Author: Advisor to the Chairman of the Board of Halyk Finance, Murat Temirkhanov
On January 17, a draft order from the Ministry of Energy was published for public discussion, proposing to move away from state regulation of fuel prices. The press release accompanying this order provides explanations for such a market reform.
In particular, it notes the following: “The price difference for AI-92 gasoline reaches between 40% to 138% compared to neighboring countries, and for diesel fuel – between 20% to 79%. This leads to shortages, an inability to modernize the industry, and the illegal export of fuel abroad through various schemes. In this regard, the Ministry of Energy is shifting to a sustainable pricing model policy. This is aimed at creating a market balance between supply and demand, eliminating fuel shortages, stimulating the modernization of the oil refining industry, creating new jobs, and attracting long-term investments.” It is also clarified that the government will not allow a sharp increase in fuel prices.
We have repeatedly mentioned the serious issue of attracting private long-term investments in oil exploration and production, as well as in oil refining in Kazakhstan. After a significant volume of completed investments (48 billion dollars) in the expansion project at the Tengiz field, new investments in oil exploration and production have noticeably decreased. In our opinion, the key problem in attracting investments in this sector of the economy is the state requirement for subsoil users conducting oil exploration and production to sell oil on the domestic market at a rather low price.
According to some estimates, the purchase price of crude oil on the domestic market is approximately 55–70% lower than the export price due to the policy of subsidizing domestic fuel prices at the expense of the profits of subsoil users. Moreover, according to the subsoil users themselves, the conditions of government contracts with private investors for oil exploration and production are often not met, and there are constant attempts to increase the share of crude oil supplied to domestic markets at low prices. A similar situation occurs in the gas exploration and production sector, which significantly reduces the investment attractiveness of the country's oil and gas industry.
We believe that the reforms to abolish state regulation of fuel prices should be complemented by the most crucial measure – the cancellation of the state's requirement for subsoil users to sell oil on the domestic market at low prices (below market rates). This will make Kazakhstan's oil sector attractive for private long-term investments. Overall, this will also help attract investments not in the export of crude oil and gas, but in the export of high-value oil and gas products, which would signify an increase in economic diversification.
Additionally, we believe that the liberalization of regulated prices should occur not gradually, but all at once. This is primarily because the influx of private investments (including the growth of long-term market lending from banks) into the oil and gas sector will be limited without parity between domestic and export prices for crude oil and gas. A gradual increase in domestic prices means that during this period, private investments will remain unprofitable, and due to the gradual rise in social tensions, there will be a higher likelihood of halting the phased liberalization of prices.
Regarding the rise in social tensions, which is often the main barrier to price liberalization in the country, we would like to note the following. In December, the World Bank published a report on poverty assessment in Kazakhstan, which, in our opinion, made a correct conclusion regarding the subsidization of fuel and utilities in the country using budget funds. While substantial state funds are spent to make these goods more accessible to the needy part of the population, with the volume of such subsidies amounting to 2.8% of GDP in 2021, paradoxically, the primary beneficiaries become the more affluent households. This indicates that such huge budgetary resources are being spent inefficiently, failing to effectively support the poor, and that their cancellation could help save and redirect funds to genuinely necessary measures to enhance social justice and protection for households.
On May 10, 2024, an inspiring decree from the head of state was published, titled “On Measures for Economic Liberalization,” which outlined the following key directions: further liberalization of the economy; large-scale and accelerated reduction of the state sector's share in the economy; improvement of conditions ensuring fair competition in the markets regardless of ownership form, etc. The measures to abolish state regulation of fuel prices are being implemented within the framework of this decree.
In our opinion, the decree “On Measures for Economic Liberalization” is an extremely important document for goal-setting regarding the denationalization and liberalization of Kazakhstan's economy. It should serve as the foundation for preparing all strategic development documents. Unfortunately, to date, there has not been a single government meeting dedicated to the decree, nor has there been any explanatory work for the press, experts, and the general public. Deadlines for many points of the decree have already passed, yet there are no reports in the public domain regarding their implementation.