Naubet Bisenov in Almaty -

The Kazakh government has adopted a programme to develop the gas sector with the aim of increasing domestic consumption, but market players believe heavy regulation and an approach that sees gas as simply an auxillary to oil discourages investment.

In June, the government adopted a scheme to expand gas supply networks in Kazakhstan until 2030. Just two months later, one investor told bne that the plan makes little sense unless Astana does more to encourage development of smaller scale gas deposits.

According to the scheme, domestic gas consumption should go up from the current 11bn cubic metres (cm) to 18bn cm a year in 2030. Former Oil and Gas Minister Uzakbai Karabalin said the programme aims to increase the number of settlements supplied with gas from the current 988 to 1,621, covering 12m people, or 56% of the projected population in 2030. 

The policy envisages building new gas pipelines, doubling the total length the network to 57,500km. That will require investment worth KZT656bn ($3.6bn) Karabalin suggests. 

All of which of course means more gas will need to be pumped into the pipes. Overall, the scheme will demand that the output of marketable gas must rocket from 21bn cm to 60bn cm annually.

The government believes that the Turkmenistan-Uzbekistan-Kazakhstan-China gas pipeline - with a capacity of 55bn cm of gas a year - should help improve gas supply in the country's south. Kazakhstan's major hydrocarbons fields are located in its western regions, and in order to supply gas to consumers in southern regions and export it to China the country has built the 1,143km Beyneu-Bozoy-Shymkent route, which will supply 5bn cm inside Kazakhstan with the remainder heading for export. For the meantime, the south consumes mostly Uzbek gas.

Best option

However, Astana could struggle to persuade private investors to contribute to the scheme. A tightly regulated market, combined with excessive red tape, is a hurdle for investors because Kazakhstan is not "a cheap place" to operate, says David Robson, executive chairman of Tethys Petroleum. That will change only if the government liberalises the gas market, says the investor, whose company is developing the Kyzyloi and Akkulka gas fields in the Aral Sea region.

The gas sector in Kazakhstan is regulated by legislation that grants the government a pre-emptive right to acquire gas assets. Producers must also sell all gas output at regulated prices, which allow a maximum profit margin of 10%, to national utility KazTransGas. While that only applies to associated gas, that actually constitutes the vast bulk of the country's current output. The government considers it little more than a "by-product" of oil production. 

Meanwhile, deposits of dry gas are small, meaning large investors show little interest, preferring the much-prized oil fields. The smaller investors that might take the gas reserves on are however put off by the tight control. "Kazakhstan should be following free-market principles, and one of the most important is a free market in energy," Robson tells bne. "While you have a market which is controlled it discourages investment, because you can't derive a true price for your products." The British oil executive suggests having just a single, state-controlled gas purchaser is "not the best option".

In addition to the regulated pricing, which is currently around $85 per 1,000 cm, the state's pre-emptive rights - as well as the bureaucracy oil and gas companies face - is another obstacle for investment in smaller fields, he claims. The pre-emptive right is triggered even when a stake of as little as 0.1% in minor gas assets changes hands, Robson complains, insisting that it should be limited to "big, strategic projects" such as the giant Kashagan oil field in the Caspian Sea. Companies involved in small projects should be able to buy and sell assets "quickly and simply".

Illustrating the point, Tethys sold a 50% stake in its Kazakh assets to the Beijing-based SinoHan Oil and Gas Investment for $75m plus bonuses in November. It is still awaiting a green light from the government for the deal. "Legislation relating to the transfer of assets is so cumbersome that it will take you at least a year to get the necessary consents to be able to bring in a partner, and not everyone is willing to wait a year," Robson laments. 

Export route

However, Tethys doesn't appear too discouraged. The Chinese investment will open the way to more exploration, says Robson, describing his company as a "good explorer". He says Tethys is the first to discover commercial oil in the northwest Aral Sea area. That has encouraged others, such as the French supermajor Total, to move into the area. 

The company plans to invest around $170m into new exploration over the next two to three years, with revenue to lead in providing the funds. Tethys expects to produce about 800,000 cm of gas per day by the end of the year, and 1m cm next year. It also anticipates oil output to rise. Tethys turned over around $36m last year.

The central point in that investment drive however is that the Beyneu-Bozoy-Shymkent pipeline will allow Tethys to export to China. The regulated prices on the domestic market "are not good enough for us to invest more," Robson insists. That means Tethys will not be contributing to the gasification scheme.

"Despite what might be said, we are not bound by the gas law because we produce dry gas," he explains. "Our contract allows us to export, but we will pay an increased mineral usage tax. We'll also pay profit tax, plus excess profit tax, so Astana will get cash. If the price in Kazakhstan were competitive with export prices, then, of course, I would prefer to sell domestically. 

Red tape is another obstacle to potential investment, the executive claims. While he says Kazakhstan "is not as corrupt place today as it was reputed to be a few years back," he says that has only seen bureaucracy spike. "The rules which have been put in place to prevent corruption means everything takes a long time. It's very difficult to operate efficiently because of bureaucracy," he complains.