The Development Programme for the Kazakh Sector of the Caspian
On 16 May 2003 the President of Kazakhstan signed a Decree to approve the Development Programme for the Kazakh Sector of the Caspian. The Programme’s objectives are to support sustainable economic progress and improve living standards in the country through efficient and safe development of hydrocarbon resources in the Kazakh Sector of the Caspian (KSC), and by encouraging related industries.
This article provides a summary of the main aspects of the Programme including the legal framework, taxation, bidding procedures, development of the transport, service and social infrastructure and issues of natural resource management.
The Legal Framework and State Control System
At present, oil operations in the KSC are subject to the Presidential Decrees On Oil (#2350 of 28 June 1995) and On Mineral Reserves and Mining (#2828 of 27 January 1996), the Kazakh-Russian Agreement on the Delineation of the North Caspian Bed for the Execution of Sovereign Mining Rights (6 July 1998), and a Memorandum to the latter agreement (13 May 2002).
Contractors operating in the KSC are also bound by the Convention on Long-Range Cross-Border Air Pollution (13 November 1979), the Convention on the Cross-Border Effects of Industrial Accidents (17 March 1992), the Convention on the Protection and Use of Cross-Border Watercourses and International Lakes (17 March 1992), and a number of other international treaties that Kazakhstan has acceded to on navigation and emergencies. In addition, the Kazakh laws on mining safety, natural and humanly-caused emergencies, industrial and fire safety, and environmental protection are all being strictly enforced.
The legal framework for mining activities also incorporates a package of government resolutions and certain presidential decrees. Work is under way to develop a law on offshore oil operations and streamline government control procedures over mining.
It is expected that there will be a boom in offshore oil operations after agreement is reached between Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan on the legal status of the Caspian.
An important political prerequisite for the development of the KSC is to speed up the drafting and adoption of a framework convention on the sea’s legal status by the five littoral states; the agreement will cover the issues of seabed delimitation.
Putting Blocks Out to Tender
According to the Kazakh Government, there are currently 23 undistributed blocks containing large or medium-sized exploration targets, i.e. where the density of geological resources is 200-500 million tonnes of equivalent fuel. In some of these blocks geological exploration will be subsidised by the Government. In order to select contractors for the “exploration/production” terms by means of bids or direct negotiations, at least three blocks will be put out to tender every year. In parallel with that, tenders will be invited for any blocks that warrant additional exploration.
The potential contract areas include blocks and smaller structures where exploration is at various stages of maturity. Poorly explored blocks will be grouped together and contracted out under exploration investment programmes, whilst well explored and prepared blocks will be put up for exploration and production bids.
The winners of exploration/production and production bids will be required to take on strict obligations including geological surveys, drilling one or more parametric wells (and, if applicable, constructing a rig), instigating a social programme, training Kazakh staff and transferring technology.
Provided that the winning company complies with the above terms and other contractual requirements imposed by Kazakh law in force on the contract date, it will be offered a choice of 1-2 blocks within the area, and a contract will be made for exploration and production. The other blocks in the area that were studied and prepared for marketing will be put out to tender.
In addition, the bidding terms for certain promising blocks within the KSC may include the obligation to invest in exploring and developing onshore deposits which show little promise or are difficult to access, as a social obligation on the contractor.
Thus the state will release itself fully from geological risk by transferring it to contractors. The risk level of the National Company operating in the KSC on behalf of the Government will be determined in the course of preparing individual contracts, according to the Company’s interest, the Government’s interest and the maturity of exploration of the block or structure involved in the contract.
Tax Treatment of Contractors
In order to refine the national tax law and increase tax revenue from oil operations in the KSC, the Government will revise existing tax treatment models and study the possibility of adopting new ones.
At present, two tax treatment models are applied to mining contracts. One requires contractors to pay a subscription bonus and a commercial discovery bonus in addition to any taxes applying on the contract date and a sliding-scale royalty depending on production volumes.
The other model relies on Production Sharing Agreements (PSA). As a measure to improve the mechanism for production sharing between the Government and contractors, the Programme envisages adopting legal provisions for three triggers (i.e. threshold production sharing values) to be used in PSAs; these are calculated on the basis of the volume factor (cumulative production), the R-factor (income-to-cost ratio), and the internal rate of return.any given contract the threshold values for each trigger will be set by negotiation, so as to provide a reasonable rate of return for the investor and the maximum possible production share for the Government, using production forecasts.
It is planned to introduce a third model drawing on the practices of other countries, such as Norway, which are developing offshore oil deposits.
According to this new model a contractor will pay a subscription bonus, an oil production tax, an excess profit tax and all taxes and fees pursuant to the Tax Code (except for the commercial discovery bonus, royalties and the Government share of production).
