The Customs Union between Russia, Belarus and Kazakhstan aims to create an economic union, including closer energy ties, between the former USSR states and has led to a growth of mutual trade of the three countries by 16% since its creation. In mid-2010, the internal borders for the three countries’ own goods and bringing immediate benefits to the member states were removed.
Currently, Kazakhstan, Belarus and Russia are members of a so-called Common Economic Space. The main difference between the Common Economic Space and the Customs Union is that the Customs Union removes borders just for the goods, while the Common Economic Space provides the same freedom for the services, capital, and workforce.
Lately, the increased co-operation between the two neighbours – Russian and Kazakhstan – has yielded substantial results. In energy, the two countries have agreed to duty-free supplies of crude oil from Russia, among other goods, on the territory of the economic union. According to the experts’ calculations, this new arrangement will save Kazakhstan approximately $1.15 billion annually.
A regular meeting of an expert club under the auspices of a non-government foundation “The World of Eurasia” has recently discussed the pluses and minuses of integration of the two closest neighbours in production, processing, and transport of oil and gas resources. The topic of the discussion was “Russia-Kazakhstan Projects in Oil and Gas Industry: New Reality of Integration”.
The Kazakhstan-Russia relations in the oil and gas industry began in the Soviet past where large volumes of Kazakhstan crude transited through Russia on their way to the export markets.
“The system of pipelines and refineries in Kazakhstan has always been oriented to Russian crude. If you look at the fuels and lubricants segment, approximately 60% the petroleum products available in Kazakhstan are either made in Russia or made from Russian oil,” political analyst Marat Shibutov said.
“Also, there is one other thing – crude oil is several times cheaper in the domestic market than it is outside, so it is not economic for the oil producers to supply crude to the Kazakhstan refineries,” he added.
However, after the 2013 Kazakhstan-Russian negotiations, Russian crude, like all the other goods within the Customs Union, will be delivered to our country duty-free, which will allow Kazakhstan to save approximately $1.15 billion a year.
In addition, Rosneft and other companies are going to ship crude to China through Kazakhstan’s Atasu-Alashankou pipeline, whose pumping tariffs are low. “We, on the other hand, will make sure to fill the pipeline, which will be beneficial for both us and the Chinese. So, we can say that Kazakhstan achieved a great success in the oil and gas sector last year,” Shibutov said.
According to another political analyst, Anton Morozov, Kazakhstan practices a pragmatic approach to its crude oil’s future sales markets and transport routes. It diversifies the export routes and maximises the use of the pipeline system.
At the same time, in spite of Kazakhstan’s statements on many occasions that the Russian direction remains the main one for its hydrocarbon exports, the expert believes that the Caspian Pipeline Consortium throughput capacity growth is limited.
“This is caused by the fact that the oil tanker throughput capacities of the Turkish Straights of Bosphorus and Dardanelles have reached their critical levels,” Morozov said.
According to him, the Burgas–Alexandroupolis pipeline project had attempted to solve that problem, but was stopped because of Bulgaria’s standpoint.
On the whole, Russia has been sympathetic to Kazakhstan’s desire to diversify its energy export routes.
“In particular, it supported the project of filling the east-bound Atasu-Alashankou pipeline. This, of course, was pragmatic of Russia, as it exports the crude from its Western Siberia fields to China through that pipe. The experts believe that this arrangement for crude oil exports to China may become a serious contribution to the creation of a common energy system of the Shanghai Cooperation Organization,” Morozov said.
According to the Chief Researcher of the Institute of Economics of the Ministry of Education and Science of the Republic of Kazakhstan, Professor Oleg Yegorov, a progress in the Kazakhstan-Russian relations is evident.
“At the same time, the participation of the Russian companies in Kazakhstan’s oil and gas sector is limited to exploration, production, and transport of crude oil. I believe it is time they participated in processing-related projects,” he said.
In particular, Yegorov mentioned the issue of refinery upgrades, citing the Pavlodar refinery as one working on Russian oil.
“Therefore, it is the Russian companies that know best what is needed to upgrade it. Kazakhstan produces crudes of unique qualities. But the metals and paraffin compounds contained in those crudes are still not separated as independent products, and the deposits of bituminous rocks are still not being developed. Maybe, this is where the joint efforts should be stepped up,” Yegorov said.
Academic secretary of the Kazakhstan Institute of Strategic Studies under the President of Kazakhstan, Bela Syrlybayeva, argues that Kazakhstan currently has a fairly diversified package of proposals for oil and gas.
“And we can see that priority is given to the western companies and China, while the Russian companies do not occupy the largest segment of the market and lack many complex technologies that are needed. There are no Russians in Kashagan, for example, and they will not go there, as it has proved to be the most costly and risky project in the world. The oil there will be expensive, so the question is what to do with that oil. So, it’s my analysis that transport and refined petroleum products will remain the Russians’ priorities,” Syrlybayeva said.
According to expert Sergey Smirnov, Kazakhstan’s refineries are currently underutilised, as it is more beneficial to export crude oil.
“Presently, Kazakhstan has low customs duties, so the oil will be also flowing to the West. Therefore, from the point of view of integration with Russia, customs duties for crude could be raised and, much as they have done in the Russian Federation, some producers could be forced to supply crude to our refineries. There is simply no other way out,” Smirnov said.