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 KAZAKHSTAN International Business Magazine №6, 2011
 Oil of Kazakhstan: Show Must Go on...
Oil of Kazakhstan: Show Must Go on...
Alexey Nigay

Conference KIOGE which was held in Almaty for the 19-th time carried on the fall marathon of the petroleum events from KAZENERGY Forum. As Sauat Mynbayev, Head of the Ministry of Oil and Gas, said during its opening, the format of the KIOGE conference has always distinguished due to its applied character of the discussed issues. KIOGE 2011 was no exception.

Lyazzat Kiinov, Vice-Minister of Oil and Gas in Kazakhstan was the first to speak at the conference. In general, his report by both form and content was almost entirely complying with the speech of Sauat Mynbayev at KAZENERGY. However, on certain issues, Mr. Kiinov gave his own, quite tough comments. For example, while talking about the situation in oil refining, he said that in the conditions when the petroleum product export is banned which are valid in Kazakhstan for one and a half years already, the local businessmen, involved in sales of oil products began to look for the ways to recover their reduced profits with various legal and illegal ways.

"Just one example. We produce the gasoline AI-80 in sufficient quantity but now it is insufficient. The question is why? Apparently because we traditionally imported 30–35% of gasoline AI-92 and AI-93 from the Russian Federation. This spring the price in Russia increased and the difference between their and our pricing was 25–30 tenge. Consequently, our import of high-octane gasoline declined sharply. We immediately felt the shortage of this kind of gasoline and those who deal with AI-80, they began to make the 92-nd, 93-rd from it. People call it "diluting". As a result, we feel the lack of not only the 92-nd and 93-rd, but also the AI-80. At the same time, there is no gasoline at the petrol stations, but there is gasoline in the tank farms", – vice-minister described the situation in the domestic gasoline market.

Creating the artificial shortage, the fuel sellers can sell the same gasoline through the coupon system at the price per liter 15–20 tenge higher than the limit price set by the Ministry. In this connection, according to Mr. Kiinov, the appropriate analysis and meetings were arranged with the resource holders and deputies of Akims (Mayors) of the regions and the cities of Almaty and Astana. "We agreed that this situation is intolerable. Now, the harsh response from our side will follow each such occasion.”

A key role In fighting with deficit can be played by a large-scale modernization of three Kazakhstani oil refineries so that they be able to fully pass to the domestic crudes (now with total volume of refining of 13.8 million tonnes, the share of Kazakh oil is only 6.8 million tonnes). However, as Sauat Mynbayev acknowledged earlier at KAZENERGY, the government began the modernization of the refineries with a certain delay.

Meanwhile the deficit is cut down for the expense of KazMunayGaz that purchased the certain amount of high-octane gasoline in Russia this fall as it is known. At the same time, the company had to incur losses due to the price gap. Nevertheless, the head of the Ministry of Oil and Gas does not exclude the possibility that the next year Kazakhstan might begin the refining of its oil on tolling basis in China.

Second wind of geological exploration

Another problem mentioned in the speech of Mr. Kiinov is the development of geological exploration which, according to his words, "is the most important for domestic oil and gas sector". Once, Kazakhstan was one of the leading Soviet republics by volume and quality of geological exploration. However, "we have lost those achievements".

Today, we still have to use the geological information, accumulated during the Soviet time. Although there is already a positive trend – the understanding of the importance of this industry became clear and government takes the steps to revitalize it. As it is known, Kazakhstan adopted a special state program on development of mineral and raw material industries for 2010–2014. Its implementation shall ensure the growth of reserves in all major types of minerals. The issue of creation of the geology research institutes – the special association within Samruk-Kazyna, which will be involved in prospecting the minerals is under consideration now. Lyazzat Kiinov expressed the hope that Kazakhstan will be able to raise this work to the appropriate level to ensure the availability of the required raw materials in the future.

This theme was continued by the academician Geroy Zholtaev, Head of the Geology Department of Oil and Gas at the Research Institute of Geological Sciences named after Satpayev. According to his opinion, 4.8 billion tonnes of Kazakh oil reserves are distributed unevenly overt the territory of our republic, since 50% of the hydrocarbon accumulations are concentrated in Tengiz and Kashagan fields.

