between received answers from participants on open-ended questions. By using this tool researcher will be able get more accurate results (Ping Fung, 2016).
Research ethics
Research will be conducted in open manner; it means that all of participants are voluntaries and no one will be forced to take a part in the study. First at all, in order to give a proper understanding of the study voluntaries will explained with the purpose of research and tools that will be used, secondly they will be asked to complete research ethical contest form (McLeod, 2015). Also, as most of respondents work for an international oil companies and government, research will need to get a permission from different authorities and organizations to interview their workers.
All the collected data will be reliably protected and stored as It requires by ethics. Additionally, researcher will avoid too personal questions in order to guaranty the anonymity of respondents.
Time scale
There is a time frame of ten weeks for this research, therefore it is necessary to complete each of activities on time otherwise it may lead to delays. The following Gantt-chart shows all the steps needed to be complete by week 10:
Activity Week
1 2 3 4 5 6 7 8 9 10
Identify research topic
Formulate research question and objectives
Write research proposal
Literature review
Chosing research methodology
Creation of questionnaire
Pre-test
Approved questionnaire
Data collection
Data analysis
Data interpritation
Conclusion and Recommendations
Writing draft
Submisson of dissertaion
Resource
There is no direct cost related to this research, because researcher is not required to travel to conduct the surveys as it uploaded on Surveymonkey, also organizations will allow to interview their employees for free. As for the indirect cost, secondary data is obtained from books, web sites and journals that are available for free online and at the library. Therefore, the only one cost of this study is time consumption.
References
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New references
https://www.theguardian.com/global-development/2012/oct/25/natural-resources-blessing-curse-developing-countries
Appendix
Questionnaire
1 The plan to become one of top 10 oil exporters in the world is too ambitious for Kazakhstan?
Strongly agree
Agree
Disagree
Strongly disagree
2 With good management is achievable to become top 10 oil exporters?
Yes
NO
If no, please specify why?
3 Due to current oil prices do you think is a right time to expand oil production and export?
Yes
No
4 Will common citizens benefit from expansion of oil export?
Yes
No
* If no, skip question 5
5 How citizens benefit from oil export expansion?
Employment opportunities
Increase of salary for existing workers in oil industry
Increase of economi growth
Other
* if other, please specify
6 How would you rate availability of skilled workers in oil sector in Kazakhstan?
Excelent
Good
Average
Bad
Poor
7 Do you think oil Sector in Kazakhstan is attractive for FDI?
Strongly agree
Agree
Disagree
Strongly disagree
8 Are the Kazakhstan’s government and oil companies able to follow standards of world oil markets?
Yes
No
Not sure
9 How important are the following factors in achieving the goal?
Unimportant Low importance Moderately important Important Very critical
Skilled labour
Well management
Government responses
Increase of oil prices
Creation of new pipeline routes
