Oil Chronicles. Wind of Change
Despite high world oil prices, Kazakhstan only slightly increased its output of hydrocarbons in 2007. For example, the country increased oil output by 2.2%, natural gas production by 10.8% and gas condensate output by 11.6% in 2007.
Oil and Gas Extraction
According to the Kazakh Statistics Agency, Kazakhstan extracted 55.55 million tonnes of crude oil and 11.91 million tonnes of gas condensate in 2007. This is up by 2.2% and 11.6% from the previous year respectively.
Gas output totalled 29.22 billion cu m, up by 10.8% on 2006. In particular, natural gas output stood at 16.67 billion cu m (a 15.7% growth), while its marketable volume was 9.57 billion cu m (a 1% decrease). Associated gas output increased by 4.8% to 12.55 billion cu m.
Production of Petroleum Products
Kazakhstan produced 2,634,800 tonnes of petrol (including jet fuel) in 2007, a 12.3% growth on 2006. Kerosene production (including aviation kerosene) jumped by 22.6% to 384,400 tonnes, while gasoil production increased by 10.4% to 4,292,000 tonnes. However, fuel oil output dropped by 22.4% to 2,585,000 tonnes.
Shipment of Hydrocarbons
The freight of the main pipelines reached 87,783.5m tonne-km in 2007, up by 5.4% from the previous year. The freight of the oil pipelines was 42,281m tonne-km (up by 6% thanks to oil shipment through the Kumkol-Atasu-Alashankou pipeline) and the freight of the gas pipelines was 45,502.5m tonne-km (a 4.8% growth thanks to an increase in shipment through the Bukhara-Ural and the Soyuz-Orenburg-Novopskov pipelines).
At the same time, from 1 January 2008 the tariff to pump oil through the KazTransOil system of pipelines went up by 24.9%. The national operator’s press service has said that the tariff to pump a tonne of oil exported for 1,000 km now stands at 3,015 tenge before VAT (2,413 tenge earlier), but the tariff to supply oil to the domestic market did not change from 1,303 tenge before VAT. The Caspian Pipeline Consortium shipped 32.6 million tonnes of oil for exports at its sea terminal near Novorossiysk in 2007, 4.8% more than in 2006. The consortium loaded 315 tankers. In total, since it was commissioned in October 2001, the pipeline shipped over 143 million tonnes (over 1 billion barrels) of oil.
Investment in the Sector
Investment in basic capital reached 3,234.2bn tenge in Kazakhstan in 2007 (an 8.2% growth). Hydrocarbons extraction and services in the oil and gas sector remained the most attractive sectors to investment – they accounted for 27.9% of total investment. For example, the transport and telecommunications sector accounted for 12.4%, while the processing sector accounted for 10.5%.
Significant growth in investment in basic capital was observed in the following regions: West Kazakhstan Oblast by 41.2% (thanks to investment in developing the Karachaganak gas condensate field), Kyzylorda Oblast by 36.5% (in connection with an increase in investment in developing oil fields), Kostanay Oblast by 28.9% (reconstruction and purchases of equipment by major industrial enterprises) and South Kazakhstan Oblast by 25.5% (as a result of a growth in investment in uranium mines). Meanwhile, due to the completion of a number of investment projects a reduction in investment was registered in Mangistau Oblast (by 14.5%) and Atyrau Oblast (by 2.3%). However, it should be noted that the bulk of foreign investment (66.1%) was still placed in Atyrau Oblast.
Sources of investment in fixed assets were enterprises’ equity funds (54.4%), foreign investment (18%), budget funds (15.7%) and loans (11.9%).
Private enterprises (60.9%) and foreign companies operating in Kazakhstan (23%) placed the most investment. The public sector accounted for 16.1% of total investment.
Entering the New Year with New Contracts…
In January 2008, the Kazakh Ministry of Energy and Mineral Resources and Russia’s Gazprom reached an agreement on a scheme to supply Karachaganak gas to the Orenburg gas-processing plant.