The tax base for the oil production tax will be the volume of oil produced, which will be computed on the basis of the value of the oil, calculated according to the quotations for reference oils (CPC Blend, Brent, Urals, etc.) on the London International Petroleum Exchange during the fiscal period.
Taking into account the fact that the early stages of offshore projects are very capital-intensive, and in order to secure an adequate rate of return for investors, the oil production tax rates will be set by a technique which differentiates R-dependence from oil quotations on the exchange.
The tax base for the excess profit tax will be the contractor’s net profit for the fiscal period, after paying corporate income tax.
In order to encourage investment by taxpayers, the excess profit tax will be levied only on that part of their net profit not exceeding 10% of the accumulated non-reimbursable costs under the contract or, in the event that they are reimbursed in full, 10% of the increase in the value of fixed assets. The sums resulting from this benefit will have to be allocated to cover accumulated non-reimbursable investment costs or, in the event that these are reimbursed in full, to investment programmes. The excess profit tax rates will be fixed in the Tax Code.
All three models will be employed in the KSC development, with any amendments necessary for the enforcement of the third model being made to the existing tax laws. The Government reserves the right to select the contract type and tax treatment model for any particular contract.
The Development of Oil and Gas Export Routes
To date, the main operational export routes for the KSC are:
The Uzen-Atyrau-Samara main oil pipeline. In the light of the expansion of oil production in West Kazakhstan it is planned to increase the throughput capacity of the Atyrau-Samara section to 25 million tonnes by 2005. Another export channel that warrants development work is the Baltic Pipeline System (BPS), which will allow Kazakh oil to be transported to the Eastern European and Baltic markets.
The Caspian Pipeline Consortium (CPC). Since the Mediterranean should be a target market for high-grade oils from Kazakhstan, there are plans to upgrade the existing CPC facilities to an annual capacity of 38 million tonnes in 2005 (Kazakhstan’s share will be 28 million tonnes), 58 million tonnes in 2008 (43 million tonnes) and 67 million tonnes in 2011 (50.7 million tonnes).
Aktau Seaport. The current oil trans-shipment capacity at Aktau Seaport will be increased to 8 million tonnes per annum by building the necessary infrastructure and/or opening branches of the company at Bautino and Kuryk.
If the planned measures for increasing capacity are implemented, the existing oil transport systems will be adequate to handle all Kazakhstan’s oil output until 2009.
At the next stage in 2009 (when Kazakhstan will achieve an annual oil output of 92 million tonnes, including 21 million tonnes from the KSC), it will be necessary to lay the first new export pipeline. When output is further boosted to 140 million tonnes (64 million tonnes from the KSC), i.e. circa 2012, a second new export pipeline will be required.
The following routes are being considered for the above new pipelines:
• Aktau-Baku (to the Baku-Tbilisi-Ceyhan facility);
• West Kazakhstan-China;
For the export of natural gas, the most promising and feasible options are the Russian, Eastern and Western European, Asian and Pacific markets. A number of possibilities exist at present which may serve Kazakhstan’s export needs:
• the Russian Gazprom pipeline system for exports to the CIS and Eastern and Western Europe;
• the initiative to build a Trans-Caspian Kazakhstan-Turkmenistan-Azerbaijan-Georgia-Turkey gas pipeline for exports to Turkey and Europe;
• the initiative to build a Turkmenistan-Kazakhstan-China transit gas pipeline for exports to China and South-East Asia;
• the initiative to build a Kazakhstan-Turkmenistan-Afghanistan-Pakistan-India pipeline for exports to Pakistan and India.
The development of export routes envisages multimodal transportation of hydrocarbons using an efficient combination of pipeline, rail and sea transport.
The Social, Transport and Service Infrastructure
The expansion of offshore oil operations in the Caspian region is expected to bring about an influx of workers, which will involve a sizable migration of the able-bodied population.
The following objectives have been set for the development of the KSC’s social infrastructure in this regard:
• to provide adequate working conditions, security, sanitation, accommodation and catering facilities for workers employed in oil operations and supporting industries in the KSC;
• to develop the rail, road, air and other transport networks in the region (including strengthening existing routes);
• to set up business centres for support services in all residential areas, meeting international standards. These will be responsible for developing support services such as creating acceptable living conditions, security and modern communications.
The main tasks in developing utilities will be the reconstruction and expansion of the power, water, sewage and waste disposal systems. Public health control over commercial premises and residential housing will be reinforced, taking local climatic conditions into account.
Setting up a social infrastructure will provide jobs for the family members of the incoming workers, who will form the mainstay of workforce in the non-production sector. Since employment in offshore projects relies on rotational work schedules and is largely seasonal, recreation facilities and winter employment opportunities will have to be created in the region.
