KAZAKHSTAN: MODERN ENERGY AND GEOPOLITICAL CHALLENGES

Remarks by His Excellency Kanat Saudabayev, Ambassador Extraordinary And Plenipotentiary of Kazakhstan to the United States, at a Luncheon Discussion of "Business Council of International Understanding",
Houston, Texas, May 30, 2001

It is difficult to imagine a more timely moment and a more suitable place for a discussion of energy and geopolitical challenges facing Kazakhstan on the threshold of the 21st century. As you know, not very long ago your fellow countryman from the State of Texas, responding to the energy crisis facing this nation, has presented the new energy policy of the United States for many years to come, which draws a considerable deal of attention to my country.
You also, probably, know that OKIOC consortium has recently confirmed successful results of drilling on an offshore Kashagan field in Kazakhstan sector of the Caspian Sea, which is considered to be the largest find in the world for the last thirty years. This remarkable event put my country among the most important oil producers on the planet.
It is remarkable that this happened on the eve of the 10th anniversary of independence of Kazakhstan, a country with the population of 15 million that includes dozens of nationalities and ethnic groups. A country that is the 9th largest in the world in terms of territory, which is roughly four times the size of Texas. To the north we have a 7000-kilometer border with Russia, and to the east we have China with whom we share a 1700-kilometer border. Figuratively speaking, waking up every morning, we have one eye fixed on the Russian bear and another one on the Chinese dragon. To the south from us lies quite an unstable region of South Asia that includes Afghanistan.
Our huge territory is, I'd say, stuffed with natural resources. A legend says that when God distributed the boons around the Earth, he stumbled above Kazakhstan and dropped the bulk of what he was carrying in his hands.
That means to say that the land of Kazakhstan contains the whole of Mendeleev table of chemical elements. For example, Kazakhstan possesses 10% of the world's copper stocks, 19% of lead reserves, 13% of zinc, 10% of iron ore (which puts Kazakhstan on the 7th place in the world), 25% of manganese (3 place in the world), 30% of chromium (2 place in the world). In terms of uranium reserves Kazakhstan is number one in the world, which can be of interest to the leading nations who seek to develop peaceful nuclear power. The agricultural potential of Kazakhstan includes millions of tons of grain and meat, for which there is a huge market in the region.
I understand, however, that in Houston it is customary to speak about petroleum. The proven recoverable reserves of Kazakhstan, without the reserves of the Caspian shelf, are currently valued at about 20,4 billion barrels (2,8 billions tons) of oil and gas condensate and 1,8 trillion cubic meters (65 trillion cubic feet) of natural gas. The bulk of hydrocarbon reserves are concentrated in 14 large fields in Western Kazakhstan.
The recoverable reserves of Kashagan are preliminarily estimated at 20-27 billion barrels.
Therefore, total amount of known and prospected recoverable reserves of petroleum in the Republic is estimated at 40-50 billion barrels. However, this figure has a considerable potential for growth.
We believe, for instance, that the overall recoverable reserves of all structures of OKIOC consortium can reach approximately 40 billion barrels. About 100 remaining prospective offshore blocks in Kazakhstan's sector of the Caspian can contain additionally 40 billion barrels. In other words, depending upon successful exploration and meeting the challenges that will come with development, total recoverable reserves in the Kazakhstan sector of the Caspian Sea could be more than 80 billion barrels, and more than 100 billion barrels for the whole country.
Not least impressive are our prospective stocks of natural gas, especially in the offshore Caspian, where the majority of deposits contain both oil and huge quantities of natural gas. By some estimates, these reserves can total 200 billions cubic feet.
All of the above make very clear and obvious the major energy and geopolitical challenges that have been facing Kazakhstan since the first days of independence and that will be relevant for many years to come.
The most important challenge is to maximize our huge oil and gas potential, coupled with the strictest observance of ecological standards, as the powerful locomotive for the multifaceted development of our economy and laying the foundation for prosperity of my people. The other side of this challenge is the provision of maximally favorable internal and external conditions for the development of our nation.
We will always remember with gratitude that the United States and President George Herbert Bush were among the first to recognize Kazakhstan's independence, to highly commend its aspiration to become a peaceful nuclear-free state, to support our social and economic reforms and to initiate the process of providing the Republic with guarantees of security and territorial integrity on behalf of major world powers.
