Minister of Oil and Gas Sauat Mynbayev gives an interview to the International Business Magazine Kazakhstan.
Sauat Mukhametbayevich, Kazakhstan’s oil and gas sector today is a key industry of the domestic economy. What are the plans for further increase of the export potential?
Kazakhstan has considerable resource potential, accounting for 3.3 % of the world's hydrocarbons reserves. The endowment with mineral resources, domestic stability and correspondence of the national laws to the market principles allowed the country to raise considerable foreign investments for implementation of large-scale projects in mineral production. Statistics are the best evidence: during the period from 1995 to 2010 alone nearly $104 billion of foreign and domestic investments were made in the oil and gas sector of Kazakhstan. As a result, over the past two decades liquid hydrocarbons production increased by more than three times, and some 900 million tonnes of crude oil and condensate were extracted.
Along with that, we are focused on further growth. We intend to produce 81 million tons of crude oil and condensate in 2011, while by the year 2020 we expect this figure will rise to 130 million tonnes. The implementation of these plans will allow us to export 80 million – 100 million tonnes of oil a year in the coming 40–50 years.
It is clear that for this we have to further diversify and develop the hydrocarbons transportation infrastructure. In this regard, the start of construction operations under the CPC expansion project was an important and long-awaited event. With implementation of this project, the oil carried over the pipeline by this route will increase from 28 million to 67 million tonnes a year by 2015.
Concerning the east route, works that are now underway under the program of expansion of the first line of the Kazakhstan – China pipeline will give possibility before the end of 2011 to increase the carrying capacity of the trunk pipeline to 12 million tonnes of oil a year. In parallel, design and survey operations on the second line of the pipeline are currently in progress.
One more promising project, designed to meet the growing export potential, is the Kazakhstan Caspian Transportation System (KCTS). At the moment, we are continuing negotiations on the basic principles of its implementation with international oil companies.
Our country has colossal potential in terms of extraction, processing and transportation of gas. A landmark project in this area, commissioned into operation in 2009, was the trunk pipeline Kazakhstan – China, which is part of the transnational pipeline Turkmenistan – Uzbekistan – Kazakhstan – China. Before the end of 2012 the capacity of the first section of this pipeline will increase to 30 billion cubic meters a year with subsequent increase of to 40 billion cubic meters. Along with that, on September 6, 2011 the welding of a first joint of the linear part of the pipeline Beineu – Shymkent took place, which is the second section of the Kazakhstan – China pipeline and which is focused primarily on provision to the southern regions of the country with natural gas.
Summarizing the said, I would like to note that gaining its weight as a net exporter of hydrocarbons, Kazakhstan realizes the greater responsibility in regards to its growing role in the Eurasian energy security system. The predictability of actions, taking into account multilateral interests, and the ability to reach consensus – this is how we understand the ways of reaching the regional energy security.
As you know intensive hydrocarbons production has to be accompanied by adequate replenishment of reserves through discovery of new deposits. What is being done today in this direction?
We are actively working to increase the resource base and production rate. For example, last year a new oil deposit was discovered at the Liman block. The pool of oil is located on the south slope of the Novobogatinsk salt dome and is 70 km west of Atyrau, in close proximity to the South-East Novobogatinskoye oilfield under development by Embamunaigas Production Branch.
In May of the current year a gushing flow of oil and gas was recorded in the testing of the KT-2 carbonate strata in the first exploration well at the Urikhtau gas condensate field. This is the first onshore discovery for us over the past 20 years. In many respects this became possible due to the employment of innovative techniques of seismic survey and digital basin modeling. Under the approved working program of the mineral production contract, KazMunayGas is planning in the current year to drill two more exploratory wells (U-2 and V-3) with a target depth of 4,000 meters each. According to preliminary estimates of KMG experts, the prospective geological hydrocarbons resources of KT-2 amount to more than 200 million tonnes.
In addition, in order to select new areas for geological exploration, we are implementing the Integrated Study of Sedimentary Basins in the Republic of Kazakhstan project. This work is designed for three years and is funded by KMG under the Program of State Geological Survey of the Subsurface.
In general, studies conducted in recent years ascertained new geological peculiarities of the basins structure. This allows supposing the presence of prospective areas and pools that have considerable reserves of oil and gas. We are carrying out activities in this direction quite intensively, so I am sure we will get results soon.
