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 KAZAKHSTAN International Business Magazine №1, 2005
 The Oil and Gas Industry: A Year's Auspicious Beginning
The Oil and Gas Industry: A Year's Auspicious Beginning
Editorial Overview
Early 2005 was quite remarkable as much occurred that could influence the further development of the Kazakhstani oil and gas sector. The most significant events were the accords reached on expanding the export capacity of the Caspian Pipeline Consortium, the completion of negotiations, Kazakhstan's return to the North Caspian Project, and the ongoing restructuring of Kazmunaigas's production assets.
At the same time, in January–March 2005, Kazakhstan steadily increased production of hydrocarbons. During the first three months alone, the production of oil and gas condensate grew by around 13% and that of gas by 42%; oil processing volumes increased by 11.7%.
Astana and Moscow Step Up their Fuel and Energy Cooperation
During a January 2005 meeting in Almaty, Kazakh president Nursultan Nazarbayev and his Russian counterpart Vladimir Putin analysed and praised their countries' cooperation in the sphere of fuel and energy. The Kazakh leader emphasised the role of Russia's Lukoil, which has so far invested around $2bn into joint Kazakh-Russian projects.
Nazarbayev made particular note of Kazakh gas supplies to Orenburg for further treatment. Within the framework of this project, Gasprom and Kazmunaigas will set up a joint venture for processing gas from the Karachaganak gas field at the Orenburg treatment plant. The venture's objective is to boost the amount of Kazakhstani gas treated to 15 billion cubic metres per year. It is expected that the Kazakh side will purchase 50% of the Orenburg plant's assets from Gasprom and these assets will be included in the joint venture. Karachaganak's operator—the KPO consortium—will sign an agreement on long-term gas supplies for the new joint venture. The project envisages an investment of $300-320m for the reconstruction of the Orenburg plant and the laying of a gas pipeline from Kazakhstan to Orenburg, occurring within 18 to 24 months. By expert estimates, the total Kazakh investment in the project, including the reconstruction of the Orenburg plant, may amount to some $1bn.
On 14 March in Moscow, Kazmunaigas First Vice President Timur Kulibayev and Lukoil President Vagit Alekperov signed articles of association for a joint venture to develop the Khvalynskoye field in the Caspian and to transport and sell energy and hydrocarbon products. Therefore, the legal process of the project ended and the practical one began.
According to Lukoil's president, "The project is very complex and capital-intensive." Total investment will surpass $1bn and the field will be commissioned into operation by approximately 2010.
Vagit Alekperov also guaranteed that the most stringent environmental requirements would be met while implementing the project. He also expressed hope that this year will see the signing of a PSA on this field.
The Khvalynskoye field was discovered 260 km from Astrakhan in the north Caspian in 2002. The sea depth around the field is 25-30 metres. As a result of 3D seismic surveys and the drilling of two wildcat wells, four gas condensates and one oil deposit have been discovered. In 2002 the Central Reserves Committee of the Russian Ministry of Natural Resources approved the reserves of the field (C1+C2): 332 billion cubic metres of natural gas, 17 million tonnes of condensate and 36 million tonnes of oil.
The joint venture is being set up on the parity basis under the protocol of 13 May 2002 to the Kazakh-Russian agreement on dividing the North Caspian seabed for the purpose of exercising sovereign subsoil use rights (6 July 1998). In particular, this document provides for the development of Khvalynskoye by a subsoil user set up by authorised organisations from both sides. The Russian government decree on 25 July 2002 appointed Lukoil as the authorised organisation on the Russian side. In addition, the interstate protocol envisaged a possible signature of a PSA on this project. Therefore, Lukoil and Kazmunaigas indicated a PSA as the priority form of subsoil use and taxation in the agreement on the joint development principles of the Khvalynskoye field (signed on 18 April 2003).
CPC Shareholders Agreed on Expansion
The Kazakh and Russian heads of state believe that expanding the export capacity of the Caspian Pipeline Consortium is one of the key directions for cooperation. CPC provides Kazakh oil with access to international markets.
On 1 March 2005, CPC shareholders held a meeting in Astana to discuss expansion of the pipeline system. As it ended, Kazakhstani Minister of Energy Vladimir Shkolnik stated that a mutual understanding was reached between all shareholders—the government and oil producers. The financial, legal, and organisational aspects related to expanding the CPC to full design capacity have been discussed. It is planned that the expansion will begin in the third quarter of 2005. In addition, an agreement to raise the tariff for transporting oil via the CPC from $27 to $29.5 was secured.