Due to peaceful foreign policy and the development of equal and mutually beneficial links with all interested countries, under quite complex circumstances we have managed to preserve peace and security on our borders and to provide for dignified membership of Kazakhstan in the global community.
Since 1992 Kazakhstan have been successfully promoting the initiative to convene the Conference on Interaction and Confidence building measures in Asia, an Asian analogue of the OSCE, a mechanism that never existed on this continent. The so-called Shanghai process that includes Kazakhstan, Kyrgyzstan, Tadjikistan, China and Russia and strengthens trust between its participants has become an important contribution to regional security, and therefore, to stability of economic development and investments.
We note the progress being made in reaching an agreement on the legal status of the Caspian Sea, and we expect the major growth of volumes of hydrocarbon production to come  from offshore fields in the sea. We are confident that in due course all five littoral states will come to a common denominator and will agree to the division of the seabed and its riches according to the principle of a median line and to the preservation of water masses in joint and responsible usage. Such agreements have already been achieved between Kazakhstan and Russia, and between Russia and Azerbaijan.
Due to firm adherence of President Nursultan Nazarbayev to principles of open market economy and democratic society, in Kazakhstan we have provided for the political stability, social justice and interethnic harmony. We have been progressively developing democratic institutes and we have laid the basis of a civil society.
We have created a dynamic market economy with the progressive taxation, advanced bank system and favorable investment climate. Eighty percent of economy is private. In terms of reforms, for example, of pension system, Kazakhstan considerably outstrips other former Soviet countries.
As a result of steps taken by the President and Government, and also due to favorable external conditions, in 2000 the GDP growth has reached an impressive 10 percent, the industrial production grew by 16%, whereas the inflation has not exceeded 9.8%. This year the positive trends in the economy will continue. We expect GDP growth at a level of 5-6 percent, growth of industrial production at 8-10%, and the inflation at 8-10%.
We understand fully well, however, that current favorable conditions in the commodities markets are not eternal. Therefore, Kazakhstan, drawing on the experience of other countries, primarily of Norway, has created the National Fund that will be accumulating the surpluses of taxes, royalty etc. from the companies working in commodities sphere and will carry out stabilizing and saving functions. In order to provide for a transparency of the Fund, which is an effective mechanism of counteracting the so-called "Dutch disease", it will be managed by the National Bank under the agreement with the Government and will be overseen by the Parliament. We have already accumulated 835 million dollars in the Fund, and we plan to increase this figure by up to more than 1 billion dollars by the year-end.
The overall foreign investment in our economy during the independence years totaled 12.5 billion dollars. In 2000 alone the FDI totaled 2.8 billion dollars. The future obligations under the existing contracts amount to more than 40 billion dollars. In terms of investment per capita Kazakhstan is the leader in the CIS.
As of 2000 there were 2366 joint ventures or fully foreign-owned companies in Kazakhstan, including 1189 JV's and 1177 foreign-owned companies. They accounted for more than 15 percent of production in the country.
We are particularly pleased with the level and pace of development of our cooperation with the United States. Out of total amount of the foreign direct investments, the USA accounts for more than 3.5 billion dollars. More than 300 American companies and companies with the American participation work in Kazakhstan.
The energy sector of Kazakhstan, which accounts for the lion's share of the foreign investment, is being developed aggressively with advanced technologies from the USA and the world. The largest petroleum, mining, power and service corporations of USA and the world, such as ExxonMobil, Chevron, Texaco, Philips Petroleum, Haliburton, AES, Access Industries and many others work actively in Kazakhstan. Some of the largest fields in the world, such as Tengiz, Karachaganak and Kashagan are being developed with their participation.
In 2000 the production of petroleum and gas condensate in the Republic totaled 257,7 million barrels (35,3 million tons). We expect the production to reach 438 million barrels (60 million tons) and 730 million barrels  (100 million tons) by 2005 and 2010, respectively. The significant part of this increase will be accounted by the growth of production on the existing large and medium fields, as well as the start of industrial production at Kashagan by 2005 according to the Production Sharing Agreement.
As I have already said, the energy should only become a locomotive of our economy, but not a whole train. Though bulk of extracted petroleum will be exported as crude, we believe that the next "car" should be the service sector and oil refining and petrochemical industry, which is particularly important if you take into account the fast growing demand of the huge markets nearby.
