QazaqGaz’s long road to relevance [Gas in Transition]

In March, when it was rebranded and its management was overhauled, few expected that QazaqGaz would aspire to become a major player in the natural gas business in Kazakhstan. At a trade conference at the end of September, however, the gas transport company said it plans to enter the exploration and production sector and launch an IPO in the medium term.

Formerly KazTransGas, the company is fully state-owned and traditionally operates the country’s gas pipelines and two small groups of fields in the southern Zhambyl region, Amangeldy Gaz and Otan Gaz.

At the opening panel at KIOGE, the oil and gas industry bi-annual conference in Almaty, QazaqGaz CEO Sanzhar Zharkeshov clarified that the plans of his company differ from Kazmunaigas (KMG), the national oil and gas company.

Also state-owned, through the holding and sovereign wealth fund Samruk-Kazyna, KMG has long been in charge of the main oil and gas operations in the country and has become the partner in joint ventures and production sharing agreements with foreign companies.

Now, Zharkeshov said that KMG’s monopoly in the production segment could be challenged.

“Should there be a standalone natural gas company? Yes, the president last year said we should align the country with global trends,” said Zharkeshov. Immediately afterwards, he added: “I hope this ends the debates in the industry on whether this was an appropriate move or not,” signalling that tensions exist within the Kazakh gas sector regarding QazaqGaz’s future plans.

The CEO also said the company will focus on research and development and plans to privatise part of its shares in an IPO by 2025. This is an important development for the company, especially coming from its young and rampant CEO, with a past at McKinsey in London and at the ministry of ecology in Astana.

Besides pipeline transport and a handful of small gas production fields, QazaqGaz also owns companies that operate in refining and natural gas products.

The new QazaqGaz

The company’s restructuring in March came on the backdrop of “Bloody January” – when there were mass protests over fuel prices that the government responded to with a brutal crackdown, resulting in over 200 deaths and close to 10,000 arrests. The unrest shook the country and caused an elite reshuffle.

Then-KazTransGas and other retail gas companies sharply increased the price of liquified petroleum gas (LPG), which is a popular automobile and household fuel in the western regions of the country. LPG prices were previously capped and gas companies received a subsidy to sell at lower-than-market prices.

In late 2021, the ministry of energy had planned the transition to an auction-based system of pricing starting with the new year and prices skyrocketed already on January 2. This provoked a protest in the oil town of Zhanaozen, already the focal point of protests in 2011, which had led to the government led by then-president Nursultan Nazarbayev to open fire on striking oil workers. The 2022 protest was much quieter, although the government decided to push back against the citizens’ request to lower LPG prices.

The protest quickly spread across the country and reached major cities such as Almaty and the capital Astana (at the time still called Nur-Sultan). There, the protest was more focused on political change and social justice. The government’s hardline repression of the urban demonstrations in Almaty resulted in an official death toll across the country of 238.

Bloody January was also considered an intra-elite clash, which saw powerful businessmen and state officials formerly linked to Nazarbayev now challenging the “new course” of president Kassym-Jomart Tokayev, who succeeded the ageing long-time leader in 2019. Among these elites, some of the people controlling the oil and gas sector were pointed at.

Kairat Sharipbayev, rumoured to be the husband of Dariga Nazarbayeva, Nazarbayev’s eldest daughter, was the CEO of KazTransGas until his untimely removal in early 2022, in response to the events in January. Another “relative” of the former president, Kairat Boranbayev, who was the co-owner of KazRosGas, a joint venture with Russia’s Gazprom for the transborder trade of gas, was arrested in March for embezzlement, as he withdrew state funds during some of the transactions. Boranbayev’s daughter was married to Nazarbayev's late grandson Aisultan.

These seismic changes threatened the very stability of the country’s leadership and in the aftermath, Tokayev announced dramatic changes in the direction of the country, a strategy he called “New Kazakhstan”. Yet, the restructuring plan for KazTransGas had already been underway for months.

A Quiet Restructuring

In November 2021, the government overhauled the natural gas industry by ordering the decoupling of KazTransGas from KMG. KazTransGas shares were then transferred to Samruk-Kazyna and president Tokayev said the company would “transform into a vertically-integrated natural gas company analogous to Russia’s Gazprom.”

The company was renamed on the last day of 2021 into QazaqGaz and the events of a few days later precipitated the changes in the company’s strategy, although they had already been set in motion.

Credit ratings agency Fitch maintained a stable outlook for QazaqGaz’s BBB- rating in February, given “its monopoly in domestic gas transmission and distribution in Kazakhstan.” Stronger oil prices could positively affect the company’s revenue, because prices under the gas export contract with China are indexed to oil prices with a nine-month lag. Around half of QazaqGaz revenues come from gas export operations.

It is notable that KMG is undergoing an IPO that should be completed in December and during which it plans to sell up to 15% of its shares. Regarding industrial plans, KMG’s CEO Magzum Mirzagaliyev said it expects an oil production increase by 40% at Tengiz, where the government controls a 20% share. Tengizchevroil’s management however said at a trade conference that it does not expect any further expansion projects in the near future. This could have a negative effect on the price expectations for the company’s share price.

Another headache could come from a potential government pressure to transfer gas assets from KMG to QazaqGaz, ahead of the latter’s IPO. In 2021, QazaqGaz’s yearly production amounted to around 278mn m3, a 15% decrease compared to the previous year. For a vertically-integrated gas giant, these production numbers are negligible. In contrast, KMG produced 8.1bn m3 in 2021, a 2% decrease compared to the previous year.

The road to relevance for QazaqGaz is long, because the decoupling from KMG left it with just 3% of the production capacity at state-owned projects. Yet, the new management’s decisions and development strategy could prove momentous in the following months. As China is increasing its gas consumption back to pre-pandemic levels, the importance of QazaqGaz in gas transit will increase. By entering the exploration and production sector, the company could switch gears.