The Times of Central Asia: newsletter of 11 June 2009

1. Kyrgyzstan will get $20 million from EBRD

BISHKEK (TCA) – At a news conference in Bishkek last week, ATF Bank chairman Alexander Picker said that the European Bank for Reconstruction and Development (EBRD) was going to allocate US $20 million to Kyrgyzstan.

“ATF Bank will receive two loans from EBRD, amounting to a total US $100 million. US $30 million of this sum, according to the loan agreement between the ATF Bank and EBRD of May 22 2009, will be directed as loans to the private Kazakh industrial companies in order to invest in the energy-saving projects in Kazakhstan . The rest of money is earmarked for financing small and medium-sized businesses (SMBes). ATF Bank-Kyrgyzstan, a subsidiary of Kazakhstan ’s ATF Bank, will now receive a loan as well; this US $20 million will be given on favorable terms for five years. Today, this is very important. The loan will allow them to allocate money to Kyrgyz entrepreneurs for the development of SMBes, the purchase of equipment and the creation of extra jobs,” said Picker.

Alexander von Gleich, Chairman of the Board of Directors of ATF Bank-Kyrgyzstan, said: “In addition to the programs focused on funding its own subsidiary banks, UniCredit Group cooperates with international organizations, including EBRD, in order to provide further support to the economy in these difficult times. As a measure to help fight the global financial crisis, EBRD is investing in Kazakhstan and Kyrgyzstan . The UniCredit Group actively began to invest in the ATF Bank-Kyrgyzstan after it got the control stock of ATF Bank-Kazakhstan, including the subsidiary ATF Bank-Kyrgyzstan, in November 2007. While Kyrgyz banks are often unwilling to finance manufacture, preferring to give short-term loans for trade, we are allocating a US $14 million loan solely for financing SMBes with a maximum of 249 employees and a maximum annual turnover of up to US $5 million. The remaining US $6 million, $5 million of which will be given in Kyrgyz soms, will be earmarked for micro bank loans. In the future, the Bank also plans to finance the tour operators, and there are several financial projects for the Issyk-Kul region. Due to the loan, the Bank’s interest rates were reduced and are now from 17 percent per annum. Everything depends on the type of a loan, meaning that consumer loans are more expensive than mortgage ones.”

2. Rebounding oil prices: causes and consequences

ALMATY (TCA) — Are the upward trends in the oil and (to a much lesser extent) other hydrocarbon fuel markets a cause for relief for those emerging economies such as Russia and Kazakhstan that produce them? Political commentators and general observers watching the business would love to make people – and investors in particular – believe it. Unfortunately, a closer look at the facts and figures tends to cast severe doubt on the assumption. Therefore, the current increases in oil output look highly premature at best.

Kazakhstan’s oil production has only increased by 3 percent during the first five months of the current year when compared to the same period last year, more precisely to just below 30.55 million tonnes including 2.373 million tonnes of gas condensate (down on-year by 13.1 percent), Interfax reported on June 4. Gas output remained all but flat at just below 14.7 billion cubic meters, just over half of which consisted of natural gas while the rest was produced as “associated” gas along with oil and gas condensate. The latter has gained in importance since the introduction in Kazakhstan , about three years ago, of draconian but apparently very effective legislation banning all gas flaring at oil and condensate fields.

Pressure and temperature

Kazakhstan, according to last year’s update by Kazmunaygaz, is sitting on remaining proven reserves of 4.8 billion tonnes of crude oil, 3.7 trillion cubic metres of gas and somewhere in the order of 300 million tonnes of gas condensate. Last year’s production was just over 70 million tonnes of crude oil alone.

The country’s government keeps sticking to its production target of 1.637 billion tonnes per year (about 3.5 million barrels per day) as of 2020. The bulk has to come from Kazakhstan ’s only major-size string of offshore blocks, dubbed Kashagan after its largest field, now under development and due to start commercial production in about three years from now. The field, in which Kazmunaygaz has obtained a 15 percent stake, remains under the control of an international consortium operated by Anglo-Dutch Royal Dutch Shell. The exploration and exploitation costs are deemed to top one hundred billion US dollars and 20 dollars per barrel respectively due to high well pressure and temperature, in turn due to complex and fractured subterranean layer composition in the salt dome string of reservoirs.

Increases in sales volumes

In terms of economic viability, the Government of Kazakhstan has indicated that a sales price of crude oil at roughly $40 per barrel is “critical” for the project in particular and the country’s sales income in general. But even then, only massive increases in sales volumes can bring Kazakhstan ’s national income up to the levels required to get out of the current financial crisis, with state funds being drained in order to prevent the national economy from collapsing.

