Kazakhstan's Oil Sector: Events and Facts
The beginning of this year was marked by events that illustrated the attractiveness of Kazakhstan’s oil and gas sector for domestic and foreign investors. A number of long-term contracts have been signed, and new production plans have been adopted envisaging a material increase in the output and export of hydrocarbons. The development of Tengiz and Karachaganak, the bringing on stream of the high-potential offshore structures in the Caspian shelf, the efficient operation of the region’s largest CPC export pipeline, and the modernisation of the Atyrau Refinery, one of the oldest in the country, are all named among the priority projects. The events of the first quarter of 2004 have proved the correctness of this view.
Dostyk For Two
The visit to Astana by Russian President Vladimir Putin on 9-10 January this year provided a new impetus for Russo-Kazakh co-operation in the oil and gas sector: KazMunaiGaz and Lukoil singed a contract to found a consortium for developing promising blocks in the central part of the Kazakh sector of the Caspian. The joint project that was entitled Dostyk (Kazakh for “friendship”) will begin during this year. In accordance with the contract, the Russian company purchased a 50% interest in the production sharing agreement for the Tyub-Karagan block and in the agreement for geological exploration in the neighbouring offshore structure Atashskaya. KazMunaiTeniz and Lukoil Overseas, affiliates of KazMunaiGaz and Lukoil, respectively, will develop the two structures.
Tyub-Karagan has an area of 1,168 km2. It lies 40 km northwest of the Kazakh port Bautino. According to preliminary estimates, the recoverable reserves of Tyub-Karagan amount to about 150 million tonnes of reference fuel. The parties estimate the likelihood of the presence of hydrocarbons in the contract area as high.
Atashskaya has an area of about 8,400 km2. The contract area includes the Mesozoic structure Atashskaya (80-85 km from Bautino), and the structures Kazakhstan and Maral (35 km from Fort Shevchenko). It is deemed likely that other commercially important structures will be found as a result of additional exploration work in the eastern part of the area. Recoverable reserves are estimated at 130 million tonnes of reference fuel as a minimum.
The Dostyk project will be implemented in two phases. During phase one, seismic studies will be carried out and appraisal wells will be drilled, and field construction and production will commence with phase two. The parties will undertake to perform all work in compliance with international environmental, health and safety standards.
In the event of commercial discovery of hydrocarbons, capital costs under the project (given a 40-year PSA) will amount to $1.7 billion with operating costs of $2.1 billion. The tax revenue is expected to total about $3.5 billion.
The contract provides that Russian and Kazakh companies and individuals will be preferred when selecting subcontractors and hiring personnel for the project. Subcontractors will be required to provide professional training to Kazakh specialists and maintain a special fund from which grants will be paid to students to an annual total of $340,000 in the initial four years and $500,000-540,000 afterwards.
Vagit Alekperov, President of Lukoil, said that the Dostyk project will become a milestone in implementing the company’s strategy in Kazakhstan, one of the focuses of its overseas interests.
Independent experts agree that Dostyk is a crucial element of the investment policy of Kazakhstan in the context of developing the Caspian shelf. Another long-term project in the region will function as an indicator of the investment attractiveness of the national oil and gas sector. As importantly, Dostyk will encourage other investors, including those from Russia who are developing the Kurmangazy, Khvalynskaya and Central structures and implementing the pilot North Caspian project, to assume a more active role.
Kashagan: In Just Three Years?
On 25 February, Kazakhstan and the international consortium Agip KCO finally settled the yearlong dispute over the commencement date of commercial production in Kashagan. In addition to the existing 1997 PSA, some documents have been signed that amend materially the implementation plan of the North Caspian project.
The North Caspian consortium was founded in 1997. The initial PSA made for a period of 40 years, covers a contract area of 6,000 km2 composed of four oil bearing structures: Kashagan, Kalamkas, Aktoty and Kairan, which in turn are divided into 11 offshore blocks.
To date, Agip KCO is comprised of the project operator ENI (16.67%), TotalFinaElf (16.67%), ExxonMobil (16.67%), Shell (16.67%), Inpex (8.33%), Phillips (8.33%) and BG (16.67%). The latter announced in 2003 its intention to withdraw from the project, and its interest is now to be taken over by the other stakeholders.
In June 2002, Agip KCO officially announced a commercial discovery in Kashagan. The consortium estimates the recoverable reserves at 7-9 billion barrels and total geological reserves at 38 billion barrels.
At the end of 2002, the State Commission for Reserves registered Kashagan’s recoverable reserves, classing them as C1+C. These include 1,647.9 million tonnes of oil, 884,000 tonnes of gas condensate and 969 billion m3 of gas.
During 2002-2003, commercial inflows were secured at the Offshore Kalamkas, Kashagan Southwest-1, Aktoty-1 and Kairan-1 sites.
Prior to signing the additional agreement, the Kazakh party insisted that the consortium should proceed to commercial production under the project in 2005. However, the new agreements provide that commercial production will be postponed for 2-3 years. In other words, the first barrels of Kashagan oil will reach the international market not in 2005 as was hoped for by Astana, but in 2007, or, if more technical problems are encountered, in 2008.
To sweeten the pill, the investors came up with a new implementation plan and budget for the North Caspian project. It has been agreed that during phase one (until 2010), commercial production in Kashagan will be 450,000 barrels per day (21 million tonnes per annum). These figures will be increased to 900,000 barrels per day and 42 million tonnes per annum towards 2013 through the expansion of the eastern part of the deposit. The peak production of 1,200 barrels per day (56 million tonnes per annum) will be achieved in 2016.
