This article examines the key problems domestic gas market in Kazakhstan faces right now and analyses, among other issues, current and future gas market designs as well as third-party access (TPA), unbundling, gas pricing and pipeline tariff setting regulation. In addition, article identifies that liberalization can help national gas market of Kazakhstan to become more openly competitive and get prepared for imminent launch of the common gas market of the Eurasian Economic Union (EAEU) in 2025, however, it seems that government of Kazakhstan still lacks clear understanding on what shall be the new target model for domestic gas market and what reforms are needed for these purposes.
CURRENT GAS MARKET DESIGN
Kazakhstan gas sector has vast potential as recoverable gas reserves in Kazakhstan are approved at the level of 3.9 trillion cubic meters, which is 1.7% of the world's gas reserves. A significant part of natural gas resources is concentrated in Atyrau region (43%), Mangistau region (29%) and West Kazakhstan region (19%)1 . According to the Statistics Committee of the Republic of Kazakhstan, the volume of natural gas production in 2018 in physical terms amounted to 55.5 billion cubic meters, in 2017 – 52.9 billion cubic meters, in 2016 – 46.7 billion cubic meters. Natural gas production in 2016-2018 increased by 18.8% (by 8.8 billion cubic meters)2. Natural gas exports from Kazakhstan in January 2019 in physical terms amounted to 3.1 billion cubic meters. The main buyers of natural gas are China, which accounts for 36% (1.1 billion cubic meters), Russia – 16% (888.1 million cubic meters) and Ukraine – 18 % (566.9 million cubic meters)3 .
The Kazakh gas market continues to be organized on the basis of central command and control, and quasi-monopolistic principles, with KazMunayGas (KMG) as the stateowned and vertically integrated oil and gas company dominating gas production, supply and transportation through its direct and indirect subsidiaries. Gas transportation services in Kazakhstan are provided by a whollyowned subsidiary of KMG, KazTransGas (KTG), which is a vertically integrated transmission system operator/distribution system operator holding company. KTG acts as the so-called 'national operator», whereas Intergas Central Asia (a subsidiary of KTG) acts as the socalled 'national operator of the main gas pipeline'. KazTransGas Aimak (another subsidiary of KTG) is the distribution system operator. KTG as a national operator executes the state's statutory preemptive right to purchase raw gas and commercial gas from oil companies in Kazakhstan (i.e. most of the gas produced in Kazakhstan is associated gas and therefore, gas production is not a major source of revenue for them) at a less-than-fair value price, that disincentivizes production of commercial gas and also discourages its efficient use by consumers.4
According to the current gas market design (model) in Kazakhstan, therefore, usually the following order of actions is applied:
- KTG as the national operator executes the state's statutory preemptive right and buys raw or commercial gas from oil companies at the price determined in accordance with the statutory formula5 .
- KTG6 sells than commercial gas to KazTransGas Aimak in all regions of Kazakhstan at the regulated wholesale prices, that are different7 for each region of Kazakhstan.
- KazTransGas Aimak8 in its turn sells gas to the population and other consumers at final (i.e. retail) prices, that are regulated9 by the Committee on Regulation of Natural Monopolies of the Ministry of National Economy of the Republic of Kazakhstan (hereinafter – the «Kazakh Regulator»).
Currently implemented in Kazakhstan domestic gas market design10 is usually called by experts11 as the so-called «main buyer» gas market model, characteristic features of which are (i) presence of a single offtaker (i.e. KTG as a main buyer), (ii) very weak competition12 in the market and (iii) high barriers to entry for new players
While thanks mainly to high gas prices and significant export revenues up until 2019, using current gas market design Kazakhstan
managed to make good progress13 in increase14 of gas production15, gasification16 of its remote areas, modernization and construction of trunk gas pipelines17, which allowed KTG not only to combine all the gas pipelines in Kazakhstan into the unified gas transportation system18, but also to diversify export markets by «drilling a window» to China. To date, KTG manages more than 19 thousand km of trunk gas pipelines and more than 48 thousand km of gas distribution networks. Importantly, more than one third of the current length of the trunk pipelines has been built over the past five years - i.e. unlike many other former USSR countries, Kazakhstan does not just operate main gas pipelines it inherited from the USSR, but also builds the new ones. So far, it has been important for Kazakhstan, therefore, to maintain the status quo with current gas market design, because this way KTG has been able to buy cheap gas and use it for investments in domestic gas distribution infrastructure and crosssubsidization of the local population and industries at the expense of foreign consumers and Kazakh gas producers. The 'new reality' of the COVID-19 pandemic and the looming official launch of the Eurasian Economic Union's common gas market in 2025, however, require urgent gas market reforms.
