The Oil and Gas Industry of Kazakhstan: New Objectives and New Priorities
The New Infrastructure for "Great" Caspian Oil
In autumn 2004 Kazakhstan took new steps in preparing the national oil and gas sector for commercial hydrocarbon production on the Caspian shelf. In particular, in September the Kazakhstani government approved the general plan for developing offshore oil production infrastructure, including measures for developing the infrastructure supporting offshore oil operations. According to the plan, the Caspian shelf will be developed in three stages: 2003 to 2005, 2005 to 2015 and then to 2040. In addition, the document takes into account the possibility of improving auxiliary production, social and environmental facilities. It is expected that realisation of the general plan will create the conditions necessary for the effective use of these facilities by oil and gas companies.
The need for infrastructure on the Caspian shelf will be determined by the growth of offshore operational activity. The facilities can be divided into two groups – basic and auxiliary.
The first group includes facilities that are mainly used by oil companies for supporting their operations, such as offshore support bases, industrial supply bases, marine tank terminals and export pipelines. The auxiliary infrastructure will not only maintain the implementation of oil and gas projects but will also be used for developing other branches of the economy and supporting the needs of the population (including power-supply systems, roads and housing stock).
Artificial islands (except for Abai and Kurmangazy structures) will be constructed for well drilling within the framework laid down for the construction of basic facilities in the northern and central parts of the Kazakhstani sector of the Caspian Sea (KSCS). By 2040 it is planned to construct 52 artificial islands in the northern part of the KSCS, where 1,132 wells of various types will be drilled. There will be 70 islands and 1,222 wells in the central part. Industrial frame-type oil platforms will be mainly used in the southern part of the KSCS.
At the same time it is proposed to construct a number of shared facilities to ensure the security of offshore operations on the shelf. First of all, a navigation control system is required. This system will provide safety for shipping in Tyub-Karagan gulf in accordance with the requirements of international conventions. It is planned that the system will include an onshore office, a position fixing station and a surveillance system.
Within the framework of the general plan, the Kazakhstani commercial fleet is to contain not less than 41 ships including oil carriers, dry cargo ships, large-capacity oil barges and tow-boats by 2015.
The National Operator Has Begun Reconstruction
According to leaders of the industry, the major role in developing the Kazakhstani oil and gas industry will belong to the national company KazMunaiGaz, which began to implement a programme of restructuring its assets in 2004. According to the president of KazMunaiGaz Uzakbai Karabalin, this programme is intended to run for three years and has the aim of creating a transparent and effective assets structure that will comply with the company’s business strategy.
The first step of the restructuring was to amalgamate the oil producing subsidiaries of the company – Embamunaigaz and Uzenmunaigaz – into Exploration & Production KazMunaiGaz. After merging these assets the company took the second place in Kazakhstan on volume of oil production. In the future this structure is planned to be integrated with Atyrau oil refinery and with the sales company KazMunaiGaz Trade House.
It is expected that the further restructuring of KazMunaiGaz’s assets will be implemented in two stages. During the first stage, 2004–2005, the company will remove its share from most non-specialised assets and assets with insufficient commercial potential. The main target at this stage will be to make the company’s control more effective by concentrating effort on the strategic assets. The expected result is that the company will have an interest in the business of only 26 non-specialised organizations.
In December 2004, within the framework of the programme, KazMunaiGaz sold its shares in Arman (Nelson Resources Company purchased 50% of the shares), Karakudukmunai (Turkish Petroleum bought 40% of the shares), KazMunaiGaz-Telf (Eastview Investment Ltd purchased 69% of the shares) and Gural (Batys Bailanys LLC bought 37.2% of the shares).
During the second stage the national oil and gas operator plans to remove its share from all non-specialised assets and assets concerned with non-specialised service activity. This stage will last from 2006 till 2007.
On realisation of the programme it is planned that KazMunaiGas will reduce its participation in associated organisations to a third of the present level with and will mainly work on exploring oil and gas fields in the Caspian Sea, improving the oil and gas infrastructure and modernising processing equipment.
According to the latest information from the Ministry of Energy and Mineral Resources, in 2004 Kazakhstan produced 59.17 million tonnes of oil and gas condensate, 15.4% more than in 2003. Volumes of oil production amounted to 53.8 million tonnes in the 11 months of this year, up 15.2% year-on-year. KazMunaiGaz subsidiaries produced 8.2 million tonnes of liquid hydrocarbons, including 5.65 million tonnes of oil and 24,010 tonnes of gas condensate by Uzenmunaigaz; 2.48 million tonnes of oil by Embamunaigaz and 17,564 tonnes of gas condensate by Amangeldy Gaz.
