In Special Focus Area
At the beginning of October, Almaty hosted the 22nd International Oil and Gas Conference KIOGE-2014. It raised a very broad range of issues; however the primary focus was on the debate on high technology adoption in hydrocarbons production, problems of exploration efficiency, and sectorial legislation optimization.
Joining to Tackle Global Challenges
Opening the Conference, the Minister of Energy and EEC Infrastructure Daniyal Akhmetov said that global political and economic instability has affected the global oil and gas industry by pushing down the price of the "black gold". Moreover, the expected shale revolution threatens to radically change well-established market architecture. "In these circumstances, despite high environmental risks in some countries, particularly in the United States, shale deposits development has increased. The rate of development of shale fracking shows that in the coming years the U.S., which previously imported a significant proportion of hydrocarbons, can now become one of major oil and gas exporters to the world energy markets."
According to experts’ forecasts by 2025 shale gas production in the United States may reach 440–470 billion m3 per year, which would allow the U.S. to move to the fore in the global energy sector. With the increase in the United States’ production, the U.S. dependence on energy imports will decline. It is expected that as early as by 2025, the country will fully meet its own needs, and by 2040 it may become a net crude oil-exporting country.
The inclusion of shale energy resources into the world energy output would significantly increase competition and affect the strategic interests of traditional exporters.
At the same time, according to Mr. Akhmetov, the projected decline in oil production in Russia down to 505 million tons by 2025 will be offset by increased production in Kazakhstan – from 95 to 125 million tonnes. As for gas production, its total output will exceed 800 billion m3 per year, which would maintain the export capacities of our countries.
According to the Minister, under the current circumstances the issues of the fuel and energy industries competitiveness in the Customs Union and Single Economic Area countries. "I want to mention the strategic importance of the Treaty on the Eurasian Economic Union signed by heads of the states this year, which is aimed at moving Kazakhstan, Belarus and Russia to a higher level of integration, which ensures free movement of goods, services, capital and labour."
In order to develop the unified energy market the treaty provides for creating the concept by January 1, 2016, and a program of common gas, oil and petroleum products markets grouping by January 1, 2018. The activities included there should be completed by 2024. Upon their completion, international treaties will be concluded to establish a common market coming into force no later than in 2025. They will include such basic provisions as uniform rules for energy transportation system access that are critical for creating competitive environment in the territory of the Union and efficient use of oil and gas infrastructure.
Certain provisions of the Treaty deal with the development of indicative oil, gas and petroleum products balances. According to the developers, they should become an effective tool for solving the problem of balanced demand and supply in the energy markets of the Union, optimization of interstate energy deliveries and access to transportation systems. "We have already prepared a draft – it is conceptual and tested by our parties, and in the near future it will be adopted," the Minister said.
In the meantime, the supply of gas, oil and petroleum products continues to apply the regulation practice based on bilateral agreements, which, according to Mr. Akhmetov, are not free from "certain disadvantages". However, he believes that gradual transformation is preferable to excessive haste. "The transition from the existing practices to a single oil and gas supply regulation mechanism shall take time and require purposeful work on the creation of an appropriate legal framework".
In this way, the EEU’s countries have already identified specific measures for creating common oil and gas markets and a particular period for their implementation. Upon their completion, in fact, a new energy market will be created with huge scientific and technological potential and enormous natural resources. According to Mr. Akhmetov, this should be a powerful factor of the Union’s competitiveness in the energy sector.
Exploration and Innovation
In turn, Deputy Minister of Energy of Kazakhstan Magzum Mirzagaliyev emphasized that the instability of the oil and gas market resulting from the depletion of the explored reserves requires optimization and modernization of the domestic oil industry. "First of all, this refers to expansion of the hydrocarbon resource base, improvement of the efficiency of existing oil fields, preparation of the domestic industry to work under the new conditions requiring innovative approaches".
According to this official, the new concept of Natural Resources Code, which is currently under development, will contribute to solving this task. It should ensure the inflow of investments to exploration, which is required to keep the dynamics of geological sector development. "This document will significantly simplify the procedure for granting exploration rights and will enhance international cooperation in the search for new oil and gas fields.
The second problem is low efficiency of development and recovery in the producing oil fields. According to Mr. Mirzagaliyev, now approximately 70% of oil reserves remains in the subsoil while in Norway this figure does not exceed 50%. "The widespread use of new oil recovery methods would increase the recoverable reserves by at least 15–20%. It is necessary to enhance cooperation and use the experience of foreign partners applying new oil recovery methods”, said the official.
Continuing the discussion, the Director General of the Research Institute of Industrial and Drilling Technologies of the NC KazMunayGas John Richards Dennis described the experience of the national operator in innovative technologies adoption. "We focus on how to put together full information and knowledge of KazMunaiGas in order to understand the history of Kazakhstan’s resource potential. In fact the Institute’s strategic goal is to increase the resource base, as well as to improve the efficiency of production at existing and new oil fields, which is called transformation process".