According to the minister, the memorandum of understanding between the parties as to the agreement of CPC shareholders on the basic principles of expanding the CPC is to be signed in Moscow in April 2005.
Experts estimate that an investment of $1.5bn will be required for boosting CPC's capacity to 67 million tonnes per year. The sources of financing will be defined in the upcoming plan of funding the CPC expansion project to be approved by the shareholders prior to signing the expansion agreement.
Shkolnik also stressed that the shareholders signed a two-part protocol: "The first part indicates that we have reached a mutual understanding and the second part is comprised of issues to be solved. It is clear why these solutions are being sought, but there are different ways of finding them."
According to the Kazakh Energy Minister, the parties agreed "on the major principles on which the expansion will be based". These are the approaches related to levying tariffs and the basic expansion principle of 'pump or pay'.
"The principles and approaches to management costs—both operational and capital costs—have also been reviewed. Everybody agreed that these should be controlled and cut as much as possible. We just have different opinions on how to make it happen," Shkolnik clarified.
According to the minister, the above protocol contains two groups of issues: "Document preparation will begin on the CPC expansion issues we have agreed upon. Experts will be working on the contradictory issues—negotiating and clarifying their positions and looking for mutually acceptable solutions so that we could meet in Moscow and sign the final memorandum during the first ten days of April," Shkolnik said.
The 1,580 km Tengiz–Novorossiysk CPC oil pipeline connects oil and gas fields in Western Kazakhstan with the Russian shores of the Black Sea.
The shares of CPC's founding governments are distributed as follows: Russia holds 24%, Kazakhstan 19%, and Oman 7%. The shares of private oil companies are: the 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 – 1.75%, and Oryx Caspian Pipeline LLC – 1.75%.
From the beginning of the pipeline's operation in October 2001 to January 2005, 50 million tonnes of oil have been exported via CPC. In 2004 alone, a total of 22.5 million tonnes were shipped.
The expansion will allow the increase of CPC's capacity to 67 million tonnes per year by building ten additional pumping stations, additional tanks, and a third tanker loading unit.
Oil Production: Facts…
According to the Ministry of Energy and Mineral Resources of Kazakhstan, 10.075 million tonnes of oil and gas condensate were produced in Kazakhstan during the first two months of 2005 (up 10.7% from the last year's figure); gas condensate accounted for 761,400 tonnes or 85.4% of the similar indicator last year.
In January–February 2005, Kazmunaigas produced 1.47 million tonnes of oil and gas condensate (110.8% of the similar indicator in 2004). The breakdown is as follows: Ozenmunaigas produced 1.031 million tonnes of oil (115.8%) and 3,840 tonnes of condensate (86.5%), Embamunaigas 430,650 tonnes of oil (99.8%), and Amangeldy Gas 4,015 tonnes of gas condensate.
The enterprises in which Kazmunaigas participates produced 2.58 million tonnes of oil in January–February 2005 (103.5% of the last year's indicator). Tengizchevroil accounted for the bulk of the oil produced: 2.28 million tonnes or 100.5% of the last year's indicator.
During the same period, other Kazakh oil companies produced 6.023 million tonnes of oil (114.1%). These include Mangistaumunaigas with 887,000 tonnes (105.1%), CNPC-Aktobemunaigas 873,092 tonnes (101.3%), Karachaganak Petroleum Operating (KPO) 1.636 million tonnes (141.8%), and PetroKazakhstan Kumkol Resources 640,338 tonnes (90.7%).
The regional breakdown of oil production in January-February 2005 is as follows: the Mangistau oblast saw a production of 1.636 million tonnes of oil, Aktobe oblast 907,897 tonnes, West Kazakhstan oblast 1.656 million tonnes, Kyzylorda oblast 1.722 million tonnes, and the Atyrau oblast 2.868 million tonnes.
By preliminary data, the production of oil and gas condensate in the country in the first quarter of 2005 was 15.64 million tonnes, which is 12.8% higher than the similar indicator of 2004.
…and Plans
The Ministry of Energy and Mineral Resources forecasts that by 2008, Kazakhstan will be producing around 72 million tonnes of oil and gas condensate.
"It is expected that oil and gas condensate production will reach 60 million tonnes in 2006 and around 72 million tonnes in 2008," stated First Vice Minister of Energy and Mineral Resources Baktykozha Izmukhambetov on 15 February 2005 in Astana, during a national meeting focusing on a midterm plan for the country's socioeconomic development in 2006-2008.
He stressed that a number of projects are to be implemented to increase oil and gas condensate production.
