Oil Chronicles. Astana does not Believe in Tears
As compared with the same period last year, oil production in Kazakhstan over the first four months of 2008 has grown by almost 6%, and that of natural gas – by 11%. Gas condensate production has decreased by 5% while the oil processing volume has risen by 5.4%.
Production and processing
As per the government official data for January-April 2008 the oil and gas condensate output amounted to 23.57 million tonnes (year on year increase of 5.9%). The gas output equalled 11.2 billion m3 (+11.1%) for the first four months including 6.63 billion m3 of natural gas (+15.7%). About 5.3 million tonnes of oil, 0.59 million tonnes of gas condensate and 2.46 billion m3 of gas were produced only in April 2008.
The extent of oil processed at domestic refineries from the beginning of 2008 to date has totalled 4.31 million tonnes, or 105.4% as compared with the year-ago period.
Transportation of hydrocarbons
Over the first four months KazTransOil JSC has transported around 15.53 million tonnes of oil through its oil-trunk pipeline system (versus 14.89 million tonnes for the same period in 2007) including 3.95 million tonnes transmitted in April (versus 3.81 million tonnes in April 2007).
The freight turnover from January to April 2008 has reached 10.76 billion tonnes per km (versus 10.12 billion tonnes per km), out of which 2.79 billion relate to April 2008 (versus 2.57 respectively).
From January to April 2008, a total of 5.43 million tonnes (versus 5.28 million tonnes) has been sent through the Atyrau-Samara segment of the Uzen-Atyrau-Samara main oil trunk line. It is worth noting that transportation of oil through this segment in April 2008 reached its all-time high of 1.43 million tonnes (versus 1.36 million tonnes). Before this the maximum amount transported through this segment was recorded in January and October 2007 amounting to 1.375 million tonnes per month.
Besides this, the amount of oil transported through the Atasu-Alashankou pipeline reached its peak – 500,000 tonnes – in April 2008. Overall, the transportation volumes reached 1.81 million tenge (versus 1.5 million tenge) over the first four months of the year.
The transit of Russian oil through the TON-2 pipeline segment located in Kazakhstan amounted to 1.48 million tonnes in January-April 2008, of which 453,000 tonnes were transported in April alone.
According to the KazTransOil JSC press service, 3.95 million tonnes (versus 3.52 million tonnes) of oil were sent to Kazakhstani refineries in January-April 2008, including 0.98 million tonnes in April (versus 0.96 million tonnes).
Astana to regulate oil exports
On 8 April 2008 the government adopted the regulation On amending Regulation No 1036 of the Government of the Republic of Kazakhstan of 15 October 2005 envisaging the introduction of customs duties for oil exports as of 17 May 2008. The customs duty rate willl amount to $109.91 per tonne. The rate used for payers of rent tax for exported oil and gas condensate is $27.43 per tonne. As regards the customs duties for export of heavy distillates (fuel oil), coke and oil asphalt, their rate equals $82.2 per tonne.
It should be noted that the afore-mentioned customs duty rates for the crude oil exported from Kazakhstan are not applied to the companies that export the oil produced under subsoil use contracts providing for exemption from the above customs duties.
Alongside this, the Ministry of Energy and Mineral Resources has proposed a package of measures to regulate export of oil products. As the Head of the Ministry, Sauat Mynbayev, stated during a telephone conference on 5 May 2008, with the crude oil export duties coming into practice, the Kazakhstani side must solve this issue as soon as possible. According to the Minister, during the first quarter 2008, the export of petrol and diesel fuel from Kazakhstan has grown 1.5 times already versus a year-ago. His verbatim statement was as follows: "We have reviewed the countries to see where the petrol exports are going. It has turned out that over January-March 2008 the petrol exports totalled 42,000 tonnes out of which 36 thousand were destined for the CIS including 24,000 for Kyrgyzstan. Obviously, there are some elements of re-export here and this aspect is to be taken into account in the proposed measures".
… and the import of goods
Meanwhile the Ministry of Industry and Trade has proposed an amendment to the rates of import customs duties for foreign goods intended for the country's oil and gas sector. This was stated by Vice Minister Edil Mamytbekov on 7 May 2008 during the Conference Developing Kazakhstan's presence in subsoil use market.