According to the new agreement, the entire gas supplied by Uzbekistan under a trilateral agreement will be sold to Gazprom which, in turn, will sell it to Kazakhstan to supply to our southern regions, while at the same price and in the same volume the KazRosGas joint venture will supply Karachaganak gas to the Orenburg plant for processing. Kazakhstan and Uzbekistan agreed Uzbek gas supplies to Kazakhstan at a price of $85 per 1,000 cu m in 2008.
Deputy Minister of Energy and Mineral Resources Lyazzat Kiinov has said that the Kazakh government has met the Russian side half-way and left the price of Karachaganak gas unchanged, and it will supply it to the Orenburg plant at $55-60 per 1,000 cu m in the first half of 2008. He stressed that KazRosGas was currently selling dry purified gas produced by this plant at $165 per 1,000 cu m. “I think that there will be the opportunity to review this price later,” Mr Kiinov said.
Russia and Kazakhstan signed an intergovernmental agreement on setting up a joint venture from the Orenburg gas-processing plant to process gas from the Karachaganak field in October 2007. The KazMunaiGas national company and Gazprom intended to set up this joint venture by the beginning of 2008.
The Kazakh company is expected to pay $350 million for a 50% stake in the new enterprise. The Russian side contributed the plant’s assets as its share in the joint venture. In addition, the sides are expected to invest $250 million each ($500 million in total) in modernising the Orenburg gas-processing plant.
The joint venture was set up with the compulsory conclusion of long-term (at least, 15-year-long) agreements on buying and processing Karachaganak gas in an amount of at least 15 billion cu m a year and selling gas processed to Russia and Kazakhstan, and exporting it using a single channel – Gazprom.
The Orenburg plant with a capacity of 37.5 billion cu m of gas a year processes about 17 billion cu m of gas a year. That is why additional gas supplies from the Karachaganak gas condensate field makes it possible to fully load this plant.
Given that Karachaganak gas is heavy, the creation of the joint venture and the increase in gas processing will ensure the work of all existing and future capacities of the gas-processing plant in the long-term. The plant is expected to reach its maximum capacity (of 30.6 billion cu m, including 15 billion cu m of gas from Karachaganak) in 2012.
And a New Environmental Code
From 2008, the Kazakh Ministry of Environmental Protection will be issuing permission for emitting pollutants to business entities only if they have long-term comprehensive environmental protection programmes. This is a requirement of the new Environmental Code which came into force on 1 January 2008. Its provisions envisage issuing permissions for emitting pollutants for a period of three to five years depending on the category of facilities and the term of validity of ecological requirements.
In connection with this, the Ministry of Environmental Protection intends to set stricter quotas for emitting pollutants for oil companies operating in the Kazakh sector of the Caspian Sea shelf and will set heightened requirements for their industrial environmental protection checks.
Full Stop in Dispute over Kashagan
On 14 January 2008, participants in the Agip KCO consortium signed a new memorandum of understanding. A press release distributed by KazMunaiGas says: “The new memorandum that implements the provisions of the memorandum signed on 20 December 2007 confirms agreements based on accords reached in December regarding economic changes in the Production Sharing Agreement and the operational model of future oil operations at Kashagan.”
In particular, the document fixes the consent of all commercial participants of the consortium to transfer parts of their stakes to KazMunaiGas’s subsidiary, which will bring its stake in the Production Sharing Agreement to the level of major participants in the project as of 1 January 2008. According to the press release, the sides are currently continuing to draft corresponding amendments to the Production Sharing Agreement and ensure their adoption. Operations will be continued in line with new accords.
“This successful completion of the long and difficult negotiations which were launched last August has found the direction of future activities on the Kashagan project,” the press release stressed.
Kazakh Minister of Energy and Mineral Resources Sauat Mynbayev has said that as a result of the negotiations a new company will become an operator in the Kashagan project and this company will be set up by all participants of the Agip KCO consortium. “Strictly speaking, the operator will change. There will be a new operating company which will be created by all participants of the consortium, but Eni will be responsible for completing the exploration and industrial stage, but under the supervision of the new operating company. How the functions of various participants will be distributed in the future will be a subject of future negotiations without any fundamentally disputed moments. This is a subject of clarification until May,” the minister said.
