Our Primary Task – Promotion of Local Content
Kanatbek Safinov, Executive Secretary of the Ministry of Oil and Gas of the Republic of Kazakhstan
The development of local content is an important and topical issue at the current stage of the industrial policy and remains one of the key tasks in support of domestic producers of goods and services. During the opening of the second session of the Parliament held on 3 September 2012, the Head of State noted the importance of reviewing the whole system of support of local content, especially in the processing industry, the agricultural sector and low competitive industries. In this regard, the President instructed the government to analyze jointly with the National Welfare Fund Samruk-Kazyna the international practice and develop our own model for support of Kazakh producers.
Two laws and twelve governmental resolutions developed and adopted pursuant to the task of the Head of State in respect of local content contributed to establishment of effective system for its monitoring and development. We have nearly achieved a hundred percent level of local content reporting submission from subsoil users and obtained a real picture of participation of domestic enterprises in the development of hydrocarbon deposits. While in 2010, when the System of the Ministry of Oil and Gas for Receiving Reports from Subsurface Users was set into its operation, we received only a third of all the reports, in 2011 this problem was completely resolved. In addition, Kazakh entrepreneurs obtained direct access to the procurement plans of the industry. Today any provider registered in the Registry of the Ministry of Industry and New Technologies information system or in the system of the Ministry of Oil and Gas can see what, when and in what amount oil and gas companies are planning to purchase. Such data allow providers to adjust their production plans to the real needs of subsurface users.
One of the major problems we faced at the early stages of our work was the lack of clear material obligations in respect of local content in subsurface users’ contracts. As a result of interaction with companies, specific obligations on local content have been adopted under 168 contracts. Serious “stimulus” for development of local content in oil and gas companies was the introduction in the contracts of penalties for failure to commit such obligations (it concerned 107 contracts). This year, for the first time, 44 penalties were imposed on the companies-violators.
As a result of the ongoing analysis which is being conducted since 2010 in terms of compliance of the procurements with the Rules approved by the Government for subsurface users, oil and gas companies have significantly revised their position on the transparency of tender procedures. While in 2010 violations of the Rules involved procurements in the amount of 157 billion tenge, which made up 25% of all purchases, in 2011 this amount reduced to 18%. And in the first half of the year 2012, the figure was already reduced to 6%.
Considering the above, according to the monitoring for the period from January to June of the current year, oil and gas companies have achieved the following indicators: local content in the procurements of goods amounted to 10.5%, works -– 39.2% and services – 59%. Overall, the volume of purchases if compared to the same period of last year increased by 35% reaching 304.5 billion tenge, and local content in goods, works and services – by 39% reaching 146 billion tenge.
In order to understand the effectiveness of ongoing measures taken by the governmental authorities, we have modeled the most favorable situation for the local content analysis. The results showed that taken full load of Kazakh producers in 2011, the level of local content would have been more by 3%. That is, already during the last year we have almost reached the maximum indicator with the existing production facilities of Kazakhstan. At the same time there is a question of production of non-capital incentive commodities and limited domestic production capacity.
Analysis of future purchases during the development of existing fields shows that the bulk of the orders (about 70%–80%) will account for the goods, works and services for wiring deep subsalt wells. Given the forecast of future prevalence of demand for goods, works and services on such fields it is required to prepare local producers to entry into this market. That is, we must learn to develop the production of goods and improve services that are in demand in the deep-lying fields.
The primary objective of governmental authorities today is to assist in strengthening the capacity of Kazakh companies to produce competitive goods, including modernization of equipment and employment of cutting edge methods and technologies through the state programs of business support.
In the short term, we plan to focus on a spot work with nine major subsurface users of Kazakhstan, which account for 75% of the total procurement of goods, works and services in the industry. Increase of local content in the procurement of these companies by only 1% means an increase of procurement from Kazakh producers by 15 billion tenge. An extended meeting with the heads of the “big nine” is scheduled to be held in the nearest future for the purpose of setting targets for promotion of local content in their projects.
We should understand that such an administrative approach in the development of local content is caused by global and domestic consistencies, and the influence of the economic crisis cannot be ignored. Considering the long-term development of local content, the today’s policy in terms of works and services will not change with the accession of the Kazakhstan to the WTO. During the negotiation process, we were able to reach certain compromises to preserve (albeit in a limited way) the policy to support domestic production in oil and gas sphere. For new contracts, we must build a new model to support of Kazakhstani economy by the subsurface users.