"We deem it expedient to consider elaboration of the proposals to change the rates of the import customs duties with a view to restricting the import of foreign goods analogous to those produced in Kazakhstan", he said. “We also intend to provide overall information support to the local commodity producers by providing them with details on the planned largescale purchases of goods, operations, and services by subsoil users, for the period of up to five years, which would help us pursue a more efficient marketing policy".
Besides this, according to Mr Mamytbekov, it is necessary to organise cooperation between subsoil users and local producers for elaboration of a joint plan to develop Kazakhstan's presence in the subsoil use market. This would rule out the possibility of Kazakhstan suppliers being indirectly restricted from participation in purchase tenders.
Another proposal of the ministry is to oblige the subsoil users to provide information on their planned purchases. "We consider it necessary to tighten the requirements for subsoil users as concerns provision of full information on the planned purchases. Such purchases reflect the needs of producing companies in commodities, operations and services", Mamytbekov said.
In this context the ministry plans to consider a possibility of making a collegial decision, together with the Ministry of Energy, to bring the subsoil users to accept responsibility in accordance with the contract terms, envisaging even dissolution of field development contracts.
Mamytbekov emphasized that "the relevant information report about the violators shall be submitted to the presidential administration for taking concrete measures with regard to subsoil users that do not provide the necessary information about their annual programmes to purchase of goods, operations and services as well as reports on the purchases made".
Askar Batalov, executive secretary of the Energy Ministry, noted in turn that pursuant to the presidential order the Ministry is strictly monitoring performance of contractual commitments and the envisaged investment terms by the subsoil users. According to his information, 97 subsoil use contracts were dissolved by the end of 2007. Presently the performance for 2007 is being examined and the new lists of contracts to be cancelled are under preparation.
"This work has brought its results and today about 80% of companies producing hydrocarbons and other minerals fulfil their contract obligations for 80 per cent while the remaining 20% do not reach this target due to objective reasons", Askar Batalov said. However, he underlined that his ministry seeks to "follow more attentively" the performance of obligations by the subsoil users in terms of Kazakh content. "I would like to pay attention to the fact that while we are making the subsoil users to fulfil the legislative conditions adopted over recent years, our producers are not ready to fully supply the whole range of goods and services needed in the oil and gas sector of the country".
Astana and Moscow sharing one viewpoint on CPC
On 7 May 2008 the acting Minister of Industry and Energy of the Russian Federation, Victor Khristenko, and the Minister of Energy and Mineral Resources of Kazakhstan, Sauat Mynbayev, formulated a single position concerning the expansion of the pipeline capacity of the Caspian Pipeline Consortium.
CPC expansion is to be implemented in two stages until 2012. As a result, the pipeline transmission capacity will be increased from 32 to 67 million tonnes. The expansion plan envisages that 17 million of Kazakh oil will be directed to the Burgas-Alexandroupolis pipeline.
During the meeting the two sides agreed on development of a joint statement on the balance of fuel and power resources of Russia and Kazakhstan for the period until 2020. The joint approaches to the use and development of the energy transportation routes will be elaborated on the basis of this balance.
Besides this, the heads of the relevant ministries discussed some promising investment projects in oil production and processing including those being jointly implemented on the territories of third countries. It was noted that the Asian and Pacific directions of supply present a huge potential for both Russia and Kazakhstan.
During this meeting the possibility of Baltic-bound transportation of Kazakh oil was also considered. The arrangements reached were reported to the Prime Minister of Kazakhstan, Karim Massimov.
CPC owns the 1,580 km long Tengiz-Novorossiysk pipeline linking the western Kazakhstan fields with the Russian shore of the Black Sea. In 2007, the volume of transmission through the CPC amounted to 32.6 million tonnes. The Russian side has expressed its concern over the project's economic inefficiency and linked the pipeline capacity expansion with CPC economic rehabilitation, particularly by means of increasing oil transmission tariff rates and reducing the debt load. In September last year the CPC stakeholders approved the increase of the transmission tariff to $38 per tonne as well as the decrease of credit rates from 12.66% to 6%. At that time it was decided that the document on pipeline capacity expansion would be signed by the end of 2008.