The consortium also agreed to pay the Kazakh government compensation (which is expected to be $3.5 billion on average depending on oil prices at the launch of commercial production) in case of overspending and delays in terms. Eni will preserve single-handed responsibility over the exploitation of the field until the end of the exploration stage which is scheduled for late 2011. After that joint operators of the field will be four international partners – ExxonMobil Corporation (it has an AAA/stable outlook rating from Fitch), Royal Dutch/Shell plc (AA+/stable outlook) and Total SA (AA/positive outlook), as well as KazMunaiGas (BBB/negative outlook).
Another result of the negotiations was that KazMunaiGas’s stake in the Kashagan project will grow to 16.81%. “Since this was a package solution, we have agreed that the price of the stake will be $1.78 billion plus interest which will be calculated on this sum until payment. The payment will be made after the launch of oil extraction in three tranches,” Sauat Mynbayev said.
In addition to the buyout of the stake, the sides also discussed a possible package of financial flows in favour of Kazakhstan. “Money flows will total about $5 billion. This is the so-called net present value. Obviously, this is the sum which will be paid to Kazakhstan over the entire lifetime of the project, that will last until 2041, which is why this sum will total $20 billion,” the minister noted.
Sauat Mynbayev also said that the budget of the project’s first stage would be defined by March 2008, when the final date for the launch of oil extraction would become clear. Meanwhile, the launch of industrial extraction in the Kashagan field is expected in late 2011.
Let us recall that the dispute over Kashagan started as early as last summer when the Kazakh government said that it might strip Eni of the status of operator of the project in the Agip KCO consortium. The reason cited for this was another postponement in the start of commercial production from 2008 until the second half of 2010 and a significant increase in the costs of the project from $57 billion to $136 billion. Moreover, Astana also aimed to obtain the status of a major partner in the project for KazMunaiGas.
The end to the negotiations with the investors was brought about by Kazakh President Nursultan Nazarbayev who met representatives of the companies involved in the North Caspian project on 14 January 2008. The head of state noted that the Kazakh government had observed the contracts signed under the Production Sharing Agreement but in connection with the delay in the date of extracting first oil in the Kashagan field the country’s budget would lose significant revenue.
“This balance of justice has now been restored. I believe that our side should also be satisfied with the decision adopted. The Kazakh government and I personally have great respect for all companies you represent. It is good that as the result of such compromise we remained friends, partners and we will work together,” Nursultan Nazarbayev stressed.
“Today’s meeting means that everyone achieved a common goal. We prevented the termination of the contract which might have happened if we had not agreed. Both investor companies and the Kazakh side are satisfied with the results of these negotiations,” the country’s president summarised his statement.
Fitch Ratings experts believe that the agreement reached should help reduce political risks around the Kashagan project. “Contrary to the usual negative perception of state intervention, we believe that restoring a stable environment to a project of this scale and importance, as well as adopting a greater sharing of responsibility between all parties involved, is a better outcome than most were forecasting. This is particularly true in the light of other state-motivated actions taken in the international oil and gas market,” said Francesca Fraulo of Fitch’s Energy team.
This rating agency believes that although “the agreement may have a financial impact on the Kashagan project economics, it is difficult to assess the magnitude of it at this stage as the compensation payment structure is linked to oil prices at the start of commercial operations. Additionally, the project was originally conceived in a much lower oil price environment, so any adjustments to the project economics may well be compensated for by a higher price environment.”
Fitch also noted that as one of the largest oil fields in the world, the project had never been perceived as likely to be straightforward to execute. Fitch also recalled that the Kazakh authorities threatened to oppose or terminate the oil field development, after a revised plan showed further potential delays and a significant increase in development costs. Negotiations between the parties have taken more than six months to complete due to complex issues surrounding compensation for delays and cost overruns, and the willingness of the Kazakh government to play a more active role in the project via state-owned company, KazMunaiGas, Fitch said.
