Special edition – kazakhstan oil and other raw materials prices fall: impacts and highlights

Prices for oil, Kazakhstan’s key export product, have significantly declined during the period from June 2014 till January 2015. On 16 June 2014 Brent oil price equaled USD 114/b, while on 9 January 2015 it declined till USD 47/b. Oil price fall aligned with the same tendencies on metal market, another large export sector in Kazakhstan.

The economic situation in Kazakhstan has been heavily affected by drop of oil price since the state budget mainly depends on oil revenues. Hence, we would like to attract your attention to certain impacts of such drop of oil price.

1. Budget Revenues Reduction in the Republic of Kazakhstan

Following the drop of export prices, export earnings were reduced as well. Based on this, the state budget is currently experiencing a deficit. In this regard, in order to cut budget expenses, the government had to revisit the budget and allocate funds from the National Fund to cover the budget deficit.

2. Oil Companies’ Income Decrease

The average operating netback for oil produced in Kazakhstan is approximately USD 50. Given the falling oil prices on global market, as well as oil companies’ transportation expenses to foreign markets, it is impending that oil companies may experience profitability problems.

3. Investments Reduction and Revision of Work Programs

Raw material prices fall will certainly force subsurface users to reduce their investment programs and other expenses, which in its turn will negatively affect performance of their commitments under the work programs and other obligations (including social obligations) under contracts with the Government of the Republic of Kazakhstan. In this regard, subsoil users are expected to have tough talks with the government authorities on adjusting work programs aimed at expense reduction during the current low price cycle.

4. Job cut

Many oil and gas industry and service companies are considering staff reduction affected by continued drop of oil and raw materials prices. We currently witness some cases taking place already. We expect this process go viral as it develops.

5. Fuel Price Reduction

Oil price reduction certainly had an impact on oil and lubricants price reduction. However, given the nuances of the petroleum products market in Kazakhstan (government regulation of prices, lack of refining capacity, etc.), the drop of oil prices does not necessarily drastically affect prices of lubes, which as we currently witness have only slightly been reduced.

6. Efforts Towards Economy Diversification

Fall of oil prices has demonstrated that Kazakhstan is heavily dependent on raw materials export. Hence, the Government is currently undertaking a number of measures to improve the investment climate in Kazakhstan and to develop downstream and non-resource sectors of economy aiming to produce final products with high added value. Such policy ultimately should help to reduce the dependence of Kazakhstan’s economy on raw materials export and make the economy more stable to commodity markets spikes.

7. Early elections of the President of the Republic of Kazakhstan

In order to avoid deterioration of political stability in the Republic of Kazakhstan amid the global economic crisis and to ensure the New Economic Policy of Kazakhstan “Nurly Zhol” is fully implemented and enforced, it was proposed to hold early presidential elections in Kazakhstan.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please seek a lawyer for a specific advice. Please note that Kazakhstan is an emerging economy and its legislation and legal system are in constant development. Should you have any questions or would like to discuss matters addressed in this Client Update, please contact us.