Ministry of Energy Responds to Dorin Baru: KazMunayGas Is Not a Subsidized Company

In November 2024, Orda.kz published an interview with Dorin Baru, an American expert with extensive experience working in Kazakhstan.

Baru highlighted issues faced by foreign companies operating in the country, criticized corruption in the oil industry, and discussed the role of Vitol, a prominent oil trader, in this context.

In an interview with Gulnara Bazhkenova, Baru shared his experience working in the Kazakhstan oil market. He claimed the system fosters corruption and monopolies, restricting companies from freely exporting oil.  

Baru noted Vitol’s monopoly in export drives up commissions and creates unfavorable conditions for other market players. He also mentioned that the Ministry of Energy of Kazakhstan often violates the terms of contracts, which undermines investor confidence.

A week later, KazMunayGas (KMG) CEO Askhat Khasenov responded to the publication, defending Vitol and asserting that the company met its obligations despite facing legal issues abroad.

Baru provided a response to Orda, detailing his viewpoint further. The editorial team translated and published the piece, with a link to the original version for readers.

In January 2025, Vice Minister of Energy Alibek Zhamauov addressed Baru’s claims in comments shared with Orda.kz.

Orda.kz publishes them unedited and unverified.

We will carefully study the text, highlight the main points, and continue to understand Kazakhstan's oil market problems.

— Recently, Dorin Baru, a U.S. citizen and former director of Petrom, gave an interview to ORDA where he spoke about monopolies, corruption, and the difficulties faced by oil companies in Kazakhstan. What is your assessment of his statements?

I’ve read the interview and must clarify that many of Mr. Baru’s claims are based on personal assumptions rather than facts. Kazakhstan’s oil market operates under strict legislative requirements that safeguard national interests while fostering an attractive environment for investors.  I am ready to answer all questions and address each issue raised in detail.

— How does the government manage oil distribution between the domestic market and exports? Can you explain the principles behind this mechanism?

The primary responsibility of the Ministry of Energy is to ensure the country’s energy security. This is achieved by prioritizing the supply of raw materials to the domestic market, which provides the uninterrupted operation of domestic oil refineries.

This is not a spontaneous decision. Under the Subsoil Code, all subsoil users — except for Karachaganak Petroleum Operating, Tengizchevroil, and the North Caspian Operating Company — are required to allocate part of their production to domestic refineries. For example, KazMunayGas directs around 65% of its output to the domestic market.

Only after meeting these obligations can excess oil be exported. This approach helps stabilize the domestic market and prevents fuel shortages.

— Does the human factor influence how much raw materials a particular subsoil user should send to the domestic market?

No, these decisions are strictly governed by legislative regulations. The criteria are clearly defined and include oil refining and supply plans, current domestic demand, pipeline capacity, and the geographic location of the fields.

At the same time, the Ministry of Energy has developed a digital system to automate oil supply schedules. This will ensure transparency, equality, and the minimization of human involvement in resource distribution.

Over 70 subsoil users, along with major players like KazMunayGas and KazTransOil, are already part of this system. The system is expected to be launched in the third quarter of 2025.

— And yet, why was the principle of “domestic market first, then export” chosen? Is introducing a more flexible approach, like a 50/50 split between domestic supply and exports possible?

The current model addresses the domestic market’s actual needs and limited resources. Today, 63 subsoil users supply domestic refineries with about 17.9 million tons of oil annually, which is 58.7% of their total production. This volume is sufficient to cover the country’s current needs. However, as oil fields naturally deplete, the burden on subsoil users to supply the domestic market grows each year.

Limiting domestic supply to contractual obligations — around 30% — would result in a total of only 9.15 million tons, covering just half of the domestic market's needs.

Adopting a 50/50 approach would reduce domestic supply by 2.6 million tons. Such a reduction could force refinery shutdowns and lead to fuel shortages for the population. For these reasons, the current system remains the most viable option at this time.

— But in such conditions, subsoil users cannot properly plan their income, and they also lose a lot given the current pricing policy on the domestic market...