“The project is likely to benefit from a strengthening of relationships and the sharing of greater responsibilities with its host country. State intervention in the oil and gas sector has become more frequent in the current high oil price environment, especially in countries where economies rely heavily on royalties and/or taxes and dividends from oil and gas companies,” Fitch said.
At the same time, Standard & Poor’s said it did not intend to change KazMunaiGas’s (KMG) rating after its stake in the North Caspian project had been increased. The national company’s rating of BBB-/stable outlook is one notch lower than Kazakhstan’s sovereign rating. “We believe that renegotiation of Kazakhstan’s agreement with the international shareholders and the acquisition price illustrates the strong government support that KMG currently enjoys,” the rating agency said. “We believe that KMG will not need to raise any new debt to pay for the Kashagan stake or to participate in the $2.5 billion-$4.5 billion compensation that the consortium will have to pay to the Kazakhstan government because of a delay in the project.”
In late January, the Ministry of Energy and Mineral Resources proposed that the country should impose an oil export customs duty on mining companies whose contracts do not envisage a stable tax regime.
Minister Mynbayev told a government meeting on 29 January that all mining contracts could be divided into three groups: mining companies whose contracts envisage stability in customs payments; mining companies whose contracts may be interpreted as contracts that do not envisage stability in terms of an export customs duty, i.e. there is stability in tax regime which excludes an export duty; and mining companies whose contracts do not envisage stability in customs payments.
“An attempt to impose export customs duties on all three groups of mining companies may lead to en-masse opposition with consequences. We do need this. I believe that export customs duties have to be imposed only on the third group of companies, while carrying out individual negotiations with the others,” the minister noted. “What is the volume of oil in question if we introduce export customs duties on the third group of mining companies? The answer is 27 million tonnes of oil. The owners of these volumes will be forced to face a dilemma: either exporting hydrocarbons paying the export customs duty or supplying them to the domestic market. These volumes will create competition on the domestic market and ensure the gap between local and world oil prices,” the minister explained.
Mr Mynbayev said that if the export customs duty were to be introduced, like in Russia, the following approach was expected to be adopted: a base price at which the export customs duty is equal to zero would be defined. If the price is higher than the base price, an export customs duty would be set as a faction of the gap between world prices and the base price. “If we assume that the profitability of the domestic and export markets are equal, the customs duty will stand at $103.4 per tonne,” the minister said. “If the price is $88 per barrel, as it is now, it will stand at $173.8 per tonne.”
Mr Mynbayev estimates that the budget’s net revenue will total $1.3 billion or $2.2 billion respectively, depending on the price scenario. Moreover, these figures are net revenue of the budget and take account of a reduction in other taxes. The minister said if export customs duties were to be imposed, corporate income tax and excess profit tax should be reduced.
However, he noted that this move might complicate the negotiation process of Kazakhstan’s entry to the WTO. “As a rule, the negotiation process does not welcome the imposition of export customs duties, but they are not formally banned by obligatory agreements of the WTO. Nevertheless, the imposition of export customs duties will complicate the negotiation process in our case, but if we do not do it now, we will never be able to do it because this would be fixed in obligatory agreements,” the minister concluded.
On the other hand, the chairman of the board of directors of the Kazakh Samruk holding company for managing state-owned assets, Kanat Bozumbayev, said: “If export customs duties are imposed, KazMunaiGas Exploration & Production’s net revenue may fall to 41 billion tenge. The price of its share in free flotation is $29-30 now. A number of experts we have talked to believe that if the export customs duty is imposed, the price of share will fall by 30% to 50% to $15-20.”
The head of Samruk went on: “At the same time, we should realise that this company’s shares cost about $7 billion now. A reduction in the price of share by 50% will cut the price of our stake to $3 billion. If we introduce a $103 customs duty, our budget will receive $1.3 billion, but we will lose about $2.5-3 billion in stock value. There are these risks.”
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