It is not a secret that lately the state strengthened its influence in the oil and gas sector. At the same time, amendments to the laws and to the terms and conditions of some mineral production contracts initiated by the state aroused concerns from mineral producers. What is the official position of the state on this matter?
First of all, we should not forget that the mineral resources are non-renewable. In this regard, the urge of Kazakhstan towards increasing profits from their production is quite clear. Every sovereign state has the right to set its own requirements and regulations, especially in the areas of fiscal and customs policies. Following that, one cannot demand from Kazakhstan that the latter would waive its right to changes for a few decades ahead. This would be interference and unfounded dictate.
Nevertheless, the question of stability of the terms and conditions of the contracts is perceived adequately by our state. For example, if the parties themselves, at their discretion, do not alter the terms and conditions of the contracts, these contracts will continue being in effect. We have had no trials in our practice, where a competent authority has demanded through the court the revision of the terms and conditions of such contracts. The amendments in tax legislation, related to the setting up of some current tax regime in the mineral production contracts in effect, are also implemented strictly in accordance with the laws.
For example, exceptionally on a contractual basis the government and mineral producers made amendments to 106 contracts, related to transition by the mineral producers to the current tax regime, and set forth in detail the commitments on local content regarding the personnel, goods, works, and services.
Issues of long-term stability of the oil and gas investments have a decisive influence on the development of local content and creating of up-to-date infrastructure of the regions. However, the hydrocarbons production is accompanied by environmental pollution. First of all, these are the problems of sulfur disposal, flaring of associated petroleum gas, oil spills and threat of oil spills, especially while carrying out offshore operations. Nature conservative measures in this concern will have to be brought into a coherent response system. Of course, these activities have to be performed both by the state and mineral producers. With this, balance between these things largely depends on the understanding by both of the sides of the social responsibility concept. In practice, the optimal and adequate balance of responsibilities will be achieved through negotiations and evidence.
You mentioned the problem of increasing local content. It is known that the Government of Kazakhstan pays special attention to that. What is your Ministry’s role in this matter?
In view of the fact that our country strives for diversification of the industry and increased competitiveness of the economy, in general, the local content issues were always and will be of primary importance, especially for the domestic oil and gas industry.
In 2010, the Ministry of Oil and Gas jointly with the Ministry of Industry and New Technologies did great work to develop a common legal framework, due to which it became possible to carry out effective monitoring of the local content development. In particular, there were passed two laws – the Law on Local Content (amendments to the seven legislative acts on local content) and the new Law on Subsoil and Subsoil Use.
The results of enhancement of the laws are seen even now. Taking into consideration that in 2009 and 2010 various techniques of calculation of local content were used, for comparison we made calculations by using the old techniques. In 2009, at the purchase of goods to the amount of 196.178 billion tenge, the local content share was 11.3 %, while in 2010 at the purchase of goods in the amount of 343.788 billion tenge, the given indicator rose to 16.1 %. So the share of Kazakhstani goods purchased by the oil and gas companies increased by 4.8 %. The local content in the purchased of works and services during the same period rose by 12.3 %, i.e. from 78 % in 2009 to 90.3 % in 2010.
Also, I want to point out that a provision was introduced into the Law on Subsoil and Subsoil Use, containing a sanction for violation of the procurement laws in the area of mineral production, and for failure of the oil and gas companies to comply with the procedures for procurement established by the government. This sanction provides states that the costs of a mineral producer for purchasing goods, works and services made in violation of the procurement rules shall be excluded by the competent authority from the costs, accounted as performance by the mineral producer of its contractual obligations.
Due to the fact that in 2010 we created an electronic database of all the contracts and related documentation, and also the reporting on fulfillment of the contractual obligations on local content became fully automated, the efficiency of management of mineral production increased, including the operative revealing of violations. Thus, the monitoring of performance of the contractual obligations by the mineral producers and inspection of procurement by them showed that in 2010 the total amount of the transactions made with violation of the laws made more than $1 billion.