Measures to strengthen the transport infrastructure will include the rehabilitation of critical sections of road in West Kazakhstan and the building of the 402-km Khromtau-Altynsarino railway line and another branch from Mangyshlak station to the port of Bautino.
At a later stage, the tank wagon fleet of Kazakhstan Temir Zholy (the national railway) will have to be modernised and increased, new oil-loading terminals and railway stations built, and existing structures renovated.
The National Sea Navigation Company Kazmortransflot is designing and building three oil tankers with a deadweight of 12,000 tonnes. These vessels will be completed and launched in 2004. Two dry cargo vessels will be built in 2004-2006 with a deadweight of 5,000-5,500 tonnes; these are intended for operation in the Caspian. In addition, special-purpose ships will be built to meet the requirements of the planned sea transport workload.
The Aktau Seaport free economic zone has been established as a way of raising investment for social and economic development in the region, creating new jobs, encouraging private businesses, setting up high-tech production and creating transport and other infrastructure.
The priority tasks are to reconstruct the port of Aktau (including construction of a new harbour and more than 10 new special terminals), modernise the airports in Aktau and Atyrau which lie on international air routes, and reconstruct the Ural-Caspian canal in order to provide easy access to the port of Atyrau for shipping.
A store for fuel and lubricants with a capacity of 25,000 tonnes and a 120-m pier with a special pipeline for fuelling ships will be built on the east side of Tupkaragan Bay. The pipeline will be equipped to the requirements of the Marine Pollution Convention (MARPOL).
Development work will also be carried out in the Bautino district which has a convenient location suitable for building the second seaport in Kazakhstan; this will offer all the necessary cargo transport services.
Tupkaragan Bay is the home base for 75 ships of various types, and the expected increase in the number of auxiliary vessels will necessitate the construction of a dockyard there. Its facilities will include a floating dock, a slip for small vessels and shops for repairs and hull works.
In order to prevent any technical limitations on Kazakhstan’s exports by sea, oil-loading terminals will be built in the KSC. Bekovich-Cherkassky Bay, a natural ice-free harbour, is an excellent place for outer anchorage and berthing; the Bay is protected on three sides from winds and high seas.
Taking into account the short distance (25-30 km) to the main Uzen-Aktau Seaport pipeline, the port of Kuryk will be organised to serve as a trans-shipment point for oil arriving from various deposits in Kazakhstan.
The port of Kuryk will allow the distance between the shipment point in Kazakhstan and various destinations on the Caspian (particularly Azeri and Iranian ports) to be reduced by some 50-60 miles.
Kazakhstan’s experience in import substitution under onshore oil projects suggests that domestic input could account for 80-90% of operating costs and 50-60% of capital costs. Many Kazakh machine building and service companies are already operating at a competitive level.
The proportion of domestic materials, equipment and services in offshore oil operations will be further increased as a result of improving the quality of Kazakh products to international standards, broadening their range to meet the demand from project operators, employing Kazakh companies as subcontractors, introducing economic incentives such as tax breaks in order to promote high-tech products, equipment and services, and securing equal tax treatment of imported and domestic products.
In this context it will be necessary to formulate a contract strategy as regards Kazakh supplies and strengthen the contractual provisions that regulate import substitution and the use of domestic products and services other than those of natural monopolies.
The diversity of technology applied by various contractors in exploration, construction and production in the KSC, coupled with demand from the support and service infrastructure, provide a basis for the proliferation of small and medium-sized businesses in the region.
The demand for imports by offshore projects can also be used as a vehicle for promoting the export of domestically-manufactured raw materials and half-finished products by making trilateral and multilateral contracts. This option is recommended in cases where certain types of product are not available from Kazakh manufacturers. For example, metal supplies from Kazakhstan can be used widely in neighbouring countries for the manufacture of drilling equipment, pipes, seagoing vessels and offshore platforms for the KSC.
In order to promote domestic manufacture of oil and gas equipment and materials, provide quality services for offshore projects and co-ordinate the implementation of the import substitution policy, it will be necessary to transfer 50% of the shares in the Kazakh Contract Agency to the authorised capital of the National Company.
Employment and Training
Bringing the KSC on stream is expected to lead to the creation of new jobs in many sectors in the Caspian region. The forecast of job creation by phase is as follows:
• Phase 1 (2003-2005): 2620 jobs;
• Phase 2 (2006-2010): 16,530 jobs;
• Phase 3 (2011-2015): 25,390 jobs.
In addition, a considerable workforce influx into the Caspian region is expected.
From 2005 to 2015 the overall numbers of staff in offshore oil and gas projects will increase dramatically, a trend which indicates the disproportionately rapid growth of this sector.
