Bank TuranAlem and Oil and Gas Producers in Kazakhstan: New Outlook for Cooperation
Valery Nalobin, Corporate Banking Department, Bank TuranAlem
Over the last few years the dynamic development of the oil and gas sector has enabled Kazakhstan to become one of the leading CIS countries in terms of economic growth and attraction of foreign investments. Parallel with the oil industry, the banking sector is rapidly growing and receiving high credit ratings from international agencies. All this has resulted in establishing strong relations between transnational oil companies operating in Kazakhstan and leading domestic banks.
One of the examples of such cooperation is corporate banking and cash processing services, which TuranAlem Bank (BTA) provides to companies such as TengizChevroil (TCO), Karachaganak Petroleum Operating B.V., Petrokazakhstan, and CNPC-Aktobemunaigaz etc. The proficiency and growing capitalization enable Kazakhstani banks to provide a more comprehensive range of banking services. In the near future, the role of banks in providing banking services to large oil and gas projects should increase, especially in the sphere of optimizing the system of mutual payments between business entities. This also concerns issues of optimizing both tax payment systems and payments to contractors, or remote services rendered to project operators. Analysts believe that other equally promising directed activities of domestic banks such as BTA include financing small- and medium-size oil and gas projects and developing joint integrated programmes for financing contractors and subcontractors participating in large and medium-size oil and gas projects.
Importantly, the format and volume of banking services provided by Kazakhstani banks largely depends on the project scale. There are three categories of projects:
· Large projects developed jointly with international companies
· Medium-sized projects where international companies are shareholders
· Small projects developed mainly by Kazakhstani entrepreneurs at fields, which were abandoned or recognized as unprofitable during the Soviet era.
Large oil and gas projects are characterized by high capital intensity, i.e. the amount of investments is on the same scale as the National Oil Fund of Kazakhstan; lack of infrastructure for production, i.e. lack of roads and power lines. These projects are also characterized by an undeveloped industry for producing oil and gas equipment, not very favourable climate conditions, low population areas, lack of qualified personnel, etc.; long capital cost repayment period; and complex field structure. The recent high international prices for hydrocarbon materials have encouraged speedy development of oil and gas fields.
Large projects developed jointly with international companies are financed mainly by shareholders or large foreign banks. Cash flow is managed either by foreign banks or by their affiliated offices in Kazakhstan. Another important factor is that the cost of borrowing for international companies is much lower than for Kazakhstani companies, even ones with the participation of foreign capital.
Usually, the cost of implementing a large oil and gas project varies from hundreds of millions to tens of billions of US Dollars; therefore, at the moment the Kazakhstani banks are able to finance only small and medium-size projects, as the minimum risk for a single borrower does not exceed $100 million.
These figures illustrate the above point: in 2003 the total assets of the 15 largest banks in the country, which constitute over 80% of Kazakhstan’s banking system, have amounted to $14.39 billion, the banks’ own capital to $1.4 billion, and the total net loans $9.25 billion. Whereas in the same year, TCO, the Caspian Pipeline Consortium, Karachaganak Petroleum Operating B.V. and Agip KCO have attracted funds with a total worth of $9.65 billion.
In the meantime, there is a mutual interest between international oil and gas companies and domestic banks. Thus, TCO and Karachaganak Petroleum Operations B.V. are accepting securities issued by BTA without the confirmation of first-class Western banks. The volume of transactions using remote BTA terminals, installed in the offices of these companies, has increased. The amount of financing by contractors has also grown; BTA in cooperation with international companies has developed programs for supporting contractors. At a recent meeting in Atyrau, the BTA Chairman Erzhan Tatishev and TCO Director General Alexander Cornelius summarized the results of joint activities and discussed the programme for strengthening the cooperation and the possibilities of BTA participation in financing Caspian shelf projects.
Medium-size projects are distinguished by these characteristics:
·High investment requirements
·Partial development of production infrastructure (main infrastructure objects are being built by international companies in the framework of large oil and gas projects)
·Medium capital cost repayment period
·Speedy development of field reserves.
As a rule, foreign companies participate in these projects, which attract large foreign banks. The heightened attention and transparency requirement posed by these banks promote development of other forms of financing, such as loans from shareholders, direct financing by foreign banks against securities of large Kazakhstani financial institutions, and international trade financing (including pre-financing of oil and gas export), and issuing corporate bonds for internal and external securities’ markets.
One of the examples of successful cooperation between these types of companies and BTA is issuing and placing the corporate bonds of Karazhanbasmunai for a total worth of $75 million. TuranAlem Securities, BTA’s affiliated company, was the financial consultant and underwriter for this issue. Presently, BTA leads in the international trade financing sector and its limit on the credit lines from International banks exceeds $800 million.
In can be fairly said that the presence of foreign shareholders in the development of large and medium-sized oil and gas projects not only offers an opportunity for attracting ’cheap’ funds, but also provides access to new technologies in the sphere of production, development of services, management of cash flows, human resources, personnel training, etc.
And as far as small projects are concerned, the small amount of investments required for their implementation makes these projects not very attractive for foreign investors. On the other hand, Kazakhstani banks adapt a conservative approach to financing such projects. The necessity of minimizing risks could be explained by the insufficient transparency of these projects, as there is no clear knowledge of the financial state of a company, no results of an audit in accordance with international standards, the information on trade partners is confidential, cash flows are managed by several banks, etc.
BTA has divisions, which specialize in the sphere of financing oil and gas projects. It has branch analysts and highly qualified personnel with experience and knowledge in the fields of oil exploration and extraction, law and economics; and this lowers the risks associated with financing small projects.
Recently, a new fundamentally important tendency has emerged in the form of joint ventures in the petroleum industry. This tendency was caused by the necessity of lowering costs of hydrocarbon production and increasing product quality, as well as by higher quality service requirements. New joint ventures are being created using technical facilities of local companies and technology and brands of leading western manufacturers. The financing of such companies in the form of loans and international credit lines could become another promising direction of cooperation between domestic banks and transnational corporations. BTA plans to play one of the leading roles in this sphere by providing a whole range of banking services to growing companies.
A growing number of Kazakhstani companies have won international tenders and have become general contractors and subcontractors of projects for building infrastructure and field facilities. Consortium contracts are being concluded for certain types of activities. An example of this type of consortium is Alimbekmolaneftestroi established by organizations such as the Kazakh Oil and Gas Institute, Kazstroiservis, and Temirpipe, which have won a tender worth more than $61 million for development of infrastructure at Alimbekmola field. The financing of these companies is another trend in the development of BTA operations in the oil and gas sector.
Importantly, Kazakhstani companies, which enjoy constant Government support and use technology acquired in the course of cooperation, have successfully mastered the production of many types of products that meet international standards and are starting to compete more actively with foreign manufacturers. In this situation, the support to domestic companies, which participate in the development of the oil and gas sector infrastructure, is one of the priorities of BTA’s activities.
Finally, even though various objective and subjective factors presently exist that hinder the cooperation between oil and gas companies and Kazakhstani banks, we expect that in the next five years they will be successfully overcome.
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