Why Kazakhstan should avoid turning QazaqGaz into something like Gazprom

The aim of the current reform of the national gas company in Kazakhstan is quite simple. The government wants to build a vertically-integrated holding, as sort of a smaller clone of Russian Gazprom. However, when you want more competition in the market, you better do the opposite.

When the cabinet discussed the Comprehensive Privatization Plan for 2021-2025, Prime Minister Alikhan Smailov once again confirmed that the government wants to reduce its role in the economy. It is expected that this rate will be reduced to 14% by 2025, which is quite impressive compared to 30–40% in the early 2010s. The government has already earned $1.6 billion in the process of privatization, including the $123.5 million it earned after 2021.

Moreover, the government wants to accelerate this process. In August 2022 it expanded the list of public entities that must be sold to 170. This is not the final number because the anti-trust agency and even private businesses can suggest any other entities to be sold as well. Among those 170 companies are subsidiaries of QazaqGaz, a company that must go private as soon as possible, according to the plan. The company’s stock might be sold to the broader market in 2024-2025, although the government will keep its controlling stake. Kazakhstan’s authorities have applied the same approach toward other national companies like KazMunayGas and Kazakhstan Railways. However, no final decision has been made so far concerning the amount of stock that will be available for trade.

Even though the transformation of QazaqGaz has been implemented since the beginning of the year, the roadmap for the company’s privatization isn’t approved. This new company should be exactly like Gazprom, which is a vertically-integrated gas company.

In order to achieve this goal, in November 2021 KazMunayGaz transferred KazTransGaz’s stocks directly to Samruk-Kazyna, the National Welfare Fund. As a result, KMG managed to cut its debts by $1 billion, while KazTransGaz gained the status of a national company.

In December of that year, the company was renamed QazaqGaz. The new name had to underline the pivotal change for QazaqGaz. It is no longer just a gas transporting company, it’s also a company in charge of gas exploration, gas production and gas selling. The company says that it will change «the vast majority of business processes.» For instance, the company established a new entity dubbed QazaqGaz Exploration and Production, which is going to expand exploration activity at ten promising gas fields in the Jambyl region. Given that QazaqGaz is still under Samruk-Kazyna’s control, the holding allocated $27.6 million for the gas company as additional capitalization.

However, since the government’s position is ambiguous, any plans of QazaqGaz might be at risk in the future.

For instance, the national plan for the development of the gas industry says that «more competition is needed» as the state’s monopoly is the key factor that reduces the attractiveness of the industry for private investments. On the other hand, authors of the plan have praised the monopoly status of the public company as an effective tool to keep internal gas prices relatively low and want the company to strengthen its position in the market.

In other words, there is no clear understanding of what exactly the government is wanting to get: a Gazprom clone or real competition. It seems that it wants to execute all options available.

Thus, the announced road map for the development of competition in the oil and gas market, prepared by the Agency for Protection and Development of Competition of the Republic of Kazakhstan (APDC), requires that QazaqGaz rely on at least three independent billing companies starting from Q1 next year. This is virtually the only sphere where the company is going to use real competition.

On the other hand, the government is moving towards a price increase. The aforementioned plan, for example, introduces two new categories of consumers who are going to pay full price with no hidden subsidies. They are digital currency miners and large industrial facilities. If the company goes further in this direction, it can eliminate at least one argument in favor of a national monopoly.

At the same time, QazaqGaz has expanded its gas output. It is unlikely that QazaqGaz can be turned into something like Gazprom unless it absorbs all independent producers of gas. From a technical point of view, this is possible because QazaqGas has a prerogative right to buy gas from smaller producers and has a monopoly right to sell it to consumers. In other words, QazaqGaz and its final shareholder has direct influence on revenue and capitalization of other gas producers.

Another question is what it will cost people and businesses. For years, Russia tried to turn Gazprom into something like KazTransGaz by splitting the production and transportation of gas into two separate businesses in order to facilitate competition. Kazakhstan is already in this situation when the state of free competition is so close. If the government wants to reduce its role in the economy, it should remember that competition is much better for this goal than the privatization of a national monopoly.