Specialists from Agip KCO maintain that the accelerated production envisaged in the additional agreement will heavily reward the Kazakh party for the missed profit resulting from the delay, and secure additional tax revenue. Naturally, the new production plan entailed a revision of capital investments in Kashagan. The new project budget includes total investments in the full-scale development of the contract area of $29 billion (compared with the initial $20-25 billion).
In parallel, Agip KCO agreed to pay an indemnity to Kazakhstan, which, according to Finance Minister Yerbolat Dosayev, amounts to $150 million.
Although it is hardly possible to conclude for sure whose interests will be favoured by the new terms in the more distant future, to date, as Prime Minister Daniyal Akhmetov put it, “the agreement that has been reached is satisfactory to all the stakeholders”.
Oil Statistics: the Reality and Plans
According to official plans, in 10 years annual hydrocarbon production on the Caspian shelf will be boosted to 100 million tonnes, which is two thirds of the national oil output. Such is the outlook, however currently all Kazakhstani oil comes from onshore deposits. Despite the fact that most of the deposits have passed their production peaks, Kazakhstan intends to produce in 2004 some 54 million tonnes of oil, a 19% increase compared with the previous year. These figures were voiced at a session of the Ministry of Energy and Mineral Resources on 11 March 2004.
In January-February 2004, oil and gas condensate production totaled 9.1 million tonnes, which is a 12% increase compared with the same period of the previous year. Of this figure, 1.33 million tonnes was produced by KazMunaiGaz’ subsidiaries Uzenmunaigaz (690,000 tonnes of oil and 4,440 tonnes of gas condensate) and Embamunaigaz (431,600 tonnes of oil). Other companies in which KazMunaiGaz has its interest produced a total of 3.77 million tonnes of hydrocarbons, including 2.27 million tonnes by Tengizchevroil and 1.15 million tonnes by Karachaganak Petroleum Operating B.V. Production by other Kazakh oil companies amounted to 4.39 million tonnes in aggregate (113.8% of the 2003 production), the largest producers being Mangistaumunaigaz (0.82 million tonnes), CNPC Aktobemunaigaz (0.86 million tonnes) and PetroKazakhstan Kumkol Resources (0.71 million tonnes).
Gas production in January-February 2004 exceeded the respective figure of 2003 by 43.5% and amounted to 3.2 billion m3 (including over 1.5 billion m3 of natural gas). 194.633 billion m3 of gas was produced by subsidiaries of KazMunaiGaz, which is only 95.3% of the previous year’s figure, including 178.92 million m3 by Uzenmunaigaz and 15.713 million m3 by Embamunaigaz (95.4% and 94.1%, respectively). Mention should be made of a 19.1% increase in production by companies with KazMunaiGaz’ interest. Namely, Tengizchevroil produced 792.245 million m3 (105%), Karachaganak Petroleum Operating 1,193.979 million m3 (127.5%), Tenge 11,909 million m3 (109.6%) and Arman 3.32 million m3 (86%). An increase in gas production was also achieved by Mangistaumunaigaz (31.8 million m3 or 112.4%), CNPC Aktobemunaigaz (355.986 million m3 or increase of 2.8 times) and PetroKazakhstan Kumkol Resources (59.577 million m3 or increase of 5.6 times).
The material increase in oil and gas output was accompanied by an expansion of Kazakhstan’s energy exports. In 2003, oil and gas condensate exports totalled 44.338 million tonnes of oil and gas condensate, which is a 13% increase compared with 2002. In January 2004 some 5.1 million tonnes of oil and gas condensate was marketed internationally (a 50.6% increase compared with January 2003). In money terms, in January 2004 Kazakhstan exported $848.7 million worth of hydrocarbons.
In 2004, in addition to the plans to expand hydrocarbon production, the Kazakh Government declared new priority goals of enhancing the quality of raw material processing and geological exploration of certain structures holding high potential.
In the near future, construction work will be commenced under the project to reconstruct the Atyrau Refinery. Phase two of the Amangeldy gas deposit project will be continued with the goal of achieving a production level of 350 million m3 in 2004. In the first half of the same year, installation of an associated gas facility at Akshabulak, construction of the Akshabulak-Kyzylorda pipeline and a gasification project in the city of Kyzylorda will all be completed.
Also in this year, geological studies will be commenced in the South Zhambai, Abai, Rakushechnoye and Kazakhstan structures (with Government investments of 2.1 billion tenge), and gas deposits in the coal basins of Karaganda Oblast will come under development (these are estimated to contain some 500-1,000 billion m3 of methane gas).
KazMunaiGaz: the Right Time for Change
In accordance with the corporate plans of KazMunaiGaz, its affiliates Embamunaigaz and Uzenmunaigaz were merged in early 2004. The company’s senior management comment that the resulting entity will be Kazakhstan’s second largest owner of recoverable oil reserves (275 million tonnes) capable of competing with foreign companies in Kazakhstan on equal terms.
The capitalisation of the new company will exceed that of Uzenmunaigaz and Embamunaigaz by 1.5 and 3 times, respectively. This will enable the company to raise long-term investments for capital-intensive projects which could not be handled by the two merged subsidiaries on their own.
On 10 March of this year KazMunaiGaz (together with Uzenmunaigaz and Embamunaigaz) signed a loan agreement with BNP Paribas Suisse SA and Euromin SA for a total of $300 million. The “structured pre-export financing” will be made available at LIBOR + 1.75% for five years.
The loan is intended to support KazMunaiGaz’ investment programme until 2006, which is estimated at $1.3 billion, and some exploration projects on the Caspian shelf. The loan is secured with the future cash flows under the export contracts of KazMunaiGaz’ subsidiaries.
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