Subsoil users' dissatisfaction with the domestic market's pricing policy is understandable. Indeed, the cost of oil sold by domestic refineries is lower than the export price, which can reduce companies' potential profits.

If domestic and export prices were closer, I believe all subsoil users would prefer to operate within the Kazakhstan market, as they could save on logistics and transportation costs.

However, this has not been the case. The policy for setting domestic prices has been developed over the past 30 years to prevent social and economic energy crises that could result from rising fuel costs. As a result, Kazakhstan currently has some of the lowest gas and gasoline prices globally, although they are significantly inferior to market prices.

In this case, the state prioritizes national interests and the needs of its citizens, which is critical for a country like Kazakhstan, where fuel is essential to the transport, agricultural, and industrial sectors.

While the price gap does create financial challenges for subsoil users, the government seeks to balance business interests with societal needs.

As mentioned earlier, KazMunayGas also supplies substantial volumes of its production to the domestic market. As a socially responsible company, it accepts these terms in alignment with the broader national interest.

— Mr. Baru claimed that the state covers KMG's losses. Does this mean KazMunayGas is a subsidized company? And in general, how is KMG's financial situation currently? Would you say the company is stable?

This is another misconception of Mr. Baru or, perhaps, a deliberate distortion of the facts. KazMunayGas is not a subsidized company.

KMG is a national operator of Kazakhstan's oil and gas industry, working entirely on the principles of self-sufficiency and efficiency.

KazMunayGas has stable financial results. In 2023, KMG contributed 2.4 trillion tenge in taxes, and its net profit was 1 trillion tenge in the first nine months of 2024 — 67% higher than the previous year.

The company's sovereign credit ratings confirm its stability.

— Let's get back to oil exports. In the interview, it was mentioned that exports from Kazakhstan are only possible through Vitol. Is this accurate?

This claim is also unfounded. The Kazakhstan market operates under the norms of the Entrepreneurial Code, which prohibits unlawful state interference in business affairs.

Kazakhstan's subsoil user companies are free to choose their export partners without restrictions or mandatory requirements.

As such, the commission rates—whether 5%, 10%, or 15%—are determined through direct agreements between the trading company and the subsoil user.

— Does KazMunayGas cooperate exclusively with Vitol? Can you clarify how this company organizes oil exports?

KazMunayGas is a public company that adheres to international standards and the legislation of the Republic of Kazakhstan.

Oil buyers are selected through open competitive procedures. The main export operator is KMG Trading (a 100% subsidiary of KMG), which supplies oil to a foreign oil refinery in Romania.

— Can you explain the advance payment mechanism for oil exports? How does it work, and how effective is it? 

Advance payments, introduced by KMG in 2016, serve as a way to secure "non-debt" financing. All transactions are conducted in full compliance with national laws and international standards, with partners selected through open tenders to ensure competitiveness.

The funds for these advance payments were provided by 16 major international banks, including HSBC, Credit Suisse, and Mitsubishi UFG.

It’s important to emphasize that, as Dorin Baru mentioned, the advanced oil is sold at market prices based on international quotes at delivery time, without any discounts or special treatment. I want to reiterate that all financial settlements were made at oil quotes on the delivery date.

As of now, KMG has repaid all its advance payment obligations ahead of schedule, which clearly indicates the company’s financial stability.

— Mr. Baru told us about the mandatory 1% deductions for research and development. Is there any data on their effectiveness? What measures are being taken to increase the transparency of the use of these funds?

From 2016 to 2023, 112.67 billion tenge was allocated for R&D projects. All projects follow established procedures: purchases are made through competitive bidding, and only entities accredited by the Ministry of Science and Higher Education can carry out the projects. Additionally, subsoil users independently select investment areas but only from a scientific and technical council-approved list.

Therefore, it is impossible to carry out a generally accepted technical event under the guise of NIOCR, including the one described in the interview (hydraulic fracturing). If this fact actually happened, then it should be the basis for an inspection by an authorized body.

Original Author: Artem Volkov