Oil prices on international markets have rallied through the month of May this year, from long-time lows in the range of $40 and $50 per barrel of Europe’s benchmark North Sea Brent for most of the winter, coming close to $65 a barrel on Europe’s main spot market in Rotterdam . The Urals mix, Kazakhstan ’s benchmark which is part of the blend used by Russia to determine the average price of oil from the northern Caspian provinces and the southwest of Siberia , hovered around $55 per barrel in the first week of June, due to lower quality. Siberian Light, however, more or less matches the standards of Brent, its global trend-setter and Caspian crude’s high levels of sulphur and tar bring the overall price-setting down. At times of lower demand, lower-quality oil’s discount on its sweet and light competitor tends to increase as refiners try to constrain processing costs.

Market interventions

In April’s economic forecast update, the Russian Ministry of Trade and Economic Development raised its forecast for this year’s sales price of Urals from an earlier $41 to $45 per barrel. But according to Russian Finance Minister Aleksey Kudrin, quoted in Russian and international media, the price will reach $50 and could well go up to $70 per barrel before the end of the current year. But he added that such a price would not be the result of more demand for oil but of the simple fact that the USA is printing excessive amounts of banknotes, in comparison to what its economic development would justify.

For Kazakhstan , the Government of which through market interventions by the National Bank continues to peg the country’s national currency to the US dollar with the aim to keep domestic purchasing power in line with net income on oil sales, a plummeting dollar could send already worrying inflation levels through the roof. Most of the country’s imports come from Europe and Russia . Towards the end of May, the euro topped $1.40 on global currency markets for the first time since the commodity slump in October last year. On Thursday June 3, the Russian rouble strengthened against the greenback by almost 22 kopek to end up topping 30 rouble and 51 kopek, Novosti reported. At the same time, the euro went up by more than 23 kopek to just below 43.65 rouble.

Constraints on spending

Amidst this gloomy scenario, globally operating “vertically integrated” oil companies, meaning those who control up-, mid- and downstream business to vast extents at the same time even though deals are made through “open” markets, seem to have propped up earnings during the fat times long enough to be able to hold out against slumps for quite some time. The main tool is time: consumers tend to notice price hikes in crude and oil product wholesale prices a lot more swiftly, and to much sharper proportions, than they see downward price trends back on the price lists of petrol stations. Looking at price developments in the first five months of the current year, this no doubt deliberately and carefully calculated discrepancy becomes painfully clear.

Overall demand has responded to the momentary gains of oil companies by contracting further. The international cartel OPEC expects a slide in global oil demand of 1.57 million barrels a day throughout the current year. Its counterpart on behalf of leading consuming countries, the Paris-based International Energy Agency which is part of the OECD, expects a drop of 2.56 million barrels a day from the beginning to the end of this year.

And the contraction is to be structural rather than momentary, according to the IEA’s chief Nobuo Tanaka, who was recently quoted by Reuters as stating: “We think that the very high prices of last year certainly destroyed some part of demand because there are many businesses changing their behavior,” pointing at both ecological commitments and constraints on spending. Combined, the two have triggered a clear message into production and trade circles in terms of incentives: away from speculation and price manipulation and towards response to skeptic demanding sides.

A switch to LNG

By stepping up output, producers (such as Kazakhstan but not only Kazakhstan ) are fighting the odds in their attempts to respond to dwindling markets by increasing their market share. Sector-wise, however, the most seriously affected “victim” of higher oil prices into the current year seems to have been the natural gas business. Spot prices on the market of Zeebrugge , Belgium , for natural gas have failed to follow the trend set by crude oil and kept plummeting over the winter as hardly ever before.

It has prompted world leader Gazprom of Russia to cut its output in substantial volumes, thereby carrying out a policy opposed to Kazakhstan’s oil industry, which could reach 18 percent on year, according to a recent report by The Moscow Times which quoted top executive Alexander Ananenkov as saying so, adding that revenue on exports to Europe in the first four months of this year had been down by 57 percent due to tumbling prices and less demand in relation to a short and mostly mild winter.

Gazprom has also announced plans to speed up production of liquefied natural gas (LNG) which allows transport by tanker and to respond to price fluctuations more swiftly than in transport by pipeline. According to the news report, discounts for European consumers through a switch to LNG could well be in the order of 20 percent on pipeline supplies.

3. Kazakhstan’s economy showing signs of recovery — PM

ASTANA (TCA) — According to Prime Minister Karim Masimov, Kazakhstan ’s economy is showing signs of recovery and is likely to achieve growth in the first half of the year. The Prime Minister presented a progress report on the government’s anti-crisis program to President Nursultan Nazarbayev at a government meeting on June 8.

The session focused on the current development status of Kazakh industry, agriculture, construction and the real estate market, as well as the modernization of residential areas, the state of credit-giving to small and medium enterprises and the stability of the financial sector and proper functioning of the banking system in general.

The export-oriented, resource rich nation has been hit hard by the global economic downturn. Fueled by high commodities prices and a construction boom, Kazakhstan had an average growth of more than 10 percent from 2000 through 2006. Nevertheless the economy shrank 2.2 percent in the first quarter of 2009 as demand for commodities declined, forcing the government to spend more than 734 billion tenge ($4.9 billion) to support banks and businesses.