Enterprises in which KazMunaiGaz participates produced 14.65 million tonnes of oil in the reporting period, up 11% year-on-year. Traditionally, the greatest part (12.46 million tonnes) was produced by Tengizchevroil.
The production volumes of other oil producing companies reached 30.9 million tonnes of oil (18% more than in January-November 2003). Among these are Mangistaumunaigaz (4.78 million tonnes), CNPC-Aktobemunaigaz (4.85 million tonnes), and PetroKazakhstan Kumkol Resources (3.99 million tonnes). The indices of Karachaganak Petroleum Operating increased by 41% (up to 7.51 million tonnes).
In November 2004 Kazakhstani oil enterprises produced 5.187 million tonnes of oil and gas condensate, up 8.6% on predicted levels.
From January to November 2004, Kazakhstan exported 47.56 million tonnes of oil and gas condensate, up 19% year-on-year.
Production of gas also increased in Kazakhstan: in January-November 2004 it was up 45.8% year-on-year and amounted to 18.388 billion cubic metres(including natural gas production of more than 10.190 bcm). KazMunaiGaz subsidiaries produced up 11.1% year-on-year (1.282 bcm). Uzenmunaigaz produced 1.034 bcm, Embamunaigaz 80.96 mcm and Amangeldy Gaz 166.993 mcm. Enterprises in which KazMunaiGaz participates produced about 4.664 bcm of gas (110.3%) in the first 11 months of 2004. In particular Tengizchevroil produced 4.336 bcm (105.5%) and Kazakhoil-Aktobe 218.177 mcm.
Other gas producing companies of Kazakhstan achieved a very substantial increase in production, up 72.1% to 12.442 bcm. Karachaganak Petroleum Operating produced 8.021 bcm(154.3%), CNPC-Aktobemunaigaz 1.983 bcm (up 2.7 times) and Mangistaumunaigaz 189.004 mcm (110.1%).
In November 2004 alone Kazakhstani enterprises produced 1.96 bcm, including natural gas production of more than 1.218 bcm. It is significant that these indexes exceeded the planned values by 31.3%.
According to the latest information, gas production in 2004 reached 20.5 bcm, up 45.9% year-on-year.
In January–November 2004 oil refining in Kazakhstan amounted to 8.575 million tonnes, up 6% year-on-year. Since the beginning of 2004 Pavlodar and Atyrau oil refineries have increased the refinery crude run up to 2.683 million tonnes (up 17%) and 2.669 million tonnes (up 26%) respectively. By contrast PetroKazakhstan Oil Products (PKOP, former Shymkent oil refinery) reduced its production volumes to 3.223 million tonnes (down 12%).
Over 11 months petrol production in Kazakhstan increased by 3% and amounted to 1.74 million tonnes. Pavlodar oil refinery produced 713,000 tonnes (120%), PKOP 677,300 tonnes (84%) and Atyrau oil refinery 350,600 tonnes (121%). Also during this period Kazakhstani oil refineries produced 2.554 million tonnes of diesel fuel, up 6% year-on-year. Pavlodar oil refinery produced 772,900 tonnes (124%) of fuel, PKOP 1,005,200 tonnes (88%) and Atyrau oil refinery 776,400 tonnes (121%).
Production of fuel oil decreased by 12% from the beginning of the year and amounted to 2.302 million tonnes. Over 11 months Pavlodar oil refinery produced 612,800 tonnes (100%), PKOP 824,200 tonnes (66%) and Atyrau oil refinery 865,600 tonnes (117%). Production volumes of aviation kerosene reduced to 256,700 tonnes (down 9%). Production of liquid gas amounted to 1.109 million tonnes (118% in comparison with the last year) and coke 118,200 tonnes (127.5%). During this period 49,900 tonnes of bitumen (98%), 240,000 tonnes of stove fuel (94%) and 246,100 tonnes of vacuum gas oil (up more than 4.3 times) were produced in the country.
The Oil Moneybox of Kazakhstan: the New Accumulation Mechanism
According to experts, if the present rates of growth are maintained, the oil and gas sector in Kazakhstan will play the leading role in developing the country's economy in the future. This raises the problem of organising more effective use of the income from production and exports of Kazakhstani hydrocarbons.
In particular, Astana considers that the optimum model is one in which all tax receipts from the production and export of oil will be transferred to the National Fund (NF).
With this in mind, a project for the medium-term development of the NF was considered on November 25 at a meeting of the Economic Policy Council (a consultative body under the Head of State) and at a meeting with members of the NF Management Council on December 7. This project was worked out on the orders of the Head of State by an inter-ministerial working group of the Ministry of Finance and the Ministry of Economy and Budget Planning, with the participation of experts from the Financial Institutions Association of Kazakhstan, the World Bank and Harvard University.