LIBERALIZATION OR SELECTIVE REFORMS
It is a widely held axiom that Kazakhstan's gas industry is in stagnation as it has been too long in the shadow of the Kazakhstan's oil industry19. KMG's interests as the national oil company so far prevailed over often conflicting interests of the KTG as the national gas operator, that puts the breaks on the development of Kazakhstan's gas industry. In the last ten years, however, gas sector in Kazakhstan develops rapidly and nowadays does better than oil sector20. 2020 is to be expected a horrible year for both KMG and KTG, because of disappearing demand for oil and gas in China and rock bottom prices. Most likely from now onwards, KTG should not expect the same level of huge profits from its export of gas and, therefore, it means that KTG would soon hardly be able to bear its social burden of cross-subsidization. It is reasonable to expect, therefore, a revival of heated discussions among relevant stakeholders on long-expected reforms of the Kazakh domestic gas market21. Among the possible scenarios of gas market reforms is a radical proposal of full liberalization of the national gas market, including deregulation of wholesale gas prices and ownership unbundling of the KMG and KTG, which would prohibit a combination of competitive (production/ supply) and natural monopoly (pipeline transmission) types of activity within one entity (or group of entities). Without ownership unbundling of KMG and KTG, evidently, it would be difficult to solve one of the biggest deficiencies of the current model of Kazkahstan's internal gas market — lack of cost-reflective gas prices and gas transportation tariffs. There is no surprise, therefore, that the most controversial issue for the proposed reforms of the domestic gas market in Kazakhstan remains the matter of deregulation of wholesale gas prices and the tariff for gas transportation services22. The problem is, however, that government of Kazakhstan has not determined yet, what shall be the new target design for the domestic gas market and what reforms are needed for these purposes. There are also legitimate concerns among different stakeholders in the Kazakhstan that any drastic and not well-thought measures with liberalization of gas prices may jeopardize nation's plan for expansion of its gas networks and gasification of remote areas of the country and may lead to uncontrolled growth of gas tariffs23 and even social riots.
1 See: KASE's report. P.2. Available at: https://kase.kz/files/presentations/ru/KASE_OilGas_industry_2019.pdf
2 See: KASE's report. P.3. Available at: https://kase.kz/files/presentations/ru/KASE_OilGas_industry_2019.pdf
3 See: KASE's report. P.6. Available at: https://kase.kz/files/presentations/ru/KASE_OilGas_industry_2019.pdf
4 See: The National Energy Report-2019 of the KAZENERGY Association. Chapter 4. Kazakhstan's Natural Gas Market and Future Challenges to Gasification. P. 84. Available at: https://www.kazenergy.com/upload/document/energy-report/NationalReport19_en.pdf
5 See the Order of the Minister of Energy of the Republic of Kazakhstan dated November 13, 2014 No. 121 «On approval of the rules for determining the maximum price of raw and commercial gas purchased by a national operator under the state's pre-emptive right».
6 As of 2019 KTG is the only gas supplier for retail gas sellers in Kazakhtan (i.e. the wholesale commercial gas market in Kazakhstan is monopolized). Read more at: https://inbusiness.kz/ru/news/vminekonomiki-rassmatrivayut-razdelenieroznichnoj-realizacii-gaza-ot-transportirovki
7 See the Order of the Minister of Energy of the Republic of Kazakhstan dated may 18, 2020 No. 196 «On approval of the maximum prices for wholesale sales of commercial gas in the domestic market of the Republic of Kazakhstan».
