Oil Chronicles. Summer Was Hot
Over the first six months of this year the oil extraction in Kazakhstan increased by 7.8%, natural gas extraction by 15.6% and the production of gas condensate by 4%. The liquid hydrocarbon exports grew by 2.4% in comparison with the previous year’s figures.
Extraction and refining
According to the Kazakh Statistics Agency, 29.19 million tonnes of crude oil and 6.45 million tonnes of gas condensate were produced between January and June 2008. With oil, this figure increased by 7.8% and with gas condensate it increased by 4% in comparison with the same period of the last year.
In natural gas production, it totalled 29 billion m3, which is 15.6% higher than the same data recorded in the first six months of the year 2007. In particular, 9.89 billion m3 of gaseous natural gas was extracted (+14.7%) and its production reached 5.94 billion m3 (+25.2%). Meanwhile the extraction of petroleum gas increased by 17% and reached 7.4 billion m3.
A total of 1,346,100 tonnes of petrol, including aviation petrol, was produced between January and June 2008, which is 2.2% less than in the same period of 2007. The production of kerosene (including kerosene-type jet fuel) also decreased by 17.2% and made 196,400 tonnes. Meanwhile, diesel fuel production increased by 4.6% and reached 2,260,300 tonnes, and residual fuel oil production increased by 34.9%, reaching 1,602,100 tonnes.
Export and import
According to the Statistics Agency, Kazakhstan exported 25.21 million tonnes of oil and gas condensate from January to June 2008, which is 2.4% less than in the same period of the last year. The value of the oil and gas condensate exports for this period increased by 65.1% and totalled $6,813.6m.
Natural gas exports during the reporting period totalled 7,747.5 million m3 (+27.3%) worth $469.9m (+115.9%). At the same time Kazakhstan exported 1,554,700 tonnes of oil products (-0.6%), totalling $831m (+63.6%).
The oil import totalled 800,000 tonnes (7.9% less than in January-May 2007), making $575.8m (+48.7%). During the same period of time Kazakhstan imported 2,896.9 million m3 of natural gas (-10.7%), totalling $165.9m (+3.8%).
Investments in capital assets
During the first six months capital asset investments totalled 1,510.2 billion tenge (+12.4%). Oil and natural gas extraction as well as related services are still priority industries for investments; they attract 25.3% of the total amount. Nevertheless the oil industry is not currently among the fastest growing industries. It was the production and distribution of electric power, gas and water, which attracted the largest investments (+75.7%) as well as transport and communications (+42.3%).
Kazakhstan joining the WPC
In early July 2008, Kazakhstan became a member of the World Petroleum Council (WPC). According to KazEnergy (an association of the oil, gas and energy enterprises), membership of the WPC allows maximum access to the latest scientific and technologic discoveries, achievements in the world oil and gas industries, as well as current production, technologic and economic information. Moreover, it will increase the influence of the domestic oil industry, bring new contacts in the sphere of international cooperation and create a new step in strengthening the country’s image in the world.
Kazakhstan joined the WPC on 1 July 2008 during the World Petroleum Congress in Madrid. The programme of the Kazakh delegation included meetings between KazEnergy Chairman Timur Kulibayev, Kazakh Vice Minister of Energy and Mineral Resources Bulat Akchulakov and EU Commissioner for Energy Andris Piebalgs and the WPC Director General Dr Pierce Riemer.
Moreover, the EU Commissioner for Energy and the WPC head were invited to Astana to participate in the Third Eurasian Energy Forum.
The World Petroleum Council, founded in 1933, consists of 60 national committees, representing almost all the countries producing and consuming oil and gas products. They include OPEC countries and others.
New year, new taxes
KazEnergy Executive Director Askar Aubakirov said on 4 July 2008 during a roundtable on taxes on subsoil users within the new Tax Code that the corporate income tax in Kazakhstan would be decreased from 30% to 15%. “The government will compensate this amount by introducing a tax on mineral production.”
It is expected that the new code will be approved in the upcoming autumn and enter into force on 1 January 2009. They expect the tax on mineral production to range from 4% to 20% depending on the volume of annual production.
