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 KAZAKHSTAN International Business Magazine №5, 2011
 Kazakhstani content. How to make a dream come true
Kazakhstani content. How to make a dream come true
Yuliya Melnik

In spite of the fact that the contracts on subsoil use are terminated with 28 companies of oil and gas sector due to non-compliance of liabilities on Kazakhstani content in 2010, some of the industry players did not consider the government sanctions seriously enough. As a result, five of subsoil users were added to the “blacklist” this year. Hence, the government once again showed its decisiveness to support the domestic producers.

The oil and gas companies engaged in the development of large fields of Kazakhstani hydrocarbons, spend annually hundreds of millions of USD for services, including infrastructure building, geological exploration and drilling the wells. Moreover, these costs under the contracts for subsoil use are recoverable and therefore, the government expects the interest and concrete proposals from their side to increase the proportion of local content in their projects.

In particular, in May of this year, during the regular meeting of the Foreign Investors’ Council, the President Nursultan Nazarbayev emphasized again that Kazakhstan's policy of supporting the domestic producers is an important element of economic modernization, because by participating in large projects, the local suppliers can master the new technologies. He also said that the share of the Kazakhstani content (KC) in the procurement of subsoil users is only 11.5 %. Last year, only 14 oil and gas companies fulfilled their obligations in this area and for the remaining 130 the Kazakhstani content did not exceed 25 %.

First of all, the government is interested in increasing the local content in projects of the three majors – TCO (Tengizchevroil), NCOC and KPO (Karachaganak Petroleum Operating). The amount of investments into subsoil development made by the operators of Tengiz, Kashagan and Karachaganak for the 2010 equals $7.4 billion or about 44 % of all investments into oil and gas sector of Kazakhstan. However, their rate of KC in the procurement of goods does not exceed 6 %. For example, in Kashagan the living blocks for rotational workers installed an artificial island D are made in England, the power modules are from Malta, the power and separation lines are made in Norway, Larsen dowels, which reinforce the islands are from Germany, dehydrators are from India, stabilizer for crude oil are from Korea and Malaysia, etc. It is clear that the government is not fully satisfied by such situation.

However, the majority of foreign companies are not too enthusiastic by the idea of switching to “made in Kazakhstan”. For a long time they simply ignored the local content requirements. In best case, the bypass schemes were used in which Kazakhstani firms were listed suppliers of goods and services, but in reality the import prevailed, often at the increased prices, which were included into production costs.

Rules against the will

Such situation in the sphere of the KC was partly created because of the government’s fault, whose initiatives were purely declaratory for subsoil users to involve the Kazakhstani companies into their projects during many years. Recently, the governmental activities turned into practice. First of all, last year the legislation in the area of the KC was unified and an electronic database was formed for procurement of domestic goods and services. In order to ensure the transparency and accessibility to procurement procedures, the substantial changes were made to the Regulation of the acquisition of goods, works and services for subsoil operations. In addition, the Ministry of Oil and Gas has raised the number of requirements and failure to follow them would result in termination of a contract. One of such requirements is that oil and gas companies shall achieve maximum transparency in their tender procedures through the transfer to the electronic procurement.

We would remind you that last year about hundred of subsoil users were put in the "black list" of the Ministry of Oil and Gas (MOG). The violations of the KC requirements made by these companies, the government estimated in amount of $1 billion. As a result 28 of the subsoil users have lost their right to work in their sites. In 2011, due to same reason, five more companies were under threat of termination of the contracts.

At the moment all the "guilty" oilmen were required to submit a plan-strategy for making procurement from the Kazakhstani producers. As a result of 2011, the sanctions for violations of procurement rules will be applied to them based on this plan. A particularly severe punishment is provided for lack of transparency of tender procedures – as many companies have not previously published the notifications about their purchases, so they restricted the rights of domestic entrepreneurs.

In addition, the mining companies together with the Contract Agency make the analysis of their medium-and long-term procurement to identify those items which can be ordered in the local enterprises. According to the preliminary data of this agency, the average weighted share of the KC in the goods in the medium term might be increased up to 20 %.

The current situation in figures can be represented as follows. In 2010, the oil and gas companies spent 2.1 trillion tenge for the purchase of goods and services and for that the local content was fixed at the level of 1.49 trillion tenge (69.7 %). In particular, the subsoil users spent only 33.5 billion tenge (or 9.7 % of the total amount for purchased goods) for purchasing the Kazakhstani goods, – 676 billion for works and 775 for services, 4 billion tenge. As for 2011, for the first six months the oil and gas companies made their procurements with Kazakhstani content for 3.66 trillion tenge. 310,9 billion tenge of this amount were spent for the goods (share of KC in this category dropped to 7.1 %), 200 951 billion tenge for works (56.7 %) and 3.148 trillion tenge for services (68.1 %).

This statistic shows that the worst situation with KC is present in the category of "procurement of goods." In this case, according to the Program for the development of oil and gas sector of Kazakhstan for 2010–2014, in four years the level of KC in the procurement of oil and gas companies for this category should be increased up to 16 %.

According to the executive secretary of the MOG Kanatbek Safinov, in the present the demand in oil and gas equipment in our country, only 3 % is supplied from the domestic production. In the same time, the main reason for the low rate of KC growth is a technological gap between the Kazakhstani enterprises and their foreign counterparts. This fact is used by the foreign subsoil users to justify their reluctance to work with local companies.

To be supported

In order to help domestic suppliers, the government has adopted the Program of Kazakhstani Content Development. It shall ensure the long-term orders to our producers (primarily from the public and quasi-public sectors), and they, in their turn, will have to expand the range of products, as well as to improve its quality and to reduce the prices.