At this stage, the Institute’s experts focus mainly on examination of the known fields, where there are still additional reserves. "These issues are solved by a standard approach, i.e. processing of geological and geophysical information in order to gain an overall picture of what we have at the moment. Previously this information was available in the form of fragmentary data. But this way Kazakhstan is losing the overall picture. Now we are trying to integrate this data in full."
According to Mr. Dennis, the main focus is on the study of dwindling resources, in particular, the fields, which have long been under production, as well as challenging fields containing oil with high viscosity or high freezing points.
A large part of the study is devoted to downtime reduction, increase of overhaul interval, as well as minimizing well drilling time. According to the speaker, a smart field concept is now under development. For this purpose in Astana an information visualization centre is under construction and will be completed this year.
In addition, the institute also carries out research to improve extraction technologies. "We intensively studied benchmarks for drilling and production processes. There are good results not only in Kazakhstan but also in other countries. There are more success stories of wells of similar depth and complexity, for example in Russia, which holds great opportunities. As a result, we are approaching a turning point, and soon we’ll get concrete results from this activity.
Elaborating on the subject, the Chairman of the Geology and Subsoil Use Committee of the Ministry for Investment and Development of Kazakhstan Bazarbai Nurabayev said that today the government agencies are developing measures on application of innovative methods for mineral resources exploration and development. And the main focus is on the super deep drilling technology. "Recent studies have shown that in Kazakhstan at such depths there are deposits with large amounts of hydrocarbons. The bulk of oil and gas mostly concentrated in the deep-lying formations over 6–7 km."
However, within the framework of a regional study of subsurface resources the exploration program for 2015–2019 provides a comprehensive geological and physical study of sedimentary basins by regional profiles – geotraverses, the total length of which is 4,720 linear kilometres with a depth of research of up to 15 thousand meters. The official explained that this work will start in 2015.
The main objective of the study is to obtain comprehensive geophysical data: determination of the total capacity of sedimentary cover, examination of the structure and material composition of the deeper layers of the cortex, fault tracking, clarification of tectonic elements and tectonic classification boundaries. The study will be carried out by using a complex of geophysical, seismic, airborne geophysical, space geological methods, with further drilling of stratigraphic and parametric wells. The purpose of this work is to study the rock composition of previously hidden deep-lying complexes.
Investors need regulatory environment...
Development of new fields, including hard-to-recover reserves, requires large investments with high recovery risk, what requires a more favourable legal environment. According to the director for business development of Total E&P Kazakhstan, Gulmira Utegenova, in this regard, much work should be done in Kazakhstan, since "some legal innovations do not work properly or they are just declarative". And it is above all the case of the administration of the subsurface use legislation.
The problems, which investors currently face, make them afraid. Therefore they need to get guarantees concerning an improvement of the fiscal system to attract more investment when the subsoil use rights are granted.
"It doesn't matter whether it's a new code or act as amended. We need very good legislation that will be quite attractive regarding simplification of exploration. First of all we would like to suggest a new principle for Kazakhstan: he who submits first gets it first. Again, many people think that if they learned about any fields, they can submit an application to the government and get the right to develop them through direct negotiations. Well, in any case, the government put them up for a tender, but if the number of tender applicants is not sufficient, it is reasonable to give the block to the only tenderer."
Ms Utegenova proposed to prescribe carefully in the draft code a procedure for implementing such a principle. "I want to give an example of what such an idea might result in. As you know, one of those tenders was issued just before Christmas And before all of our foreign investors had returned from their vacation, the first round was over and all of them lost the opportunity to participate in it. It is necessary to avoid such situations, and the government should work on bidding proposals".
To this effect, in the speaker’s opinion, it is essential to use other countries’ experience and publish a notice of invitation to tender long before its holding, and "not only in Russian and Kazakh languages and in any local newspaper, but through extended coverage in foreign media."
In addition, Ms Utegenova said that a geological information package has to be prepared in advance, in order to give investors time to get ready and make an informed decision on participation in the tender.
At the end of her speech, she noted that at the beginning of the year, amendments were made to the regulatory documents on access to geological information; however this mechanism does not work properly, because it is not available for every subsoil user. "At the moment, this system is mostly declarative. Many people, when they apply to the Committee for Geology, find that there is a multiple-stage permitting process required, and as a result, they do not take advantage of the opportunity."
…and our service companies need access to projects
Given the challenges faced by the domestic oil and gas industry, oil related services delivery can be a very promising and profitable area. According to the Chairman of Kazservice, the Union of service companies of Kazakhstan, Almaz Kudaibergen, oilmen will need helpers, who will do the exploration, drill, build complexes, serve wells, feed. In general, everything that is oil service.
According to his estimation, today for one employee of an oil and gas company there are at least three representatives of the oil service industry, which according to experts is estimated at at least 130 thousand people employed representing a contribution to the GDP of 5%.