"In the rest of the land – North, South and East of the Pre-Caspian area, where an infrastructure is available, we cannot be proud of the oil reserves increase. The successes in these areas are modest, despite the fact that there are the great prospectives.  The problem is that targeted, high level oil exploration is not ensured." In Kazakhstan there is still no single science-based program of exploration, except the rest of that was made during the Soviet time and written according to the old theoretical basis. As a result, "we cannot advice the new investors the better and effective way of developing the sedimentary basin". However, the academician highlighted the activity of the E&P KazMunayGaz as positive, because the company tries to conduct the exploration works in salt and subsalt part of the Pre-Caspian area and in Mangyshlak as well.

Indeed, today the company shows the highest activity in the field of geological exploration. For example, a month ago it announced about completing the acquisition of four exploration contracts with the total amount of $43.8 million according to which the geological exploration will be conducted in the blocks of Temir, Teresken, Karaton-Sarkamys and in the territory adjacent to Uzen and Karamandybas. The company estimates that geological resources of all units might reach about 1.5 billion barrels of oil equivalent. An action plan was developed for works in these blocks according to which 2D and 3D seismic surveys and exploration drilling in the different blocks of 6 to 17 wells will be carried out within the next few years.

Uzakbai Karabalin, General Director of the Kazakh Institute of Oil and Gas, focused his attention on the condition of the domestic oil and gas science. According to him, at present the Kazakhstani scientists, working in this field, face a number of important tasks, including the automation of the oil production processes. "Many fields in Kazakhstan are at the late stage of development and remaining reserves of the most fields are hard to extract. The mining projects in Kazakhstan Caspian shelf are also complicated, and therefore they require the most advanced computer technologies."

New relationships in new conditions

Speaking at the conference, Aliakpar Matishev, Executive Director of KAZENERGY said that Kazakhstan forms a new model of relationships with the foreign investors, in which the Republic plays the leading role through KazMunayGaz and its subsidiary KazMunayTeniz. According to him, already at present time Kazakhstan can implement the large offshore projects – we have enough finances and resources as well as the technological capacities to do so and in the future this position will only gain strength. The State intends to continue increasing its presence in offshore projects to ensure their full compliance with the national interests. "As practice shows, the shelf of the Caspian Sea is attractive for the investments. During several years, Kazakhstan attracted the companies from India and Korea that both proves the country's policy to diversify the investments and indicates the existence of real competition for access to the resources of Kazakhstan's shelf."

As for the interaction between government and oil companies, according to Mr. Matishev, there is a necessity to conduct systematic balanced fiscal and tax policies now, as well as to develop the additional incentives for investment in the offshore projects.

It is well known that many projects for the raw material sector launched in the nineties didn’t fully meet the strategic interests of Kazakhstan. Today the issue for the government is how to restore the fair balance of interests for these projects. There are two courses of activities: acquisition of shares at commercial prices (what the government does purposefully and for a long time) and improvement of the legal environment. The new legal rules give the government an opportunity to control the investors significantly better.

For example, for more than a year the new "Law on Subsoil", which substantially toughened the approachs to oil and gas contracts, has been in force. Currently, the contracts for combined exploration and production can be concluded only for the fields of strategic importance or with geologically complicated conditions and only by special decision of the Government. In addition, the number of requirements appeared which are also obligatory for the subsoil users under old contracts. Zhayylgan Arman, Partner of SNR Denton consulting firm, gave us one example. The subsoil users that previously signed the contracts with the State, in the case if they have not the project documents, they shall develop and submit them for the approval to the authorized agency within 18 months from the date of entry into force of the “Law on Subsoil". Based on his opinion, not all the companies will be able to do it because "it is unclear how the project document is determined in compliance with the new definition and which requirements will be applied". As the expert believes, this one and many other rules of new regulations will allow the government to apply a variety of measures regarding the subsoil users in case of necessity.

Interweaving of interests

Speeches of the foreign participants at KIOGE have shown the concern with some actions of Kazakhstan, but they still sounded quite diplomatically. For example, David Moran Ambassador of the UK to Kazakhstan and Kyrgyzstan said that it is profitable to use and to increase the local experience.