One of them is the practical implementation of the second-generation plant project and the first phase of the sour gas injection project by Tengizchevroil at the Tengiz field (Atyrau oblast) in 2007–2008.
During the period under consideration, Kazmunaigas will continue rehabilitating the Uzen field.
In addition, the infrastructural development of the Kashagan field in the Caspian is expected to be complete in 2007–2008. Production will be launched in 2008 at the initial rate of 500,000 tonnes of oil per year.
Gas Production Figures
According to the Ministry of Energy and Mineral Resources of Kazakhstan, gas production in January–February 2005 came to 4,210.533 million cubic metres (up 39.6% from the 2004 index). Production of natural gas amounted to 2,322.753 million cubic metres (149.1% of the same period last year).
In January–February 2005 Kazmunaigas produced 238.134 million cubic metres of gas (122.4%). Ozenmunaigas produced 172.52 million cubic metres of gas (98.4%), Embamunaigas 26.651 million cubic metres (169.6%), and Amangeldy Gas 38.963 million cubic metres.
The enterprises involving the participation of Kazmunaigas produced 1,251.292 million cubic metres of gas (150.1%) during two months in 2005, with Tengizchevroil accounting for 1,165.27 million cubic metres (147.1%) and Kazakhoil Aktobe 51.148 million cubic metres.
The other Kazakhstani companies produced 2,721.107 million cubic metres of gas (136.8%) during the first two months of 2005. These include Karachaganak Petroleum Operating (KPO) with 1,940.655 million cubic metres (162.5%), CNPC Aktobemunaigas 347.755 million cubic metres (97.7%), and Mangistaumunaigas 34.941 million cubic metres (109.9%).
In all, Kazakhstani gas production during the first quarter of 2005 was around 6.6 billion cubic metres by preliminary data, which is 42.4% higher than the similar indicator in 2004.
According to Izmukhambetov, it is expected that 28.9 billion cubic metres of gas will be produced in Kazakhstan in 2006 and 40.34 billion cubic metres in 2008. Production of marketable gas will be increased to 21.6 billion cubic metres by 2008.
As for gas exports, they stood at 7 billion cubic metres in 2004 and are planning to increase to 9.8 billion cubic metres by 2008.
In 2006, $9.8bn is to be invested into Kazakhstan's mineral resources complex, including $7.2bn in foreign investment. In 2008 the figures will come to $12.7bn and $9.3bn, respectively.
Oil Processing Figures
According to the Statistics Agency of Kazakhstan, in January–March 2005, Kazakhstan processed 2.471 million tonnes of oil, up 11.7% year-on-year.
Petrol production, including aviation petrol, grew by 27% during the first quarter of 2005 (as compared to the same period of 2004) and reached 532,900 tonnes.
National Operator Optimises Structure…
To form a vertically integrated company, in January 2005 Kazmunaigas gave its 86.7% share in the Atyrau refinery's authorised capital stock to Exploration & Production Kazmunaigas, its subsidiary, in order to pay for the latter's placed stock.
Kazakh experts estimate that the transfer of the nation's oldest refinery to the management of Exploration & Production Kazmunaigas will allow "the vertical integration of the production/treatment process and the generation of additional profits by boosting added value."
The new issue of 5,826,164 shares of Exploration & Production Kazmunaigas common stock was registered on 10 December 2004 with the Financial Supervision Agency. Share placement was by subscription, at 250 tenge per share.
The company's authorised capital stock was 10.340 billion tenge before the issue. After the entire issue is placed it will reach 11.797 billion tenge.
The ordinary shares of Exploration & Production Kazmunaigas were included in the A category of the Kazakhstan Stock Exchange (KASE) official securities listing. The KASE Council made the decision on 29 December 2004.
The total number of shares included in the official listing is 43,051,132 with 37,224,968 ordinary shares and 4,136,107 preferred shares as of 1 December 2004.
The appearance of Exploration & Production Kazmunaigas shares at the KASE proves that the company is oriented toward developing the securities market and pursues a policy of improving corporate management and increasing transparency.
At the same time, the management of the national oil and gas company is set to continue asset restructuring and optimisation. According to president of Kazmunaigas Uzakbai Karabalin, the ongoing restructuring programme targets the creation of an effective asset structure and an increase in management efficiency by focusing efforts on strategic assets.
"The structural optimisation will reduce the number of business entities to 21 by 2007. This is the minimum number that is essential for the company's effective operation," notes Karabalin.
