Are you sure?

Fitch release on Kazakh oil, gas industry

Fitch Ratings has today said that an increased state role in the Kazakh oil and gas industry announced recently by the Kazakhstani Prime Minister looks unlikely to have implications for the credit ratings of companies operating in this sector in the short-to-medium-term.

“Overall, on the positive side, an increase of the state role could underpin greater stability and certainty for all the players in the Kazakh oil and gas sector,” says Angelina Valavina, Director of Fitch’s Energy, Utilities & Regulation team. “In addition, it could set clearer rules of the game, albeit tightened, and provide more clarity and coherence pertaining to industry regulation.”

Fitch notes, that National Company KazMunaiGaz (NC KMG; ‘BBB’/Negative) is well placed to capitalize on its close ties to the government and gain most of the benefits from the state reasserting control over the oil and gas industry amid the first right of refusal on acquisition of any on-shore projects in Kazakhstan, as well as tangible state support. In regard to the international oil and gas majors operating in Kazakhstan, a potential increase of the state role in the sector could limit their equity upside, but is unlikely to have negative impact on their credit profile. Furthermore, seeking to replenish reserves, they could still maintain access to vast reserves in Kazakhstan.

In case of severe tightening of the state control (which seems unlikely), Fitch will closely monitor the companies’ ability to distance themselves from political ambiguities and balance their strategic objectives with the state’s political agenda. The emphasis would be placed on whether the state supports aggressive financial policies to increase its participation in the industry, which might jeopardize the companies’ credit metrics. In addition, an increase of a state role could lead to lower transparency.

Nevertheless, NC KMG has been successful in managing its assets to date and has introduced better corporate governance, including more stringent financial policies and improved transparency. In regard to international oil and gas majors, any terms of their potential buyout from existing projects will also be analyzed, which is likely to have limited impact on these entities credit profiles given that their capex for the Kazakh oil and gas projects has already been incorporated into the ratings. At the same time, rising uncertainty could jeopardize the implementation of the country’s ambitious oil and gas production expansion program, which requires substantial investments and expertise. Thus, the balance between national resources and ability to exploit them without foreign assistance needs to be maintained.

The call of President Nazarbayev in his state-of-the-nation address for the state to strengthen its role as a participant on the international oil and gas markets prompted the announcement by Kazakhstani Prime Minister in early February that Kazakhstan will withdraw licenses for natural resource projects where investors have breached contracts. A number of oil and gas companies, including consortia developing the Karachaganak field, the Tengiz field and the Kashagan offshore project, have been subject to intense scrutiny over the last several months by Kazakh officials over their environmental stewardship. As Fitch highlighted in its previous research reports, current favorable oil and gas industry fundamentals provide impetus for the governments of oil producing countries to tighten their grip on the industry, which has been seen in places as diverse as Russia and Venezuela. Kazakhstan will be influenced by the fact that the oil and gas industry is essential to the country’s economy, contributing about 30% to government revenue. Furthermore, future substantial oil production expansion is expected from fields which at present are mainly operated by international oil majors.

(The statement was released by the ratings agency) (Reuters)