"I know that the international energy companies will agree with it. The issue is how to do it in a way to make it possible to help three energy projects of Kazakhstan – Kashagan, Karachaganak and Tengiz, to ensure their prosperity. Now, all these projects came to its critical stage. This is very important time for Kazakhstan and its international partners. There are some important decisions which should be taken". According to him, it can be done using the experience of the Great Britain as an example which succeeded in increasing the local content in the UK oil and gas projects in the North Sea. The key to success was "dialogue, cooperation and time".

View of the official Washington on the development of energy in the Caspian region was announced by Daniel Stein, Senior Advisor of special envoy of the U.S. State Department on Energy Issues in Eurasia Region. According to him, the U.S. will continue to encourage the development of balanced and differentiated energy market for Europe with many resources and transportation routes and will also help the Caspian countries to find new routes to foreign markets. "These countries should be able to make their own independent choice," – noted the American diplomat.

He also said that the events of the past year, including the accident at the APS Fukushima and civil war in Libya raised further the role of the Caspian Sea in the global energy market. However, Mr. Stein has denied the opinion that the region becomes the arena of new "great game" between the major powers.

In respect of the negotiations over the "big three" oil and gas projects in Kazakhstan, the diplomat confined himself to the phrase that already became standard: “there is a concern about some actions of the Kazakhstani party that might damage the long-term contracts, and they should be resolved in terms of equal partnership, rather than through other mechanisms".

The evaluations of other speakers were more outright. In particular, Douglas Townsend, Senior Adviser of the International Center on Taxation and Investment said that the value of legislative regulations on the avoidance of double taxation is lost due to repeated revisions of the contracts with the Kazakhstani taxation authorities. It happens despite of the fact that "clear rules and stability is important in attracting and holding investors".

Michael Wilson, Managing Director of the law company "Michael Wilson & Partners" reminded us that in 1994 it was agreed that the terms of taxation on the Karachaganak project will not change for 10 years after the end of the contract, but as it is known the changes began even earlier the scheduled date.

Chief energy analyst from the U.S. consulting company IHS Energy Andrew Neff presented the result of the study according to which in Kazakhstan as compared with other countries risks of changes in tax legislation are very high. And yet, despite the fact that foreign investors complain about these risks a lot they do not leave Kazakhstan. "The influx of investment does not stop. Just both the government and foreign players have their own interests and nobody wants to lose their positions". According to the expert, the main problem is that while the debates are going projects cannot develop steadily. So it is necessary to renegotiate contracts once and for a long time, or "leave them alone".

In his turn, during the press conference held within the frameworks of KIOGE Sauat Mynbayev had emphasized that the authorized agencies do not have a purpose of reviewing all the contracts. "We signed contracts with only 201 foreign investors, and two years ago they were more than 250. Contracts were annulated only because of non-fulfillment of the terms”. Answering the question about the prospects of the PSA signed in 1990s, the head of Ministry of oil and gas said that the government does not have the special intent to terminate these contracts only because they are the PSA. "But situation when we make decisions about their termination in the legal field are possible."

"Chinese factor" was separately considered at the KIOGE. So, Andrew Neff emphasized that geopolitical balancing of Kazakhstan moved towards Asia's is due, in particular, with active operations of China. Over the past four years Chinese investment to Kazakhstan quadrupled while in the UK after the global economic crisis they have fallen. Already now the Chinese companies take the substantial share in Kazakhstan's oil and gas sector, and not only in the mining, but in refining too, and in the nearest future they will do the same in petrochemistry. According to Michael Wilson, the success of Chinese companies is connected with the fact that they are ready to pay everything that is required by law and sometimes "over and above that".

The experts agreed that the impact of the Central Asian region further strengthens because of the shift of world economic center of gravity eastward. As a result, today the countries of this region gain strategic importance being midway between the traditional European buyers and rapidly developing economies of Asia. In its turn, Kazakhstan shall consider its own interests by choosing the best direction and balancing between Western, Russian and Chinese investments.

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