KazEnergy Chairman Timur Kulibayev thinks that after the enforcement of the new Tax Code, “we will have increased the tax liabilities of Kazmunaigas and Chinese companies participating in oil extraction.”
Earlier, the country’s Prime Minister Karim Masimov also declared that the government planned to significantly decrease corporate income tax and to implement a classic VAT system, introducing a tax on mineral production into the primary sector.
In June 2008, Karachaganak Petroleum Operating (KPO), an international consortium of investors which mines the largest Karachaganak oil, gas and condensate field, for the first time paid an export duty of 10 billion tenge.
The Government’s Resolution On Amending Government’s Resolution No. 1036 dated 15 October 2005, which was adopted on 8 April 2008, entered into force on 17 May 2008. It establishes the export duty for crude oil in the amount of $109.91 per tonne and $27.43 per tonne for rent tax payers for exported crude oil and gas condensate. In other areas, the export duty for heavy condensate (liquid fuel), gas carbon and asphalt was fixed at $82.2 per tonne.
The government’s resolution said that the fixed rates for crude oil exports from Kazakhstan were not to apply to the export of crude oil extracted under subsoil use contracts, which stipulate relief from the mentioned duty.
They planned to impose an oil export duty on 38 subsoil users, including: Kazmunaigas Exploration & Production, Kazakhturkmunai, Kazakhoil Aktobe, Petrokazakhstan Kumkol Resources (except contracts No. 49 dated 10 December 1996 and No. 214 dated 24 August 1998), Turgai Petroleum, KOR Oil Company, CNPC Aidan Munai, Sauts Oil, Zhaikmunai, Fial, Tasbulat Oil Corporation (except contract No. 169 dated 28 January 1998), Khazar Munai, Karakudukmunai, Zhalgiztobemunai, Emir Oil, Fiztekh Firm, Lancaster Petroleum, Caspi Neft TME, Sagiz Petroleum Company, Aral Petroleum Int. B.V., Kazneftekhim Kopa, Sazankurak, Altius Petroleum International B.V. (except contract No. 535 dated 14 September 2000), Atyraumunai, Svetland Oil, Arnaoil, Gyural, Caspi Neft, Pricaspian Petroleum Company, Adai Petroleum Company, NBK, Tobearal-Oil, Matin, Potential Oil, Ekogeoneftegas, Embavedoil, Samek International, and Kozhan. The Kazakh government approved this list on 12 May 2008.
The Finance Ministry of Kazakhstan emphasised that KPO and TCO would be relieved from export custom charges, “since they demonstrated stability in their contracts”.
An addendum to the government’s resolution contains formulae of the export duty on crude oil with its average market price fixed during the price monitoring at more than $138.6 per tonne. Thus, when the average market price is from $138.6 through $438 (inclusively) per tonne the duty is fixed at 5% of the difference between the world price and $138.6. When the average market price is between $438 and $547.5 (inclusively) per tonne the duty is $14.97 plus 22.83% of the difference between the world price and $438. When the average market price is between $547.5 and $657 (inclusively) per tonne the duty is $39.97 plus 38.21% of the difference between the world price and $547.5. When the average market price is between $657 and $766.5 (inclusively) per tonne the duty is $81.81 plus 48.48% of the difference between the world price and $657. When the average market price is between $766.5 and $876 (inclusively) per tonne the duty is $134.9 plus 55.82% of the difference between the world price and $766.5. Finally, if the average market price is more than $876, the customs rate is $196.03 plus 61.34% of the difference between the world price and $876.
Don't change horses in the middle of the race
The Italian company ENI SpA will remain the operator of the Kashagan project on the north of the Caspian Sea till the beginning of commercial production in 2013. Christophe de Margerie, Chief Executive Officer of the French company Total (one of the members of the project) spoke about it in an interview to Bloomberg on 1 July 2008. He added that the members of the international consortium Agip KCO should approve the conditions of the new production sharing agreement on Kashagan before 15 October 2008.
