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 KAZAKHSTAN International Business Magazine №3, 2004
 The Oil and Gas Sector in Kazakhstan: Some Facts and Plans
The Oil and Gas Sector in Kazakhstan: Some Facts and Plans
Editorial Overview
The oil and gas sector has traditionally been one of the major sectors of Kazakhstan's economy. Vast hydrocarbon reserves, a solid production base and a well-developed infrastructure for transporting raw materials form the groundwork for the broad development of the oil industry in Kazakhstan and for protecting the strategic interests of the country. 
According to experts, the Kazakhstani oil and gas fields continue to attract foreign and local investments. In the first half of 2004, total capital investment in the raw material sector of the economy was about $3.6bn, and $2.8bn (77%) of this sum was directed towards studying and developing hydrocarbon fields.
By regional breakdown, the bulk of the investment in the oil and gas sector was made in Atyrau (38.5%), Mangistau (19.0%) and West Kazakhstan (9.8%) regions. Significantly, foreign investment accounts for 88% of all subsoil investment in these regions. Thus in the first half of 2004 the inflow of foreign capital investment for developing oil and gas fields in Atyrau region has increased by a factor of 1.7 against the corresponding period last year, and in Mangistau region this indicator has increased by half as much again.
Oil Production
In parallel with the steady growth in investment, Kazakhstan is constantly increasing the production and export of fuels. Whilst the country produced about 52m tonnes of oil and gas condensate in 2003, this year this figure should reach at least 56m tonnes. The production of gas is expected to exceed 16bn cubic metres, which is 15% higher than in 2003.
Regarding the current situation, the Statistical Agency of Kazakhstan has reported that between January and August the country produced 33,073,600 tonnes of crude oil and 5,403,400 tonnes of gas condensate, figures which exceed the level of the corresponding period of last year by 12% and 36% respectively.
The affiliates of Kazmunaigaz National Company account for 5,863,928 tonnes of oil and gas condensate, which is 12% higher than in the first eight months of last year. For example, Uzenmunaigaz has produced 4,420,000 tonnes of oil and 17,650 tonnes of gas condensate, and Embamunaigaz 1,792,340 tonnes of oil.
In January-August 2004, joint ventures with the participation of Kazmunaigaz produced 10,488,179 tonnes of oil, which is 9.9% higher than in January-August last year. Significantly, Tengizchevroil accounted for the lion’s share of oil production - 8.95m tonnes of oil.
Other oil producing companies operating in the country produced 21.9m tonnes of oil during this period, which is 17.4% higher than during the corresponding period last year. Mangistaumunaigaz produced 3.46m tonnes of oil, CNPC-Aktobemunaigaz 3.47m tonnes, Karachaganak Petroleum Operating 5.16m tonnes and PetroKazakhstan Kumkol Resources 2.9m tonnes.
Gas Production
In January-August 2004, Kazakhstan has produced 7,196.1m cubic metres of natural gas in the gaseous state, which is 51% higher than over the corresponding period of the previous year. The production of tank gas has reached 6,267.7m cubic metres (a 37% increase), and the production of petroleum gas 6,688.9m cubic metres (a 14% increase).
In January-August 2004, the affiliated companies of Kazmunaigaz produced 921m cubic metres of gas; Uzenmunaigaz produced 750.16m cubic metres, and Embamunaigaz 58.308m cubic metres.
At the same time, in the first eight months of 2004 joint ventures with the participation of Kazmunaigaz produced 3.297bn cubic metres of gas; Tengizchevroil accounted for 3.074bn cubic metres and Kazakhoil-Aktobe 144.801m cubic metres.
Other gas producing companies have extracted 8.669bn cubic metres of gas. Mangistaumunaigaz has produced 135.846m cubic metres, CNPC-Aktobemunaigaz 1,378.082m cubic metres, and Karachaganak Petroleum Operating 5,524,583,000 cubic metres.
Export of Oil and Gas
In the first half of 2004, Kazakhstan exported about 29.1m tonnes of oil and gas condensate, which is 15% higher than in the corresponding period last year. In monetary terms, exports have reached $5,385.8m (a 37% increase).
Future plans
In view of continuing favourable situation with oil prices in the international markets (more than $25 per barrel) Kazakhstan intends to sustain the rate of hydrocarbon production growth that has been achieved. In accordance with the macroeconomic forecast of economic growth made by the Ministry of Economy and Budget Planning of Kazakhstan for the period up to 2007, next year the country will produce 59m tonnes of oil and gas condensate, 64.4m tonnes in 2006, and 68.7m tonnes in 2007.