According to the President of Kazakhstan Nursultan Nazarbayev, the National Fund was organised, on the one hand, to ensure uniform use of income from non-renewable resources by present and future generations, and on the other, for converting this income into financial assets which will return regular proceeds in the future. The market value of the NF assets currently amounts to $4.7 billion, having increased by 28% since the beginning of the year.
The Prime Minister of Kazakhstan Danial Akhmetov declared that the suggested model for forming the NF assets would allow the budget to be balanced, for “the non-oil deficit formed between budget expenditure and income in other branches of the economy will be met by transfers from the fund”.
The Head of Government emphasised that, when using the balanced budget method, “firstly, the budget stays independent from world prices for oil and other raw materials; secondly, there is the positive factor of synchronising budget expenditure with income of the non-oil sector”.
In addition, according to the Head of State, the new model for forming the National Fund assets must have a well-defined mechanism for determining an assured transfer from the NF to the budget in the medium- and possibly long-term future. He noted that it would be necessary to consider the problem of avoiding depletion of the NF in order to “preserve accumulated savings and increase them as much as possible”.
The President emphasised that it was necessary "to define the investment strategy of the National Fund properly and show its specific asset management policy”. So in future it will be necessary to aim to reduce the country’s debt and increase the capacity of the NF to cause an economic effect from the savings. Nursultan Nazarbayev cited the experience of Norway, where “the ratio between the government debt and the assets of the Petroleum Fund ranges from 33% to 40%”.
The Head of State believes that it is necessary to diversify the monetary portfolio of the NF, increasing savings in different convertible currencies.
It is expected that the new pattern of forming the capital of the National Fund will be introduced not earlier than in 2006.
The National Fund, organised in Kazakhstan in 2001, accumulates contributions coming to the national budget above the planned level from the largest enterprises in the raw material (oil and metallurgical) sectors of the economy. In addition, from the middle of last year, the Fund has been accumulating proceeds from the sale of state property.
On 23 April 2004, the President of Kazakhstan signed the Budget Code stipulating the new mechanism for forming the NF assets, according to which, from 2005, the replenishment of the Fund's assets will be carried out only through the national budget.
The Fund exercises saving and stabilising functions. In the event that the budget is not implemented, any shortfall in finances is made up from the NF.
The Government of Kazakhstan expects that 243.5 billion tenge will flow into the National Fund in 2005–2007.
The Subsoil Use Law Changed Again
On 2 December 2004, the President of Kazakhstan signed the law on amending some legislative acts relating to the subsoil use and oil operations. The law regulates the priority right of the state to buy out the right to subsoil use and/or shares in mining projects, including those producing hydrocarbons. This principle will be applied both to existing and future subsoil use contracts.
The new regulation reads: “In order to preserve and strengthen the resource and energy base of the country, in newly and previously executed contracts the state has the priority right above any another party to the contract or participants in a legal entity enjoying the right to subsoil use or other persons to purchase the alienable right to subsoil use (or part thereof) and/or a share in a legal entity enjoying the right to subsoil use, on conditions not worse than those proposed by other purchasers”.
Meanwhile, this Law aims to perfect the state system of regulation of legal relations in the field of subsoil use and to eliminate a number of legal omissions. The document introduces amendments to the laws in effect On Oil, On Mineral Resources and Subsoil Use, and On Environmental Protection. These stipulate the transfer of mining licensing functions from the government to the authorised state body (currently the Ministry of Energy and Mineral Resources).
The law introduces a number of fundamental regulations: a recurring tender for subsoil use may be acknowledged valid even if only one tenderer participated; the restrictions relating to financing of geological investigations by the national budget alone are eliminated; a subsoil user becomes obliged to cease all operations if a threat to the life and health of the public arises and not resume the work until safe conditions have been created and the threat eliminated.
In accordance with the Law, KazMunaiGaz has the right to represent the state interest in contracts with oil and gas operators through the obligatory share of not less than 50%.
Amendments include a number of regulations obliging subsoil users to prevent above-standard losses of mineral resources when mining and processing mineral raw materials and not to carry out selective processing of mineral resources.
In addition, the law contains requirements on protection and effective use of mineral resources, and regulations stipulating the penalties for infringing these requirements.
In addition, subsoil users will be obliged to employ a fixed quota of Kazakhstani specialists within the total number of employees and to purchase a set volume of goods and services produced in Kazakhstan, provided that they comply with international standards. It is anticipated that the definite percentage of the “Kazakhstani content” in mining contracts will be set separately in by-laws.
According to experts, the changes made to Kazakhstani legislation have given Astana extra leverage on contractors, allowing the state to control the implementation of joint investment projects in the field of subsoil use more effectively.
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