In addition to other profound impacts, the corona virus has offered global energy markets an unprecedented natural experiment. Collapsing demand for conventional energy fuels and inelastic supply responses have depressed oil prices that are now being incorporated into forward energy planning. This adverse investment accelerator effect is now expected to bring forward the so-called “peak oil” milestone, significantly shortening the profitable lifecycle of known oil reserves. Thus a global health crisis has given us only a foretaste of what we can expect over a longer time horizon, as climate risk continues a slower but more inexorable ascent. Simply put, the rising social cost of carbon will exert the same effect on conventional energy demand, compounded by the emergence of ever more affordable renewable substitutes. Furthermore, the international push for a ‘green recovery‘ in the aftermath of the pandemic is perceived to hasten the end of the oil era. Oyuna Baldakova and David Roland-Holst report
In this environment, both conventional energy companies and exporting countries have an important opportunity to reassess their strategies. Markets for their products are still large, offering significant resources that can be invested to adapt to a changing future. Here we focus on one important Central Asian energy exporter, Kazakhstan. Diverse energy endowments, relatively high resource income for reinvestment, and centralized energy administration, make this country an excellent candidate for leadership in innovative energy sector development.
Kazakhstan Energy Trade Challenges
The oil and gas industries have played a key role in Kazakhstan’s economic development since its independence in 1990. Referred to as “the blood of the economy” and “startup capital from the first days of independence” by former President Nazarbayev, oil and gas exports have been rising continuously and, in 2018, Kazakhstan was the world’s 9th-largest exporter of crude oil and 12th of natural gas. In fiscal terms, oil and gas revenues accounted for about 44% of the government budget in 2019. In 2020, Kazakhstan entered a perfect storm, combining the Covid-19 pandemic with plummeting oil prices, losing $3.8 billion or 20% of public revenue in 8 months.
As the global community affirms its commitment to ‘build back better’, Kazakhstan’s largest sources of oil and gas demand (China and Europe) are beginning a sustained transition away from fossil fuels. China has recently pledged to stabilize and begin reducing national CO2 emissions by 2030 and to achieve carbon neutrality before 2060. The European Commission has suggested to reduce emissions 55% by 2030 and reach carbon neutrality by 2050. Moreover, the EU is redoubling commitments to transport electrification and considering introducing a carbon border adjustment mechanism in 2023, a tax on carbon-intensive imports, to level the playing field and prevent carbon leakage, as well as compel countries outside of the EU to implement more aggressive climate rules.
Meanwhile, another primary Kazakh fossil fuel importer, China has focused on “new infrastructure”, promoting seven innovative fields (5G networks, data centres, artificial intelligence, the industrial Internet of Things, ultra-high voltage (UHV) power transmission, high-speed rail and electric vehicle charging infrastructure) with the total anticipated investment of 10 trillion yuan (US$1.4 trillion) over five years.
New Opportunities for Kazakhstan
If proactively managed, shifting patterns of global energy consumption and trade can present new opportunities for Kazakhstan, enabling a transition from carbon fuel dependence to more sustainable economic growth. In his September state of the nation address, President Tokayev placed special emphasis on environmental priorities, suggesting that the Government develop a package of proposals for green growth. Over the past two decades, Kazakhstan has adopted the legislative and institutional base for such a package, including the Environmental Code (2007), the Law on Support for the Use of Renewable Energy (2009), the Concept for the Transition to Green Energy (2013). The Concept established targets for the share of alternative sources, including gas, nuclear and renewable energy, in electricity production: from the 3% in 2020 to 30% in 2030 and 50% in 2050.
By global standards, Kazakhstan is rich in wind and solar resources. Wind energy has the greatest potential, with half of Kazakhstan’s territory having an average wind speed of about 4 to 5 m/sec at a height of 30m, which can produce about 1.8 trillion kWh per year. Solar energy is estimated at 2.5 billion kWh per year. In 2020, Kazakhstan has approved nineteen new renewable energy projects worth $1.1 billion and is currently producing 3% of its energy from renewable sources. Massive investments would be required for Kazakhstan’s to realize its clean energy potential. Fortunately, however, these can be financed from a combination of today’s export earnings and Public Private Partnerships. Because of long collaboration with leading global energy companies and prominent energy importers partners both East and West, Foreign Direct Investment can play a major role for all parties, investing jointly in a low carbon transition that sustains Kazakhstan’s energy export revenues and dramatically reduces GHG emissions in Europe, China, and beyond.
We recommend a transition comprising three stages:
- High-carbon (2020) primary carbon fuel exports, financing growth and transition to
- Mid-carbon (by 2030) (natural gas and gas-fired electricity and hydrogen exports) financing new capacity for
- Low-carbon (2040-50) solar and wind capacity for carbon- free electricity exports).
This strategy also opens the possibility of extension across a diverse and predominantly lower income Central Asian region, where endowments of renewable energy capacity are much more equally distributed than carbon fuel resources. Thus, phases 2 and 3 of the transition would create opportunities for more extensive and profitable regional energy infrastructure investment. Meanwhile, grid buildouts needed for expanding energy supply could also dramatically improve energy access across the region. In this way, energy can play the same role that manufacturing did in the dynamic East Asian economies, where export opportunities drove infrastructure investments that ultimately facilitate intra-regional connectivity, efficiency, and long-term, more inclusive regional growth.
 In its first forecast for next year, the IEA said demand would rise by 5.7m barrels a day to 97.4m b/d. This is a rebound from the expected 8.1m b/d fall in 2020, set to be the largest drop on record. But it will still put 2021’s total demand 2.4m b/d below 2019.
Oyuna Baldakova is a Ph.D. Candidate at the Graduate School of East Asian Studies (GEAS) at the Free University of Berlin and a former fellow of the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG). — (I am not a fellow of the DFG anymore, was for the first 3 years of my Ph.D.)