In 2005, the average price per barrel is predicted to reach $32.9, $29 in 2006, and $28.5 in 2007. The export prices of Kazakhstani oil after the deduction of transportation costs are expected to be $24.7, $21.8 and $21.4 respectively. The forecast volume of investment in projects in the oil and gas sector should reach $4bn a year.
The Kazakhstan Government is entrusting Kazmunaigaz with a leading role in implementing these ambitious plans. In the next three years, the state oil and gas company plans to produce a total of 25.9m tonnes of oil. Whilst in 2003, the affiliated companies of Kazmunaigaz produced 7.9m tonnes of oil and gas condensate, this year this figure should reach about 8.3m tonnes, and in 2006 production should increase to 10m tonnes.
Kazmunaigaz is planning to reinforce its position as a large investor and taxpayer. In 2004-2006 the total volume of investment in fixed assets from all sources of financing will amount to 328.2bn tenge, with the total amount of budget payments by the company in form of taxes and dividends on the state shareholding being about 182.3bn tenge.
Expected Amendments to Laws
In September 2004 the Government has submitted a Bill on amending some laws regulating the financial activities of investors, aiming at stimulating the process of attracting investment into the economy. The Kazakhstani law makers hope that the proposed amendments will establish clearer and more transparent procedures for granting investment preferences to enterprises engaged in investment activities and more favourable and motivating conditions for acquiring new fixed assets and/or boosting the value of existing ones. At the same time, the conceptual amendments to certain laws will help to avoid misinterpretation and, consequently, to prevent potential disputes between the State and an investing company.
A special set of amendments concerns the issue of mandatory reporting of information on the financial soundness of enterprises applying for investment preferences. These measures will eliminate the possibility of potential bankrupts receiving preferences. In addition, the Law on Investment will be modified by new provisions establishing the rules and procedures for monitoring the fulfilment of contractual obligations by investors.
According to officials, the existing Investment Law and the respective section of the Land Code do not define with adequate clarity the protection mechanism used by the Government against the risk of investors abusing the terms of natural grants. In order to prevent potential negative consequences such as lawsuits, it has been proposed that, when implementing investment projects, natural grants should be given for temporary use with subsequent ownership, given that the investor fulfils all the terms of the contract.
The authors of the new law are planning to amend the section of the Code of Administrative Offences that defines penal sanctions for the late payment of state natural grants on termination of a contract. Presumably these measures will increase the investment activity of investors, which in turn will have an effect on the development of priority sectors of Kazakhstan's economy.   
At present, in order to encourage private investment in these sectors, the issue of changing the range of investment and tax preferences is being re-examined as part of the general process of amending the Tax Code of Kazakhstan. These Tax Code amendments are aimed at promoting the renewal of fixed assets and simplifying the procedures for taxpayers who fulfil their tax obligations.
The main provisions of the Bill stipulate improving depreciation policies, extending the list of investment preferences and providing preferential procedures for payment of corporation tax. 
Additionally, the Bill stipulates amendments, according to which the unearned income tax on exports of crude oil and gas condensate will be paid not only by subsoil users, but by all legal entities and individuals engaged in hydrocarbon export activities.
The Kazakhstan Government plans to submit a Bill on Production Sharing Agreements and Offshore Operations for Parliamentary approval in the near future. According to government officials, the necessity to adopt this law arises from the changing situation in the oil and gas sector. In itself, the law is aimed at improving the system of government regulation in the subsoil use sector and eliminating a number of legal loopholes. Specifically, it is proposed to secure the priority of the State in buying out subsoil rights and/or its share in mining projects; this priority is to be extended both to existing and future subsoil contracts.
The Bill foresees a transfer of the function of the government in subsoil licensing to the competent government body (at present the Ministry of Energy and Mineral Resources). A number of new conceptual provisions will be introduced, such as provisions on deeming a second subsoil tender to have been held even if there was only one bidder; about removing restrictions on financing geological surveys only from the State Budget; and about the obligation of subsoil users to terminate activities in the event of a risk to the life or health of the public, and to resume activities after safe conditions have been ensured and the risk has been removed.
There are plans to grant Kazmunaigaz State Oil and Gas Company the legal right to represent state interests in contracts with oil and gas operators through mandatory 50% participation.
The Bill lays down provisions that are binding on subsoil users, in order to prevent excess wastage of raw materials and to exclude selective mining of mineral resources. The Bill contains requirements on the conservation and efficient use of mineral resources and regulations stating the penalties for violating these requirements. 
Additionally, the Bill contains a regulation that binds subsoil users to engage a certain percentage of local professionals within the total number of employees, and to procure a specified volume of Kazakhstani goods and services, if these meet international standards.

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