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Four problems Kazakhstan could face if lower oil prices remain

Oil&Gas Materials 22 April 2020 20:31 (UTC +04:00)
Four problems Kazakhstan could face if lower oil prices remain

BAKU, Azerbaijan, Apr. 22

By Nargiz Sadikhova - Trend:

A decrease in global oil demand and a drop in its value have a noticeable effect on the economy of Kazakhstan due to the country’s continuing raw material dependence, Trend reports with reference to Kazakhstan’s FinReview informational and analytical website.

“The country has significant hydrocarbon resources – the total volume of oil reserves is about 30 billion barrels, or 1.7 percent of world reserves, making Kazakhstan 12th in the world. With its high raw material potential, Kazakhstan is enhancing the contribution of the oil and gas sector to the development of the national economy,” the report said.

Over the past three years, a number of projects have been implemented to increase industrial production, the economic effect of which became noticeable in 2019. Thus, oil production increased by 33 percent compared to 2017, reaching 90.5 million tons in volume, and 12.3 trillion tenge ($28.5 billion) in value.

The report said that this made it possible to strengthen the sector’s contribution to the country’s GDP from 13.6 percent to 14.4 percent, provide the budget with tax revenues and payments by 44 percent and fully cover the domestic market with its own fuel.

However, since the beginning of 2020, global oil demand has declined by almost 20 million barrels per day, and its cost by 70 percent. Despite this Kazakhstan increased its oil production by 2.4 percent, and its transportation by 5 percent in 1Q2020.

“An decrease in global oil demand and a drop in its value have a noticeable effect on the economy of Kazakhstan due to the country’s continuing raw material dependence. Over the past two years, oil has provided revenues to the Kazakh budget for more than 1 trillion tenge ($2.3 billion). If the value drops to $25, the export customs duty will reach zero and the revenues from oil companies will also be drop to zero,” the report said.

At the same time Kazakhstan’s revenues from oil and natural gas exports fell by $900 million in Jan. 2020 as only France, Switzerland and Italy reduced imports of Kazakh oil by $863 million.

However, the report said, despite the decline in global demand, the statistics of industrial production in Kazakhstan show an increase in oil production by 2.4 percent in 1Q2020 compared to 1Q2019. The volume of its production amounted to 23.6 million tons in volume, and 2.6 trillion tenge ($6.03 billion) in value. At the same time, as oil production volume did not change in January, in February it grew by 4.3 percent, and in March by 3.3 percent.

However, Kazakhstan has committed to reduce production by 390,000 barrels per day starting from May 1 within the OPEC+ agreement.

“This reduction was determined from the base level for October 2018, when production was 1.7 million barrels per day, although at the end of December 2019 it was increased to 1.9 million barrels per day. That is, in fact, the reduction will be much more than the voiced plans,” the report said.

The report said that the need for this agreement is obvious as a decrease in oil overstock at storage facilities will ensure stabilization of its value, as if oil consumption does not recover and does not show a positive trend, then low prices will remain. At current prices, the annual decline in Kazakhstan’s GDP will be from 2.3 percent to 2.7 percent of GDP, the report said.

The first and most basic problem that Kazakhstan could face if lower oil prices remain is the shortage of cash receipts to the state budget, which will lead to lower funding for social programs, production development programs, higher inflation and lower living standards.

The second problem is associated with a decrease in financing for the oil industry and the development of new fields. Now, the average oil price is about $46 per barrel in Kazakhstan, while cost of oil production at some Kazakh oil fields is $20, and in others $60.

The third problem is the upcoming suspension of oil companies' activity. A decrease in demand and a drop in the cost of oil may lead to a suspension of production at some fields, where the cost is much higher than the market price. Such deposits will not be closed because the resumption of work will bring more costs to the company. However, such a pause will create financial risks and lead to a reduction in the number of employees,” the report said.

The fourth problem is caused by a decrease in investment income in the sector which started in 2019, when there was a decrease in quarterly volumes of foreign direct investment from $1.8 billion in 1Q2019 to $643 million in 4Q2019.

“This year the situation has become more aggravated due to a decrease in demand for oil and oil products. But Kazakhstan has a definite advantage in the form of financial institutions that can help enterprises attract additional capital,” the report said.

Nevertheless, the report said, it is currently difficult to assess what the cost of oil will be in the near future as market forecasts are very different.

“However, even in the case of a long-term preservation of the cost of oil at about $20 per barrel and the current economic situation in the country, Kazakhstan will be able to maintain the national economy for 15 years, thanks to the accumulated international reserves, which amount to about $30 billion. That is, Kazakhstan has great potential to survive the current crisis with the least losses,” the report said.

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