Indeed, Kazakhstan provides substantial opportunities not only for oil and gas companies but also for oil and gas equipment manufacturers and service companies.  For example, we have calculated that, assuming exploration programs are successful for all offshore prospects, there will be approximately $140 billion in exploration, appraisal and development costs incurred over the next 40 years.  This estimate does not include capital investment in transportation systems (pipelines, barges, railroads, etc.).  Operating costs have been estimated at approximately $120 billion. All of these activities will require the support of the international oil and gas manufacturing and services sector  which spells great opportunities for American and international companies.
We are very pleased that the positions of Astana and Washington on this issue coincide. During a May 3 meeting with Foreign Minister Erlan Idrissov in Washington Vice President Richard Cheney argued for the need to diversify trade and economic cooperation and to expand the presence of American companies in various sectors of Kazakhstan's economy.
We are sure, that in a train called "the Economy of Kazakhstan" there should be and there will be many "cars" and that many places in them will be occupied by the Americans, for the opportunities of our economy are wide and diverse, including not only rich recourses, huge agricultural potential, existing infrastructure, but also, which is especially important in our times of new technologies, highly educated population.
I would particularly draw your attention to one more positive factor, namely our favorable geographical position and huge potential of a transit country, which some people for some reason have been calling a problem of a land-locked country. This potential is worth billions of US dollars annually, and at present we get about 1 billion from it. I mean not only railways and roads, international airports and seaports, which we modernize and improve, but also new technologies, such as, for example, TransEurasian fiber optic cable that connected China with Europe through our territory.
Considering expected significant growth of hydrocarbon production, Kazakhstan has traditionally advocated the development of a multiple export pipelines system.
We are glad that considerable progress is being made in this sphere. Currently a number of pipelines through Russia are operational. Last year the Baku-Supsa pipeline went into operation. Since the end of March the CPC pipeline is being filled up with oil from Tengiz field. At the beginning of August the first loading of the first specifically designated tanker with Kazakhstan's oil is due to take place in Novorossiisk.
In March Kazakhstan signed the memorandum of joining the project of "Aqtau-Baku-Tbilisi-Ceyhan" pipeline which receives the special support the US Administration. We see the role of our Government in creating the best possible conditions for oil-producing companies to choose the most favorable and commercially profitable export routes. In this connection we welcome the announcement made on May 17 by the group of companies developing this project about its viability and the commencement of detailed engineering study of the project.
Kazakhstan believes that hydrocarbon export to the south through Iran and to China has a great potential.
So, Kazakhstan has been successful in responding to challenges facing it and we do so in many ways due to the support of USA and due to your work.
But still there are many new challenges lying ahead of us, for Kazakhstan and Caspian region are fast becoming one of the largest oil producing provinces of the world and one of the important factors of maintaining stability of hydrocarbon supplies to the world markets.
I believe that this is what is meant in the New Energy Policy Report announced by President George Bush on May 17.
We welcome recommendations of the Report to support Baku-Tbilisi-Ceyhan oil pipeline and to continue working with relevant companies and countries to establish the commercial conditions that will allow oil companies operating in Kazakhstan the option of exporting their oil via the BTC pipeline.
We particularly warmly welcome the recommendations of the Report to deepen commercial dialogue with Kazakhstan, Azerbaijan and other Caspian states to provide a strong, transparent, and stable business climate for energy and related infrastructure projects. I am sure you would join me in saying that it is exactly deepening of commercial dialogue that we have been were engaged in with the USA and American companies through all these years.
Presenting new energy policy for the United States in Minnesota President Bush declared that "if we fail to act, our country will become more reliant on foreign crude oil, putting our national energy security into the hands of foreign nations, some of whom do not share our interests".
I am sure you know that Kazakhstan does share common interests with the United States not only in energy sphere, but also in terms of security. I believe you would agree that the recommendations of the Report prove firm commitment of the US Administration to development of close relations with Kazakhstan. They confirm that my country is not one of these "some".
Moreover, in our view, the new US energy policy means that from now on our countries, using the solid foundation and proceeding from common interests, will be jointly addressing new challenges and will be developing long-term and mutually beneficial strategic partnership.
President Bush himself said this most clearly in his message to President Nazarbayev last January. He noted that he was confident that "with a spirit of mutual respect, cooperation, and open dialogue, we can successfully meet the challenges facing us. The future also presents enormous opportunities. Together we can use these opportunities to advance the peace, freedom, and prosperity of our peoples".

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