The feasibility studies on the expansion of the pipeline to 67 million tonnes of oil per year are valid until September 2008. Further approval of the new feasibility studies may take up to two years. The CPC Board of Directors approved the partial updating of the feasibility studies on the CPC expansion.
The shares of participating of founding governments in the CPC are distributed as follows: Russia – 24% (this package was passed to Transneft Stock Company in April 2007), Kazakhstan – 19%, and Oman - 7%. Among the private oil companies participating in the Consortium are the following: Chevron Caspian Pipeline Consortium Company – 15%, Lukarco B.V. – 12.5%, Rosneft-Shell Caspian Ventures Limited – 7.5%, Mobil Caspian Pipeline Company – 7.5%, Agip International (N.A.) N.V. – 2%, BG Overseas Holding Limited – 2%, Kazakhstan Pipeline Ventures LLC – 1.75% и Oryx Caspian Pipeline LLC – 1.75%.
Kashagan as the stumbling stone
As the Minister of Energy Sauat Mynbayev informed the government meeting on 12 May, the foreign participants of the Agip KCO Consortium again propose resetting the production start date, now to 2012-2013. "We will react to the consequences with due severity. If some shift of terms is made very concrete sanctions are to be agreed already now. Therefore, to put it briefly, we are again trying to reach an agreement", the minister said.
Alongside this, as regards formation of the budget for Kashagan development, Mr Mynbayev noted that the Kazakhstani side has hired technical consultants who could provide an independent assessment of the project. "We have some questions on what is being done at the pilot stage. The prices in the expenditures part of the budget are growing but one should not forget that the prices for oil have increased as well. We must be objective in this context".
As per the Production Sharing Agreement signed in 1997 for a 40-year period, the international Agip KCO Consortium, is implementing the North Caspian project which envisages development of several promising oilfields in the Kazakhstan sector of the Caspian shelf where Kashagan is the biggest one.
All in all, the drilling area to which the Consortium is entitled as per the contract comprises four oil-bearing structures: Kashagan, Kalamkas, Aktoty, and Kairan. These structures are made up of 11 offshore blocks occupying the total area of about 5,600 km2. The extractable oil reserves of Kashagan are estimated at minimum 7-9 billion barrels and the total geological reserves at 38 billion barrels.
Pursuant to the PSA, Agip KCO had to start production at Kashagan in 2005. However, this term could not be met and, upon agreement of the parties, the starting date was reset to 2008. Nevertheless, in mid-2007 Agip KCO informed the government of Kazakhstan of another postponement from 2008 to the second half of 2010. Besides this, the consortium noted a significant upsurge in the project expenditures – from $57 billion to $136 billion.
In this connection the Kazakhstani side expressed its dissatisfaction at the pace of implementation of the project and demanded the status of a major project participant for its national company KazMunaiGas. So, on 14 January 2008, the agreement was signed between the Agip KCO participants and the government of Kazakhstan. The long negotiations resulted in amending the PSA on the North Caspian project. According to these amendments, KazMunaiGas received the status of the largest (16.81%) stakeholder in the consortium, along with Eni (project operator), Total, ExxonMobil, and Shell. The parties agreed that the project operator will be a new company formed by all the consortium participants taking into account the strengthened role of KazMunaiGas in the project.
According to the Citigroup expert assessment, the delays in development of the huge oil and gas fields inflict further growth in the world prices for energy sources. The Citigroup report says that the delay in development of the giant Kashagan field in Kazakhstan is already three years and the launch of the Australian project Gorgon by Chevron may start later than the planned date in 2011. The experts note that the operators have not approached the solution of the problems accounting for the delays and, notwithstanding the experience gained, the companies are still facing a threat of decreased production which may lead to the rise in the world oil prices.
The growing complexity of development of these less and less accessible fields impacts the whole industry. The average period from the launch of the project to the start of production has doubled and, as from 2000, amounts to 7-10 years on average. Besides this, the analysts believe that the PSA between the companies and the governments was rather favouring the delays. The expenditures for the PSA based projects tend to grow more quickly than for the projects envisaging payment of taxes and royalty.
Another risk factor for oil supply, according to the Citigroup experts, is that the control over field development is transferred from huge transnational corporations to local state companies that may lack some necessary expertise and skills in management of large-scale projects.