In the meantime, Chief Executive Officer of ExxonMobil (another member of the project) Rex Tillerson criticised the Kazakh government for repeated delays in development of the Kashagan project. According to Financial Times, he “barely managed to contain his anger as he warned the Kazakh government to stop delaying the development of the field, into which he said a consortium of the world’s biggest energy companies had already invested $17bn but which has yet to produce a barrel of oil or a dollar of revenue”. According to Mr Tillerson “It is time for the government of Kazakhstan to stop delaying the project, [to] be supportive of the consortium and see the project through to a successful start-up.”
Christophe de Margerie said that he “agreed with Mr Tillerson and that ExxonMobil and Total had long believed that earlier start-up dates had been far too optimistic.”
But the management of the national company Kazmunaigas denied the accusation of their partners in this project about delays by the Kazakh side in the beginning of the development of the Kashagan field. The heads of the national company believe that the government protected “the interests of Kazakhstan in the face of the consortium’s inability to bring the field into production on schedule.” At the same time Kazmunaigas noted that only owing to all the parties, including the members of the consortium, a memorandum of understanding was signed on 25 June 2008, aiming at continuing the development of the project.
Who is new here?
Kazakhstan represented by Kazmunaigas is discussing the purchase of Oman’s share in the Caspian Pipeline Consortium (CPC). As is known Oman has decided to leave CPC due to inefficiency of this pipeline project. In 2007, CPC earned $423m net, but the shareholders never paid dividends.
The KazEnergy’s chairman believes that increased share of Kazakhstan in CPC will contribute to an increase in oil flow in this pipeline. All the more so that CPC state shareholders (Russia and Kazakhstan) have priority rights to buy this share.
An informed source close to the heads of the consortium said that Oman had already found a buyer for its share and agreed about the price, adding that this is “not a shareholder of CPC, it is a third party from Eastern Europe.” Oman has evaluated its 7% share in CPC at $700m. The Oman’s offer expired on 30 June 2008.
New gas vector
On 9 July 2008, a ceremony dedicated to beginning of construction of the Kazakhstan–China pipeline was held in Almaty Oblast near the 42nd kilometre of the Almaty–Kapshagai highway. The Energy and Mineral Resources Minister of Kazakhstan Sauat Mynbayev and the General Director of Asian Gas Pipeline Beimbet Shayakhmetov participated. This company was created specially for this project in February 2008 on a parity basis by Kaztransgas (a subsidiary of Kazmunaigas) and Trans-Asia Gas Pipeline Company Limited.
Opening this ceremony, Sauat Mynbayev said, “Taking into account its multiple-vector policy, Kazakhstan is now discussing the possibility of participating in alternative transport projects. As a result, we are sure that construction of the Kazakhstan–China pipeline will give a new impetus to the development of not only the gas sector but to the economy of the country as a whole.”
In order to implement this project successfully, the Asian Gas Pipeline company plans to raise a loan of not less than $6bn for a term of 15 years before the end of this summer. It plans to spend this amount on the construction of the Kazakh part of the pipeline. It is already negotiating with several foreign banks to attract project financing. It is expected that the agreement will be signed before the end of summer 2008. They plan to finish the construction of the Kazakh part of the pipeline in June 2010.
The Kazakhstan–China pipeline will consist of two parallel pipelines with a diameter of 1,067 mm and a total length of 1,304.5 km. Its capacity will be 40 billion m3 per year. From the outset, it is supposed that 4.5 billion m3 of gas per year will circulate in this pipeline and its total load of 40 billion m3 will be reached by the end of 2013. A total of 30 billion m3 of it will go to China and 10 billion m3 will be used by Kazakhstan. Kazstroyservice will be the Kazakh subcontractor in the project and China Petroleum Pipeline Engineering (CPPE) will be the Chinese one.
Kazmunaigas is buying a controlling stake in Mangistaumunaigas. The company’s press service informed that an agreement about it had been reached with the main shareholder of Mangistaumunaigas, Central Asia Petroleum Ltd.
Mangistaumunaigas was founded in 1995 and is one of the largest oil extracting companies in Kazakhstan today. It owns 36 oil and gas fields, 15 of which are now being developed. The largest of these are Kalamkas and Zhetybai. The company also owns 58% of the Pavlodar Oil Refinery.