According to Reuters, some economists, including those at the International Monetary Fund, expect the Kazakh economy to fall even further this year after gross domestic product contracted by 2.2 percent in the first quarter.

Monday’s governmental session reviewed the progress of the government’s anti-recession program. "We are still in negative territory. But ... we have seen a positive trend starting from March," Masimov said at the meeting chaired by the President. "All the signs are showing that it [GDP] will step into positive territory in the first half."

After hearing the report, President Nazarbayev agreed that the government is able to prevent the slowdown of economic growth in January-June and praised government efforts to stabilize the financial sector and revive the construction industry.

“The government has put its best foot forward and done significant work. Thanks to the measures taken, the growth rates have improved over the months. The state-allocated funds reached their beneficiaries. There is a real chance of the economy improving by the end of June.”

(Reuters, Bloomberg, Ferghana.ru, KazTAG)

4. China to loan $3 billion for Turkmen gas field development

ASHGABAT (TCA) — China is to lend energy-rich Turkmenistan $3 billion to develop its vast South Yolotan natural gas field, Turkmen state media reported on June 6.

The loan marks a key step in Chinese efforts to secure long-term energy supplies from ex-Soviet Central Asia and will likely loosen Russia ’s grip over Turkmenistan ’s gas exports.

Work on a 4,300-mile (7,000-kilometer) pipeline from Turkmenistan to China with the capacity to deliver 52 billion cubic yards (40 billion cubic meters) of gas per year is expected to be finished by the end of the year.

An audit last year by British company Gaffney, Cline and Associates found that the Yolotan field near the Afghan border likely holds 7.85 trillion cubic yards (6 trillion cubic meters) of gas, making it one of the five largest deposits in the world.

Some international experts have voiced doubt that Turkmenistan could meet all of its current supply obligations, claiming that Turkmenistan overestimates its total reserves. Turkmenistan has committed to exporting 65 billion cubic yards (50 billion cubic meters) per year to Russia under a 25-year contract, and it also has agreed to provide China with 52 billion cubic yards (40 billion cubic meters) annually beginning late next year. An additional 10 billion cubic yards are sold annually to Iran .

The Turkmen president, however, maintains that the country’s total reserves amount to more than 26 trillion cubic yards (20 trillion cubic metres). Speaking at a Cabinet meeting last Friday, President Gurbanguly Berdymukhammedov noted that "the deposits at Southern Yolotan alone, if it produces 50 billion cubic meters of gas annually, could provide enough gas to supply any state for 100 years.”

He went on to say that Turkmenistan currently produces 105 billion cubic yards (80 billion cubic meters) of gas per year, while Malaysian company Petronas and other foreign companies produce another 26 billion cubic yards (20 billion cubic meters) of gas in the Turkmen sector of the Caspian Sea.

The pledge of financial support from China comes amid a strain in relations between Turkmenistan and Russia , which has bought most of the Turkmen gas for onward sale in Ukraine and Europe .

On June 3, Berdymukhammedov was expected to continue negotiations with Victor Zubkov, Russia ’s First Deputy Prime Minister and co-chairman of the Turkmen-Russian intergovernmental commission for economic cooperation. Zubkov was in Ashgabat to try to negotiate an end to the standoff between Turkmenistan and Gazprom. The Kremlin-controlled energy company has said that if Turkmenistan doesn’t agree to lower the volume of gas it exports to Russia , or make it cheaper, Gazprom may decide not to buy it.

Earlier this year, Russia moved to reduce its gas imports from Turkmenistan because of plunging demand and prices in Europe, a move which commentators suggest has encouraged Turkmenistan to diversify its exports to China and the West.

While one Turkmen delegation visited Beijing , last week Turkmen Foreign Minister Rashid Meredov was engaged in high-level meetings with EU officials in Brussels . EU officials have played down the visit. Ferran Tarradellas, spokesman to the EU Energy Commissioner Andris Piebalgs, told RFE/RL that “it makes perfect sense for the Turkmen foreign minister to visit the EU capital from time to time.”

Speaking ahead of Meredov’s meeting with Piebalgs, Tarradellas pointed to the recently enlivened energy cooperation between the EU and Turkmenistan .

"In May last year, there was the signature of a memorandum of understanding between Turkmenistan and the European Union on cooperation on energy issues," Tarradellas said. "This cooperation is being developed at this point in time. There is certainly the importance of Turkmenistan as a possible gas supplier to the European - [that] is well known. So this is certainly one of the issues which will be discussed."

However, other diplomats have been more outspoken and claim that President Berdymukhammedov is “furious” with the behavior of the Kremlin.

While, however, these meetings may mark another step by Turkmenistan away from Moscow and towards the West, any direct energy trade between Turkmenistan and the EU must await the completion of the Nabucco pipeline. Without Nabucco, one EU official noted, all talk of trans-Caspian links - including a possible trans-Caspian gas pipeline from Turkmenistan to Azerbaijan - must remain theoretical prospects at best.

(AP, Eurasianet, AFP, RFE/RL)

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