Of course, the government’s position with regard to those who violate will always be the strictest, up to the termination of the contract. As a result, the Ministry put in claims to such companies. First, in 2011 they have to come to maximum transparency in the bids procedures. Second, the oil and gas companies have to enter into supplementary agreements to the contracts, containing exact figures on the local content in procurements and provisions of the training of local specialists. In addition, the percentage of obligations on the local content in procurements are already present in 145 of 199 mineral production contracts. 66 of them were executed in the past six months; 30 more are to be agreed on. Third, the mineral producers have to develop their own programs of local content development and "nationalization of the personnel", containing measures to support the domestic producers.
Some companies have already radically revised their procurement policies. Many of them have chosen e-procurement as the best way to ensure transparency of the procurement procedures. Only the largest mineral producers used this way of procurements prior to 2011, today there are 35 such companies.
Now, in the consideration of mineral producers’ applications for extension of the mineral production contracts or for development of new fields, we take into account the "history of violations" of the contractual obligations and the laws, including that related to local content. The process of termination of the mineral production contracts with the malicious violators, ignoring the notifications and failing to meet the requirements of the authorized bodies, started. Last year 28 companies already lost their right to develop fields. Moreover, in the coming year the Ministry will further continue toughening the measures. At the end of 2011, in case of non-compliance with the laws and procurement procedures, we will apply measures of an economic nature.
Thus, to date we have created all the conditions for local content development. Also, all related laws are developed, and an effective monitoring system is in operation. Among the important achievements is that we have managed to overcome the "information blockade" on part of the mineral producers – the issue that was brought up a few times by the Kazakhstani producers. Practically all oil and gas companies, including the largest operators, such as TCO, KPO and NCOC revealed their plans for procurements both in the medium-term and long-term prospects. Today, all users that have an account at the Internet website, designed for submission of the reporting by the mineral producers, have access to such information that is provided online.
In 2012 Kazakhstan will join the Single Economic Space (SES). What challenges and opportunities will this step bring for the domestic oil and gas sector?
First of all, I would like to emphasize that the setting up of the SES is a complex solution dealing with all sectors of the economy. Therefore, considering just a few advantages or drawbacks of only one sector of the economy, namely the oil and gas sector, would be not right to judge for the entire economy on the expediency of accession to the SES by Kazakhstan.
As for the oil and gas industry, this step will help to form a common market of petroleum and petroleum products, to bring to a balance the priority provisions with these goods of the SES member-countries, and to prevent the re-export of petroleum products.
No doubt, we are interested in a stable transit of hydrocarbons at competitive rates. With the accession to the SES, we legally secured on a long-term basis the right of our exporters to pay the same rates for transportation, as the Russians do. Given the fact to what distances our goods have to be transported to reach the final destination, losses at high rates can be very, very considerable. In addition, this gives us the guarantee of access to the Russian pipeline system. Just imagine what troubles we would have with transit.
Again, today we sell 9 billion m3 of gas to Russia, and in the future, this volume will only grow. At the same time, our gas is by 90% associated petroleum gas. So, if any restrictions on the receipt of gas will appear in Kazakhstan, this can be a threat for oil production. To place this amount of gas in the domestic market with our distances between the inhabited localities and population density will not be an easy process.
From this point of view, Kazakhstan is primarily interested in stable long-term relations with the SES member-countries.
Currently, a draft law to regulate the gas market in Kazakhstan is under development. Will you tell us more about this?
As you know, the Head of the state pays much attention to the oil and gas sector of the republic, also to the issue of provision of the population with gas. In this regard, he gave a commission to the government to develop mechanisms for effective use of associated petroleum gas produced in the republic and to put an end to its flaring. This topic has been raised also a few times by the deputies of the Parliament who applied to the Government with a request to develop a separate draft law to regulate the gas supply issues.
A draft law on Gas and Gas Supply, currently under development, provides for the priority supply of tank gas to the domestic market. To do this, it is planned to set up a single national operator, who will have the preemptive right to purchase processed associated petroleum gas from mineral producers to meet the needs of the republic.
The draft law sets forth the state regulation of prices in the wholesale sales of tank gas to the domestic market. In this regard, the plans are to introduce uniform wholesale prices separately for every oblast (region), city of republican status, and capital. These prices will be approved by the Government upon submission of proposal by the Ministry of Oil and Gas, the latter to be agreed with the Ministry of Economic Development and Trade.
The draft law provides for the development and approval by the Government of the General Layout of the Gas Distribution Network Development, w