Under an asset-restructuring programme approved in 2003, Kazmunaigas consolidated and restructured most of its subsidiaries last year. There were 53 business entities within the company in 2004; as a result of optimisation, this number has been reduced to 39.
Withdrawal of non-core subsidiaries into the small- and medium-sized business sphere will boost their competitive edge, let alone that of the national operator.
…and Raises Production Rates
In the first quarter of 2005, Kazmunaigas produced 2.241 million tonnes of oil and gas condensate, up 199,000 tonnes year-on-year. The increase in production was due to the use of state-of-the-art technologies.
The Atyrau refinery, which is a part of Kazmunaigas, processed 723,000 tonnes of oil during the first three months of 2005. Oil supplies by Kazmunaigas to the refinery totalled 515,000 tonnes. The manufacture of oil products also grew: petrol by 54.5%, diesel fuel by 24.6%, and fuel oil by 69.9%.
Kaztransoil transported 9.078 million tonnes of oil in the first quarter of 2005, up 112,000 tonnes as compared to the 2004 figure.
The volume of gas transported by Intergas Central Asia in January–March 2005 came to 33.69 billion cubic metres, up 0.02 billion cubic metres year-on-year.
The Kazmunaigas's income in January–March 2005 reached 124.4 billion tenge, which is 28.2% higher as compared to the same period of 2004. In 2005, the revenues are projected to reach 497.5 billion tenge.
The company is currently implementing an active investment policy. In January–March 2005, capital investment from equity funds made up 10.9 billion tenge, including 10.8 billion invested into production.
Kazmunaigas's subsidiaries and associated companies account for 26.08 billion tenge in taxes and contributions paid to the government budget in the first quarter of 2005.
Regarding production, Kazmunaigas plans to increase the production of oil and gas condensate to 9.3 million tonnes in 2005. For comparison, the figure was 7.914 million tonnes in 2003 and 8.92 million tonnes in 2004.
It is expected that transportation volumes in 2005 will reach 36.574 million tonnes of oil and 116.7 billion cubic metres of gas.
In 2005, planned capital investment by Kazmunaigas from equity funds is at 95.8 billion tenge. The national operator's profits are projected to reach 495.9 billion tenge in 2005.
Kazakhstan Becomes a Shareholder in the North Caspian Project
In late March, negotiations between the government and contractors to purchase 50% of BG's shares in the North Caspian PSA (signed on 18 November 1997 by Kazakhstan represented by Kazmunaigas) came to an end. The price of stake was $900m.
The final sum due to the BG Group will reach $1.79bn. It includes compensation for the costs incurred by the BG Group from the date when the agreement came into force economically (1 January 2003).
Kazmunaigas's specialists point out that the document package on Kazakhstan's 50% share purchase signed with the contractors fully reflects the accords reached on Kazakhstan's participation in the North Caspian Project. Buying the stake will help Kazakhstan strengthen its energy balance and augment its proceeds to the national budget.
At the same time, according to Chairman of ENI's BOD Vittorio Mincato, Kazakhstan's joining of the North Caspian PSA will foster and speed up Kashagan's development.
Mincato believes that the success of this important project, concentrating the best international oil know-how, is of strategic importance for Kazakhstan and all the partner companies.
They are planning to finalise the deal by the end of April 2005.
After the deal is complete, the composition of the project participants will be as follows: ENI (the project operator with an 18.52% share), Total (18.52%), ExxonMobil (18.52%), Shell (18.52%), ConocoPhillips (9.26%), Inpex (8.33%), and Kazmunaigas (8.33%).
In 2003 BG announced its intention to sell its 16.67% share in the AGIP KCO consortium, which operates a number of oil-bearing structures in the Caspian off of Kazakhstan, including the giant Kashagan field.
Three other structures make up the North Caspian project: Kalamkas, Aktoty, and Kairan. All of them comprise 11 offshore blocks occupying an area of 6,000 sq km.
AGIP KCO was formed in 1997 as a result of a corresponding PSA effective for 40 years. Until recently the consortium comprised ENI (the project operator), Total, ExxonMobil, Shell (16.67% each), and Inpex and ConocoPhillips (8.33% each) in addition to BG.
The consortium plans to launch commercial extraction within the North Caspian project in 2007–2008.
According to statements by AGIP KCO, Kashagan's extractable oil reserves are at least 7-9 billion barrels and the probable reserves stand at 38 billion barrels.
The total investment in the North Caspian Project over the entire PSA term is planned at around $57.1bn, including $3.5bn in 2005.

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Oil in the CIS: Economic and Sovereign Rating Implications  Special Report of Fitch Ratings Agency 
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