Fuel for Thought: Rising oil producer Kazakhstan’s stability under spotlight

President Donald Trump’s assertion that resource extraction by US companies can strengthen Ukraine’s sovereignty will have a familiar ring for oil-rich ex-Soviet Kazakhstan. But the Caspian country’s own experience suggests resources are a fragile underpinning.

A Feb. 17 drone attack in southern Russia on the CPC pipeline system – one of the world’s largest crude oil pipelines, carrying some 1.7 million b/d – seemed to underline the tenuousness of Kazakhstan’s infrastructure lifeline to world markets, which runs across Russian territory currently under attack by Ukraine.

The pipeline attack, quickly recognized by Ukraine’s military as its responsibility, prompted Russian warnings of an impending drop in flows amid repair difficulties due to sanctions on technology needed to fix a damaged pumping station.

Yet, oil flows continued largely uninterrupted and have even increased thanks to the startup of an expansion of the giant Tengiz field on Kazakhstan’s Caspian shore.

The pipeline’s resilience appears to lie not in a military-style approach to security of the type seen in nearby Azerbaijan, where the BTC pipeline is buried along its length, but in the high operating efficiency and redundancy of the equipment. The route features 15 pumping stations with storage tanks at multiple locations.

CPC, which is legally separate from Russia’s Transneft and includes several international companies, can typically operate well above its stated “design operating factor,” dependent on weather, temperature and other conditions, a source familiar with the system said.

Just as important has been a political and financial accommodation whereby Russia profits as a transit route for its southern neighbor, notwithstanding a recent comment by Russian President Vladimir Putin that the pipeline brings only “kopeks.”

The result is Kazakhstan has a major card to play, as Trump might say, helping boost state coffers and national prosperity. Oil and gas accounts for 50% of Kazakh exports, Kazakh President Kassym-Jomart Tokayev noted recently.

Western companies have also been reassured by rhetorical support for Kazakhstan from US and European politicians, from Secretary of State James Baker in the early 1990s to President Joe Biden more recently.

This has encouraged companies to commit major investments at Kazakhstan’s super-giant oil fields. The Tengiz expansion alone is expected to lift crude output by 260,000 b/d, costing some $49 billion.

In this context, Kazakhstan’s joining of OPEC+ in 2016 and ensuing output quotas have been a double-edged sword, helping foster ties with countries like the UAE, but conflicting with production-sharing agreements requiring operators to maximize economic returns.

Unhappy partnership

Kazakhstan’s journey to becoming a major oil producer has not been entirely happy, as evidenced in recent claims by Kazakhstan against shareholders in the Kashagan field for as much as $150 billion in spending overruns; claims that appear to be being whittled down in an arbitration process.

Tokayev’s grip on power since taking office in 2019 has appeared at times at risk, notably in a January 2022 uprising and apparent coup attempt, for which he had to call in Russian military support.

Kazakh oil wealth and ensuing corruption have long shown signs of having a corrosive effect, with criticism of the authorities by the media stifled in sometimes brutal fashion. “Demand for mineral resources has placed extraordinary temptations before Kazakhstan’s rulers,” Central Asia scholar Marth Brill Olcott wrote in a 2002 book exploring Kazakhstan’s “unfulfilled promise.”

For the industry’s part, Chevron, at the recent startup of the Tengiz expansion, described Kazakhstan as a “strategic,” long-term partner. Yet one former US energy envoy to the region, Steven Mann, has also highlighted another characteristic of the industry: its “always shifting” nature, ready to respond to new opportunities and move elsewhere, from Guyana to US shale.

In the example of Ukraine, President Volodymyr Zelenskyy insists he is open to a deal on US investment in mineral resources, even as wartime conditions appear unconducive. But for Ukraine, the current US obsession with obtaining rights to mineral resources appears to miss the bigger picture, which is the need for more comprehensive engagement with the region.

Russia’s aggression in Ukraine resonates also in Kazakhstan, where macho Russian rhetoric about retaking former colonies in Central Asia causes alarm.

Logic might suggest one disincentive to anyone trying to abruptly seize Kazakhstan’s oil resources: the ultra-deep, high-pressure, high-temperature oil reservoirs are formidably complex, requiring multibillion-dollar facilities to remove deadly hydrogen sulfide gas and process the oil.

But much as Ukraine relies on Black Sea shipping for its stability, access will remain key also for Kazakhstan’s future. Commentators note the fairly minimal presence of US companies in nearby Azerbaijan is not helpful, as Kazakhstan seeks to diversify export routes via that country.

Olcott's writing underlined that political stability remains key and that resource wealth can be a mixed blessing: “Caspian oil will be a strategic asset only if continued access to it can be ensured… This requires that the host country as well as the transit states all be stable."