Phase 1 will see the following developments:
• employment of foreign workers (with compulsory substitution by highly qualified Kazakh specialists);
• employment mainly of workers from the Mangistau and Atyrau Oblasts and migration of critical trained staff from other regions;
• employment of persons who have applied to local state employment agencies;
• accelerated training of Kazakh staff in offshore oil operations under skill upgrading programmes (3 months to 1 year) and at universities.
Foreign companies should be obliged to train 10 Kazakh nationals per foreign specialist employed.
• substitution of foreign specialists with Kazakh counterparts;
• retraining and skill upgrading of Kazakh specialists as necessary.
In Phase 3, staffing requirements will be fully satisfied by graduates of Kazakh universities and colleges.
Professional training will be provided by the KSC operators themselves and by educational institutions. Occupational guidance will be provided through authorised employment agencies, private recruitment agencies and the mass media, which will publish information on the professional and social prospects for workers in the oil and gas and supporting industries.
Occupational guidance in creating new offshore oil and gas enterprises will be based on the following principles:
• forming an industry- and region-specific workforce structure;
• priority employment of certain target groups;
• encouraging young specialists by placing them in challenging positions appropriate to their qualifications;
• horizontal and vertical staff rotation;
• training adequate numbers of offshore specialists in a timely manner and supplying the staffing needs of offshore projects by designing and implementing an industry-specific programme.
In order to provide the workforce for offshore oil and gas operations in 2005-2015, improvements will be made to:
• accelerated professional training;
• college education;
• university and postgraduate professional training.
The outlook for the oil and gas industry, the leading sector of the economy, calls for new approaches to workforce training.
In this regard it will be necessary to develop a technique for forecasting the demand for university graduates in the medium and long term.
The volume of government contract work for oil and gas educational institutions should be specified.
The practice of special educational grants provided by large companies should be expanded.
Educational institutions should introduce the industry’s experience in training highly qualified specialists, coupled with advanced Western educational technology.
In particular, attention should be paid to the UK system for training oil and gas industry specialists (the leading European system). Many British colleges and universities offer correspondence courses for upgrading skills in addition to the normal BSc and MSc programmes.
Since offshore operations should be safe as regards human life, the environment and offshore structures, the training of specialists, including the crews of vessels, should be conducted in accordance with international conventions and standards.
A marine training and retraining centre should be established to perform these tasks; it would award training certificates and international standard marine diplomas to its graduates.
The experience of the British National Training Organisation for Oil and Gas Extraction (OPITO) in developing and implementing training standards should be employed to the maximum possible extent. These training standards are recognised by the oil industry throughout the world.
It is possible that OPITO’s international practice of establishing training centres could be adopted here. It would operate to OPITO standards, with certification of training providers and inspection and audit of the centres being carried out by that organisation. The standards, however, would have to be adapted to the conditions existing in Kazakhstan.
The educational experience of the best foreign schools could be applied more widely in Kazakhstan. For example, the Kazakh-British Technical University was founded for this purpose, and the British side provides assistance in preparing oil industry specialists with university degrees. The KazFraMunai Kazakh-French Oil Centre was founded on a French initiative to train specialists in oil chemistry and refining to international standards, and to transfer experience in the use of the latest technology.
The above measures will allow the training of Kazakh specialists to be raised to a new level of quality.
The full-scale development of hydrocarbons and oil and gas processing in the Caspian basin are associated with upgrading the existing production infrastructure and opening new facilities, which in turn will result in a tremendous increase in human pressure on the environment.
In order to prevent the potentially disastrous impact of the planned offshore operations in the KSC, limits will be set on human pressure and an environmental impact assessment (EIA) will be carried out.
The following environmental protection and epidemiological measures will be implemented in a phased manner in 2003-2015:
• improving the legal framework and standards for minimising pollution from industrial sources;
• rehabilitating degraded water and coastal ecosystems, fish feeding and spawning sites and the habitats of commercially important animals;
• developing an efficient mechanism for the preservation and efficient use of biological resources in the Caspian and its coastal zone;
• improving general awareness of the environmental situation and securing public participation in decision-making.
The Programme envisages a ban on burning of gas, except for strictly limited periods during test production, well tests and following accidents. Burial of liquid wastes at sea and on shore will be subject to state examination of the proposed site and an environmental assessment.
A number of oil companies in the Caspian region are currently implementing measures to clean up production sites contaminated with black oil. Clearing the existing contamination sites and preventing the emergence of new ones will result in a substantial reduction in the present human pressure on the environment and stabilisation of the environmental situation in the region.
The application of modern competitive technology and adoption of international environmental and hygienic standards will also assist greatly in reducing the current levels of contamination.
All these measures are expected to lay the foundation for improving the state of the environment and rehabilitating the habitats of plant and animal life on land and water.
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