During intensive implementation of large fields development projects, for example in Kashagan infrastructure development, construction of TCO second generation plant or Karachaganak Expansion Project, have been established a number of new companies that have significantly improved their competence. If in the early 2000s local contractors and service firms provided mostly simple work, now they can be found involved in projects of medium and high complexity.
Where does Mr Kudaibergen see opportunities for even more involvement of domestic firms? The first is the transfer to local contractors of at least 50% of engineering work on projects that are currently performed outside the Republic. "This will help to create in Kazakhstan several thousand of new highly skilled jobs, strong oil and gas engineering industry will develop. By developing this direction in a few years we already will be able to export services in the neighbouring countries within the EEA, in particular, to the Russian shelf.
According to tradition, the speaker mentioned as an example the experience of Norway, which now from oil and gas services exports gains income comparable to half of the revenue from sales of energy resources as such. Moreover, the engineering in Kazakhstan will open even greater access to projects for our manufacturers. "They will be able to plan the release of new products or equipment in advance. Their workload will increase, and new businesses and services conducted by foreign companies will be established."
The second opportunity, according to Mr Kudaibergen, could be an increase in local content in construction of oil and gas facilities. "In the civil construction industry large national champions formed, which employ 10 thousand citizens of Kazakhstan. There are a lot of construction sites in Astana, large automobile and railway roads are under construction, and it is Kazakhstan companies, who perform all this. If we manage to repeat that success in the oil and gas construction, it will be a great achievement."
To this effect, large building operators should be advised to involve Kazakhstan companies in the oil and gas sector. It is clear that the latter have to be competitive on price, quality and human resources. And to achieve this, Mr Kudaibergen recommended to local entrepreneurs to adopt extensively experience of foreign colleagues and create joint ventures.
Gas Exports Prospects
Simon Pirani, the senior researcher of the conventional gas programme of the Oxford Institute of Energy Studies, presented to the Conference participants his opinion on the market prospects of Central Asian gas exports.
According to him, despite the fact that most of the conventional gas in the country is brought to the surface together with oil, Kazakhstan has quite a high potential in this area. According to his appraisal, in the coming 15 years, production of gas in the republic will increase significantly and will stabilize at the level of 30 billion m3. And the main markets for the raw materials can be seen in Russia, the Central Asian region (including domestic market of Kazakhstan) and Asian countries (especially China).
As for Russia, according to the expert, due to investments in the development of atomic energy industry our neighbour has ample opportunities to improve energy efficiency, what will cause a decline in gas demand. In the past 3–4 years, Siberia and major industrial regions became the main consumption driver in Russia. According to the speaker, the potential of the two largest and competing Russian gas producing companies is large enough to cover 50% of the domestic consumption market. "In these circumstances, it will be hard for the Central Asian gas to get into the Russian market, because by the time it reaches a consumer, it gets more expensive than the gas produced there. But at the same time the Central Asian gas could compete in the South of Russia, which is the closest to the region, and there are particular opportunities seen there."
Talking about the market potential of Central Asia Mr Pirani drew attention to the fact that gas infrastructure development policy becomes more important in Kazakhstan. "In this regard, it is expected that local consumption will continue to grow according to the plans of the government." A similar situation is observed in Uzbekistan, the country produces large amounts of gas, and at the same time it becomes a very large consumer of it due to the developing industry.
But for all that, China remains the most important market for the region; it was opened in 2009 following completion of construction of a gas pipeline from Central Asia to China. "Certainly, gas consumption in China is larger than in all the European countries combined, and the policy of the PRC’s Government aiming at reducing coal consumption and raising gas use will only increase the demand for it. This will contribute to increase imported volumes. In the future the Central Asian gas would be a bit more expensive compared with domestic production in China but this will not prevent it to take its place in the Chinese market basket."
The expert also paid attention to the gas needs of European countries. "Given the current situation caused by political instability in Ukraine, the EU is also interested in bringing Turkmenian gas to their markets. But if you compare the slump in European demand, which has been remaining stable over the past 5 years, and the fast-growing Chinese market, and also taking into account serious problems associated with possible construction of a trans-Caspian gas pipeline, it is clear that Turkmenistan does not require the opening of the West route".
And this situation will persist as long as the Chinese market is willing to buy larger volumes of Central Asian gas.
In this respect, the expert forecasts that China will remain the main driving force for the gas industry development in the region and, in particular, in Kazakhstan, where the latest Russian-Chinese agreement will influence the pricing. As is known, in May 2014, following many years of negotiations, Russia signed a contract for exports of 38 billion m3 of gas from Eastern Siberia to China for 30 years. On the basis of the information available to the public, the supply price will be $10.5 to $12 per British thermal unit that is slightly lower than Turkmenistan has for its gas. This gives a sort of benchmark for other exporters, including Kazakhstan, the expert said.