On 11 July 2008, the Energy and Mineral Resources Ministry and Kazmunaigas signed an agreement on the exploration and production of hydrocarbons in the Myortvy Kultuk field, located in the Kazakh sector of the Caspian Sea. The licensed area of Myortvy Kultuk makes 7,273 km2 and the depth of water in the area of operations is from 1 to 2.5 m. Recoverable oil reserves (C-3 category) are estimated at 164 million tonnes.
A press release by Kazmunaigas said that after the company receives the approval to explore and produce hydrocarbons in accordance with the country’s legislation, it plans to transfer 50% of its share under the contract to a legal entity, which will be founded by a group of Kazakh investors. Planned oil operations for the first period include geophysical and geotechnical studies, as well as drilling of two exploratory wells. The project provides for the realisation of the ‘zero discharge’ principle.
Kazmunaigas Exploration & Production (a subsidiary of Kazmunaigas) has made public its plans to drill its first exploratory well on block P-9, located in the western part of the country in the first six months of 2009. This decision was taken on 1 July 2008 at a regular meeting of the company’s board of directors, during which they approved amendments to the exploration programme for 2008. According to them, before drilling the company will do 3D seismic surveys in 360 km2 in order to study the Buiyrgyn subsalt structure in block P-9 in details.
In 2007, Kazmunaigas Exploration & Production occupied second place in Kazakhstan in terms of oil production, which – taking into account its shares in Kazgermunai and CCEL – exceeded 10.6 million tonnes (215,000 barrels per day).
Russian Lukoil plans to agree with Kazakhstan an increase of its share in the joint venture Turgai Petroleum. On 2 July 2008, Lukoil’s President Vagit Alekperov said at a press conference in Baku, “Trials are in progress now and it’s early to speak about the dates of finishing the bargain, and agreement with the Kazakh government will be reached after legal proceedings are over.”
It is known that Lukoil plans to increase its share in Turgai Petroleum up to 100% through its priority right to buy the share of its partner in this project – the Chinese CNPC. Lukoil was not satisfied with the assets offered by the Chinese company, which would allow it to refuse buying a 50% share in Turgai Petroleum. The president of Lukoil believes that the issue of purchasing share in Turgai Petroleum will be resolved within a year.
Remember that the heads of Lukoil have agreed on the possibility of obtaining a share in one of the CNPC projects in autumn 2007, planning to make their choice by the middle of this year. The companies concluded a respective agreement after a long trial.
The trials began in autumn 2005 when the partner of Lukoil in Turgai Petroleum, PetroKazakhstan changed its owner – it was bought by CNPC for $4.18bn. The same autumn Lukoil went to the Stockholm Arbitration Court, believing that the bargain created new owners of Turgai Petroleum itself, since Chinese became the final owners of the shares in the company. In the same time the shareholders’ agreement on Turgai Petroleum provided that in case one of the parties left the project the second one obtained priority purchase rights. In October 2006, Lukoil won the trial and proved its right to purchase a 50% share in Turgai Petroleum.
Turgai Petroleum is working on the Kazakh field Kumkol, the known reserves of which reach about 170 million barrels of oil (more than 20 million tonnes). In 2007, the company extracted 3.5 million tonnes of oil and 145 million m3 of gas. Lukoil and Petrokazakhstan (belonging to Kazmunaigas and Chinese CNPC) each own 50% in the joint venture.
Meanwhile Lukoil is continuing to study the Atash structure in the Kazakh shelf of the Caspian Sea. The head of the company said that exploration in this structure had not been finished yet, adding that “the second well is only just going to be bored.” It gave more information about the block. In particular, exploration showed that there is the possibility that a structure could diverge. That is why the company’s geologists are having additional consultations.
The Atash area is located in the central part of the Northern Caspian with a sea depth of 7-10 metres and includes the Atash, Kazakhstan and Maral structures. The exploration contract for the Atash field was signed by the Energy and Mineral Resources Ministry and Kazmunaigas on 29 December 2003. In 2004, Kazmunaigas assigned its subsoil use rights to the Atash Company, which was founded on a parity basis by Kazmunaiteniz (a subsidiary of Kazmunaigas) and Lukoil Overseas Shelf B.V.
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