8 As of 2019 KazTransGas Aimak holds the 95% market share in Kazakhstan's retail gas market (i.e. KazTransGas Aimak is defacto a monopolist). Read more at: https:// inbusiness.kz/ru/news/v-minekonomikirassmatrivayut-razdelenie-roznichnoj-realizacii-gaza-ot-transportirovki
9 See the Order of the Minister of National Economy of the Republic of Kazakhstan dated February 1, 2017 No. 36 «About approval of Rules of pricing for socially important markets».
10 I.e. approaches, principles and mechanisms of functioning of the market.
11 Eremin. S.V. Presentation «Common gas market of the Eurasian economic Union: initial prerequisites and prospects for formation» at the International Conference «Energy of Eurasia: new trends and prospects» held in Moscow on 4 December 2015. P.5. Available at: https://docplayer. ru/27997453-Obshchiy-rynok-gazaevraziyskogo-ekonomicheskogo-soyuzaishodnye-predposylki-i-perspektivyformirovaniya.html
12 E.g. only two companies, namely Karachaganak Petroleum Operating and Tengizchevroil LLP account for 76% of the gas produced in the country. As mentioned above the wholesale commercial gas market in Kazakhstan is monopolized by the KTG, whereas KazTransGas Aimak holds the 95% market share in Kazakhstan's retail gas market.
13 E.g. see some history information on development of gas sector in Kazakhstan at: https://online.zakon.kz/m/Document/?doc_id=31509377
14 E.g. see some statistical information at: https://www.petroleumjournal.kz/index.php?p=article&aid1=111&aid2=585&id=1353&outlang=1
15 Interestingly, Kazakhstan experiences robust growth in domestic consumption of gas so that experts expect that Kazakhstan will have to make hard choices soon between achieving high level of exports to China or making more gas available for domestic use. See: The National Energy Report-2019 of the KAZENERGY Association. Chapter 4. Kazakhstan's Natural Gas Market and Future Challenges to Gasification. P. 84. Available at: https://www. kazenergy.com/upload/document/energy-report/NationalReport19_en.pdf
16 The level of gasification in Kazakhstan, however, is still quite low as reached about 50% by 2020 only so there is still a great need for the huge investments into domestic gas distribution and trunk gas pipelines.
17 There are three transnational trunk gas pipelines now on the territory of Kazakhstan: (i) Central Asia – Center, (ii) BukharaUral and (iii) Central Asia – China, as well two local trunk gas pipelines: (iv) Beyneu-Bozoy-Shymkent and (v) SaryArka pipeline.
18 It is widely accepted that Kazakhstan's gas transmission system is in excellent condition and is capable of passing up to 85 billion m3/year of gas, with the prospect of increasing the volume of pumping up to 120 billion m3 /year. See: https://neftegaz.ru/analisis/transportation/328523-gazotransportnye-sistemy-stran-sng-dinamikai-perspektivy-razvitiya/
19 E.g. see Russian expert's opinion on this at: https://neftegaz.ru/analisis/world_market/328478-kazakhstanskiy-gazovyyrynok-vremya-samostoyatelnosti/
21 E.g. see one of the opinions on the reforms needed at: https://kursiv.kz/news/otraslevye-temy/2020-08/kak-ne-poteryatvnutrenniy-rynok-gaza
22 E.g. see opinion on this matter of one of the most influential experts in Kazakhstan: https://www.kazpravda.kz/fresh/view/gaz-bespechnosti-ne-proshchaet
23 Some experts expect fivefold increase of the gas prices in case of deregulation of wholesale gas prices in Kazakhstan. See at: https://zonakz.net/2019/10/02/podorozhaniya-gaza-v-pyat-raz-ozhidayutmonopolisty-rk-v-rezultate-otkaza-ot-gosregulirovaniya/
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