Partnership potential
The range of equipment used in the oil and gas industry today is very broad. For example, in the procurement analysis conducted jointly by the work groups of KMG, TCO, KPO, NCOC and Association of Legal Entities “Union of Machine Builders of Kazakhstan” aiming to increase local content in major oil and gas projects on the product group, 30 thousand items of equipment, spare parts, tools and materials were revealed.
Considering the above, it is very important to correctly identify the range of import substitution goods, and to assess the economic feasibility and technical possibilities of their production in the long term, that is, during the entire life cycle of the project.
The initiatives of the KAZENERGY Association, large oil and gas operators, local and foreign companies are primarily focused on increasing local content in the procurement of subsoil users, including through the creation of joint ventures with foreign service companies, which should bring modern technologies, investments, and ensure the creation of new jobs. All of the above should give additional impetus to the development of both oil and gas and related industries in Kazakhstan.
As the benefits received by foreign partners in joint ventures, it may be noted, first, the state-run policy for industrial and innovative development, creating a solid foundation for the successful expansion of the business in the long term, as well as a favorable investment climate. Second, there is a potential opportunity to win the tender for the supply of goods, works and services for national companies and organizations that are part of Samruk-Kazyna JSC, as well as the entry to the market of the Customs Union countries and Kazakhstan’s neighboring states.
The personnel is first
For the two decades Kazakhstan has been developing its oil and gas industry. And if at the beginning the republic suffered lack of knowledge and experience to perform independent development of the largest oil and gas fields, now we have reached a certain level of development and can provide, where possible, the maximum involvement of Kazakhstan people in this process.
The fundamentals of the regulatory framework for creating a pool of qualified Kazakh specialists and their participation in the development of oil and gas industry were identified by the adoption of the Law “On Subsoil and Subsoil Use”. The reporting forms for oil and gas companies, as well as the methodology of calculation of local content in the personnel structure were adopted. Almost all subsoil use contracts contain obligations for companies on the volume of local content in their staff, and the amount of mandatory expenses for training of Kazakh specialists was determined.
In figures, today about 72 thousand people are engaged under contracts for subsoil use of hydrocarbons. The share of foreign specialists is insignificant and constitutes only 2.3 thousand people, that is, the indicator of the local content in staff is 96.7%. The fact is worthy of noting that we are talking about permanent employees working under current contracts, excluding contractors and subcontractors involved in the work on the fields. Coverage of this particular segment is the main focus in the project implemented by the Ministry to prepare the high-demand technical specialists at the expense of subsoil users.
In general, the development of labor potential in the oil industry pursues two directions. First, as part of their contractual obligations subsoil users improve competence of their own staff in order to perform gradual nationalization of the personnel.
Taken the average annual expenses of $600,000 spent on training by a single oil and gas company, the total amount of funds earmarked for these purposes by the industry is about $120 million. Second, according to the Law “On Subsoil and Subsoil Use” the unused funds allocated to the corporate training should be directed to the education of citizens of Kazakhstan, and especially to the advanced professional training of domestic contractors’ personnel.
Monitoring of contractual obligations on training identified a number of subsurface users with significant debt. A coordinated approach to the development of these tools allowed us to prepare more than four thousand highly-demanded technical experts, which was a real support to about 170 Kazakh companies, as well as a real contribution to solving the issues of full employment.
This year, the project under implementation reached a qualitatively new level. One of the obvious problems in the employment of young professionals is a lack of unique qualification requirements from the employer’s side. Given the current level of the development of the national qualification system, international qualification may become the alternative and the professional “elevator” for the candidates. Investing in the training of highly qualified specialists in accordance with international standards meeting the requirements of foreign investors will provide the demand and labor mobility of Kazakh personnel. For example, this summer the Lloyd's Register Kazakhstan international certificates for welding were provided to the first participants of our project.
We should understand that the development of giant oil fields unheard-of in the history of the domestic oil industry, including in the Caspian shelf, will require maximum mobilization of human resources, and we must be ready for it. Therefore, our primary task is to cooperate fully with the Kazakh service companies, including preparation of relevant personnel. This will bring up qualified local suppliers able to perform the most complex offshore work, satisfying the requirements of the oil and gas industry.