In addition, in 1998 the NC KazMunayGas developed and deployed the Program of support of domestic mechanical engineering. However, at that time orders were placed only at 260 million tenge at local enterprises and only 20 types of oil and gas equipment (primarily various types of spare parts and components) were mastered. Today, Kazakhstan has already produced more than 325 items of equipment for oil industry workers, at that the amount of orders placed has reached 28.5 billion tenge, and as it is proved in KMG is not the limit.

This year, the NC KazMunayGas has developed the new Program of promoting the machine building for oil industry in 2011–2013 and signed a technology agreement with the JSC Center for Engineering and Technology Transfer. As a result of its implementation by 2015, the production volume of oil and gas equipment in Kazakhstani plants shall increase for more than 23 % to achieve 35 billion tenge. In total, the project involves 52 national companies, including the Almaty Heavy Machinery Plant, Aktobe Oil Equipment Plant, Ust-Kamenogorsk Fitting Plant, Voskhod, Pre-Caspian machinery complex, KSP Steel, Format Mash Company, Munaymash, Petropavlovsk Heavy Machinery Plant, Kirov’s Plant, Tynys, Kentau Transformer factory, etc.

As a successful example of cooperation and support of domestic oil and gas engineering, the KMG makes the joint work with KazTurboRemont LLP (gas turbine equipment) and JSC Western Kazakhstan Engineering Company (oil heating furnaces and heat exchangers). KMG participated in co-financing of these plants through the issuance of guarantees for $13 million and placing the long-term orders for $2 billion in 2010 and for 4 billion tenge – in 2011. According to Kairgeldy Kabyldin, chief of the NC KazMunayGas, the issue of repairing the gas turbines and gas pumping units was resolved in Kazakhstan, because previously they were repaired abroad (in Russia or Europe). According to Mr. Kabyldin, now it is necessary to consider the issue of involving the KazTurboRemont LLP JSC Western Kazakhstan Engineering Company into provision of repair and maintenance services for gas turbine plants in Karachaganak and Tengiz fields, where about 13 gas turbine stations are operating.

Overall in 2011–2015 KMG plans to sign the long-term contracts with the domestic enterprises for total sum of 55 billion tenge. As it was noted by the company, this program will create the conditions for production of new types of Kazakhstani oil and gas equipment, machinery and materials (which are currently imported), including such items as the screw and electric centrifugal pumps, equipment for gas transportation systems, control equipment, chemicals, etc.

The systemic work with local suppliers brings the results. At the end of the first half of 2011, the group of companies KazMunayGas had 40 % of KC, while the average KC share in the goods is shown at the level of 7.1 %. Moreover, while the remaining oilmen will have to overcome 16 % level, KMG expects to reach 50 % at least.

According to the opinion of the MOG representatives, the programs of Kazakhstani content developed by the subsoil users now might follow the way of KMG and to include such measures for supporting the local producers as entering into long-term contracts, assistance in their certification, advance payment for the costs for mobilizing equipment and personnel by the contractors, technology transfer and etc.

There is a potential

Anyway if we judge according to the study, provided by KazMugnayGas, Kazakhstan could rely on the rapid increase of the KC in the petroleum sector, especially in the product categories. These are the results of industrial research made by the Customs Union and the analysis of goods, works and services purchased by KMG, as well as other major oil and gas projects. It turned out that quite huge number of production items can be recommended for production in Kazakhstan. For example, the pumps which average annual volume of purchases exceed $5.8 million. At this time we use the pumps from the manufacturers such as John Crane, Flowserve, Worthington-Batignolles, Sunndyne, Sulzer, Weir, Bornemann Pumps. However, the Almaty Heavy Machinery Plant LLP, Pre-Caspian Engineering Complex LLP and JSC Munaymash might become the potential suppliers.

Now the products of Enersul Limited Partnership covers the needs of large subsoil users in tanks and reservoirs with the average annual volume of purchases about $12 million. Meanwhile, JSC Imstalcon, JSC Byelkamit and SFP Montazhspetsstroy LLC are quite ready for production

The valves: shut-off valve, tap valves and gates (size of the market is about $1.9 million) can be produced in Kazakhstan. In present the suppliers of these products are Cameron, Emerson Process Management AG, Worley Parsons, Lazaro Ituarte. According to the JSC KMG, Petropavlovsk Machinery Plant LLP, Kazarmaprom LLP and Ust-Kamenogorsk Valve Plant can be considered as the local suppliers for these products. In the instrumentation market ($1 million) the companies like Fisher Rosemount, Swagelok, Klinger, Emerson, Honeywell, Siemens, Krohne, K-tek, IMS Holding and Areva NC are the leading ones. The JSC Research Institute Gidropribor might be a competitor for them.

Considering the electrical equipment ($18.9 million), supplied by Siemens, Schnieder, ABB, Areva, Anixter, Peppers Cable Glands, Furse, Legrand Electrical, Cameron GMBH, Carpenter & Paterson ltd, the companies like JSC Kentau Transformer Plant, JSC Kirov’s Plant and JSC Kazelektromash are ready to establish its production here. Finally, the furnaces and heat exchangers ($7.448 million) from Delaunay et Fils could be replaced by the products which are already produced in JSC Kaskor-Mashzavod and JSC AtyrauNefteMash.

As it can be seen from the above-mentioned examples, the domestic oil and gas industry might increase the KC not only by adding more works and services, but also by switching to many types of equipment, produced within the country. The only issue is to support the companies which can deliver it and to persuade (or to oblige) the subsoil users to purchase the products with "Made in Kazakhstan" label, especially if our quality will be competitive to the quality of foreign suppliers.


Table of contents
More Oil Soon  Editorial 
Kazakhstani Сontent in Procurement of Subsoil Users  Yerbolat Yerkebulanov, Dariya Saginova 
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