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  KAZAKHSTAN International Business Magazine №3, 2005
 The Rise of Kazakhstan on the Global Stage
The Rise of Kazakhstan on the Global Stage
Valentina C. Kretzschmar, Analyst, Wood Mackenzie
Over the past decade, Kazakhstan’s position as a global oil and gas player has rocketed, placing it firmly amongst the most prolific oil and gas producers in the world.
Wood Mackenzie’s Global Oil and Gas Risks and Rewards Study (GOGRR), which compares exploration performance and returns for International Oil Companies (IOCs) in 58 countries between 1994 and 2003, ranks Kazakhstan number one in terms of: commercial reserves discovered, average discovery size, reserves discovered per well and finding costs per boe.
However, high transportation costs and a tough fiscal regime mean that investors must settle for a smaller share of the value created by these huge discoveries. This leaves the investor with the dilemma of pursuing materiality (large reserves) or profitability (high unit value reserves).
Moreover, the introduction of harsher fiscal terms in 2004, did nothing to attract additional investment. Although these terms have now been improved, the level of interest in Kazakhstan’s proposed 2007 offshore licensing round will be the true test of its ongoing attractiveness. But will it be enough to keep its number one position?
A Global Impact
Commercial reserves discovered in Kazakhstan between 1994 and 2003 account for almost a quarter of the world’s commercial reserves discovered in this period. For comparison, the three next most prolific areas, all of which are deep-water zones (USA Gulf of Mexico, Nigeria and Angola) together accounted for a further 31% of commercial reserves discovered (Chart 1).
The super-giant Kashagan discovery represents the largest single commercial find. Out of the 26 giant oil fields (i.e. those with more than 500 million barrels of oil) discovered by IOCs, 18 of them were in Kazakhstan and the deep-water areas.
Unit Costs Appear Low, but Transportation Costs Are High
Finding costs per barrel of reserves discovered tend to reflect the gross level of reserves found, with lower finding costs driven by large-scale discoveries and vice versa. Considering the super-giant discovery Kashagan, it is not surprising that the lowest finding costs in the world were recorded in Kazakhstan, at US$0.04/boe. This is despite the technical and environmental challenges of exploration in the Caspian Sea.
The sheer size of Kashagan’s reserves also influenced unit capital costs, which appear much lower than the global average.
Generally, areas with low capital costs tend to have low operating costs and vice versa. However, Kazakhstan does not conform to the overall trend, mainly due to its remoteness from markets and the low average capital and field operating costs are offset by high transportation tariffs (Chart 2). 
The high cost of transporting Kazakh crude to European and US markets means that Kazakhstan’s average unit operating costs are among the highest in the world.
Wood Mackenzie estimates transportation costs in Kazakhstan range from US$3.50/bbl to over US$9.00/bbl. However, ultimately, it is the net-back achieved from each of the export routes that will determine which is most profitable and, hence, most attractive to producers.
We believe that the BTC and CPC are the most profitable routes, achieving netbacks of ca. US$23.00/bbl and US$25.00/bbl respectively, whilst the routes to China and Batumi are much less competitive, achieving netbacks of around US$17.00/bbl and US$19.00/bbl respectively (Chart 3).
Fiscal Terms Are Tough
In addition to the cost challenges posed by operating in Kazakhstan, there are no lenient fiscal terms. Wood Mackenzie’s recent study ‘Global Oil and Gas Risks and Rewards’ found that Kazakhstan falls into category of countries with a very high Government Take, in excess of 80%. The study found that average Government Take from commercial discoveries under base price assumptions varies from 25% in Ireland to over 95% in Myanmar (Map 1).
An additional factor driving differences in Government Take from oil and gas production is an area’s reliance upon hydrocarbon revenues relative to other sources of income. Many Middle East and North African countries rely heavily on income from oil and gas production and are, therefore, very keen to extract as high a proportion of the value as possible from development of the resources. Kazakhstan, whose fiscal regimes look similar to those in North Africa and the Middle East, must continue its efforts to avoid over-reliance on oil sector revenues (often referred to as ‘Dutch disease’). 
Value Is Not Proportionate to Reserves
Government Take, however, needs to be looked at in the context of the value created – if the prize is large enough, then even a smaller proportion of it may be attractive enough to investors. 
Chart 4 shows the relationship between the total commercial reserves discovered and their potential value to investors (NPV10 under the base price assumption). 
USA GoM (Gulf of Mexico) stands out in the list of most successful exploration areas in the study because of the significantly higher value created (25% of the global total) compared to its share of reserves discovered (9% of the global total). This occurs partly as a result of the smaller average discovery size (and hence shorter production profile and development lead times), but primarily because of the significantly lower Government Take.
By contrast, the enormous Kashagan field in Kazakhstan – which is expected to produce for at least 55 years and has very high transportation costs – generates a relatively low value per boe. As a result, Kazakhstan’s share of total value (4%) is considerably lower than the area’s contribution to total reserves discovered (18%).
This dramatic contrast between the results for Kazakhstan and GoM deepwater highlights an ongoing dilemma for all investors – whether to pursue materiality (large reserves) or profitability (high unit value reserves).
Hot and Cold
As far as materiality is concerned, Kazakhstan ranks very highly, with its enormous volumes of commercial reserves discovered and very high total value created (Map 2).
However, in terms of profitability and unit value created, Kazakhstan drops significantly in its ranking, mainly because of the high level of Government Take (Map 3).
Prospects for the Future
Until January 2004, fiscal terms for Kazakhstan’s major projects (Kashagan, Karachaganak and Tengiz) were generally accepted to be tough but fair, reflecting the scale and quality of resource.
However, new offshore blocks are expected to offer more modest potential and longer lead times to development, given the infrastructural demands of existing projects. Many investors feel that these additional challenges should be reflected in a more lenient fiscal regime.
Conversely, the introduction of the 2004 Tax Code, even with its 2005 Amendments, have imposed a higher burden on future investors. As a result, no new exploration contracts have been concluded under the new terms and Kazakhstan is in danger of losing its appeal as a ‘must have’ exploration opportunity.
Wood Mackenzie’s analysis of a 13 billion barrel model project shows that the Government Take under the current PSC regime appears slightly tougher than when modelled under the pre-2004 PSC regime (similar to Kashagan terms) – this is despite the increased technical risks and uncertain exploration potential (Chart 5).
The Kazakh government’s attempt to improve the tax terms by introducing the 2005 amendments, as well as draft proposal for 2006 tax terms amendments, shows its willingness to listen to investors and try to find a balance where the State will get its rightful share of oil and gas revenues, but investors will also be able to operate profitable projects.
In 2007, the Kazakh government plans to offer 200 offshore blocks in the North Caspian shelf and aims to attract around US$30 billion of foreign investment. The success of the tenders will be a true test of attractiveness of the new fiscal regime.

Table of contents
The Rise of Kazakhstan on the Global Stage  Valentina C. Kretzschmar 
SAP’s Solutions for Kazakh Business  Jacob Korobko, Alnur Zhetbayev 
The Origin of Brands  Al Ries, Laura Ries 
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