TengizChevrOil increases capacity for sulphur sales
Joint Venture TengizChevrOil (TCO) reduces open air sulphur stocks. "Last year we sold above two million tonnes of sulphur with the production of sulphur amounting to 1,600,000 tonnes – that is, we sold the total output, and we have reduced the open air sulphur stocks", said Rzabek Artygaliyev, deputy general manager of the company.
According to the TCO, in 2007 the sales amounted to 126% of the total produced sulphur – the figure has grown by 24% as compared to 2006. Today the company sells as much sulphur as it can physically export out of Tengiz. According to Mr Artygaliyev, while last year the open air sulphur stocks were 9 million tonnes, in early 2008 the stocks decreased to 8.4-8.5 million tonnes. In the first quarter the sulphur sales reached 563,000 tonnes or 136% of the production which is 24% more as compared to the same period a year ago.
The TCO representative highlighted the fact that the company plans to significantly increase sulphur sales, With sulphur production growing to 2.2-2.3 million per year TengizChevrOil expects to bring the sales level to 3 million tonnes. Over the period of 2008-2011 the sulphur related projects are receiving more than $600 million. Over $100 million have been allocated to these purposes during the last five years.
"While at first we aimed to reduce all sulphur pads till 2022 now we have reconsidered this plan taking into account the current market, and now we look to fully get rid of the sulphur pads by 2017 leaving only the working volumes", Artygaliyev noted.
At present the company is selling sulphur to 61 consumers in 24 countries, with four forms available.
The oil production in Tengiz started in 1994 within the framework of the previously signed agreement between Chevron Corporation and Kazakhstan. At the present time the participants of TCO are the American companies, viz. ChevronTexaco Overseas (with a share of 50%) and ExxonMobil Kazakhstan Ventures Inc (25%), Republic of Kazakhstan (through National Company KazMunaiGaz, 20%), and LUKArco, the Russian-American Joint Venture (5%).
The results of 2008 show, that the company contemplates increasing the hydrocarbon production from 13.3 million tonnes (2006 figure) to 22 million tonnes. Apart from this, TCO implements long-term projects on processing oil-dissolved gas with its further sale to the Kazakhstan consumers.
New pipeline contract
On 12 May 2008 National State Construction Company KazStroiService JSC signed a contract with the Kazakhstan-Chinese Pipeline LLP for designing, supply and construction of the first part of the second phase of Kazakhstan and Chinese pipeline – the Kenkiyak-Kumkol branch. The oil pipeline will be 841.5 km long. The diameter of the pipes will be 813 mm.
As per the contract the launch of the second part of the pipeline is scheduled for September 2009. According to Karsten Trimmer, Director General of KazStroiService, in spite of extremely difficult working conditions, the company expects to complete the main works already this year.
In terms of economic returns, the experts estimate that Kazakhstan will benefit from the Kenkiyak-Kumkol segment with 60 billion tenge of taxes during the 2010-2020 period only.
In December 2006 the first part of the Kazakhstan-Chinese Atasu-Alashankou oil pipeline was constructed. The production supplies from Kazakhstan to China started in the second half of July 2006. The 962.2 km long pipeline with 813 mm pipes has the transmission capacity of 10 million tonnes of oil per year at the first stage, expandable up to 20 million at the second stage. The expansion will become possible with the launch of the Kenkiyak-Kumkol segment. Today the Atasu-Alashankou handles oil supplies from the Kumkoil in the south Kazakhstan field to China. Oil supplies from the western regions are also feasible. To this end the discharge jetty has been built to intake oil from rail tank cars and transfer it further to the Atasu-Alashankou oil pipeline.
In spring 2003 the Atyrau-Kekiyak pipeline was completed to complement the Kazakhstan-Chinese pipeline.
The construction of the second part of the Kazakhstan-Chinese pipeline – Kenkiyak-Kumkol segment – started in Aktobe oblast In December 2007. The oil pipeline will run through the territory of Aktobe, Kzyl-Orda and Karaganda oblasts.
The operator of the interstate oil pipeline is the Kazakhstan-Chinese Pipeline LLP, a joint venture of KazTransOil JSC and the China National Oil and Gas Exploration and Development Corporation (CNODC).
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