Oil and Gas Complex 2005: Midway Passed
Contract of International Significance
The hot summer of 2005 was marked by an event that seems to breathe new life into the bilateral fuel and energy cooperation between Russia and Kazakhstan. A Production Sharing Agreement on the Kurmangazy oil-bearing structure was signed in the presence of Presidents Nursultan Nazarbayev and Vladimir Putin on the 6th of July in Astana. The Kazakhstani side was represented by Minister of Energy and Mineral Resources, Vladimir Shkolnik, and the President of KazMunaiGaz national company, Uzakbai Karabalin, and the Russian side by the President of Rosneft national company, Sergei Bogdanchikov. The PSA is valid for 55 years. Over this period, the total Russian and Kazakhstani investment in this project will amount to approximately US$23 billion.
The Kurmangazy structure (Kulalinskaya) is located on the North Caspian shelf. Estimates of its recoverable oil reserves range from 550 million to 1,800 million tonnes. The basic prospective horizons—Jurassic and Cretaceous—occur within the structure at a depth of 300-1,200 metres. Triassic deposits at a depth of 1,200-2,000 metres are also of certain interest.
Under the interstate Treaty on Dividing the Seabed of the North Caspian, signed by Kazakhstan and Russia on 6 July 1998, and the Protocol to this Treaty of 13 May 2002, Kurmangazy is under Kazakhstani jurisdiction.
At the same time, KazMunaiTeniz Offshore Oil Company and RN-Kazakhstan signed an agreement on joint development of the structure. These organizations, representing the two countries, will develop and produce energy from Kurmangazy on a parity basis. The document defines mutual rights and obligations within the project to be operated by a subsidiary company of KazMunaiTeniz Offshore Oil Company.
Under the PSA, contractors undertake to implement the minimum exploration program, envisaging an Environmental Impact Assessment of the exploration and drilling of two exploration wells. Under the project, exploration will be conducted for six years and may be prolonged depending on the results. The contractors undertook to employ as many Kazakhstani staff as possible, and use local goods and services. In addition, the PSA stipulates that the project participants will pay a signature bonus of US$50 million to the Kazakhstani budget. In the event that a discovery is made, the commercial discovery bonus will be paid. Its size will depend on the reserves found and world oil prices. The companies expect that the recoverable hydrocarbon reserves in the Kurmangazy structure may amount to approximately 1 billion tonnes. KazMunaiGaz experts estimate that total payments to budgets of all levels may come to US$31 billion over the entire period of development.
At the Crest of the Oil Wave
Christened a contract of international importance by President Nazarbayev, the PSA once again proved that Kazakhstan is serious about becoming an oil production leader in the Caspian. With its officially proven recoverable reserves of some 4 billion tonnes of oil and 3 trillion cubic metres of gas, the country is among the top ten countries in terms of energy reserves. At the same time, Kazakhstan is still 19th in the world in terms of energy production. If the plans for developing the Caspian off Kazakhstan are implemented successfully, the country may enter the top ten by 2015. The deterrents, such as costliness and complexity of offshore operations, lack of shelf work experience, and antiquated infrastructure are not taken into account. The growing global demand for energy is expected to compensate for these risks. According to forecasts by the Kazakhstani Ministry of Energy, global oil consumption will increase from the current 80 million bpd to 110 million bpd in 2020. Developing countries, such as China, India and Southeast Asian nations, will contribute most of all to this increase. At the beginning of the 21st Century, the economy entered a high-oil-price phase (this year, oil prices beat all records reaching US$70 per barrel). This is not the limit: certain analysts forecast an increase to US$100 should the situation not change dramatically.
The existing energy price situation makes Kazakhstani hydrocarbon fields more attractive for domestic and foreign investors. According to results from the first half of 2005, the total investment in the country’s mineral resources complex was around US$5.3 billion, which is 1.5 times higher than the same period last year. Nearly US$4.2 million (or 79%) were allocated for researching and developing energy deposits.
The majority of investment in the oil and gas sector is accounted for by the Atyrau (56%), Mangistau (25%) and Aktobe (7%) Oblasts. It is indicative that foreign investment made up 85% of all ‘oil’ investment in these oblasts. As compared to the same period last year, the flow of FDI in developing oil and gas fields of Atyrau Oblast in the first half of 2005 increased by 1.7 times and in Mangistau Oblast by 1.4 times. At the same time, the investment in mining in Western Kazakhstan Oblast decreased by 1.4 times.
The Energy Ministry forecasts that the total investment in the mineral resources complex will total around US$9.7 billion by the end of 2005, with US$7.7 billion allocated to the exploration and development of energy resources.
Against the 50% growth in investment, the oil production indices in the first half of 2005 looked much more modest. According to the Energy Ministry, 25.4 million tonnes of crude (without gas condensate) were produced in Kazakhstan. This is only 3% higher than in the first half of 2004. The western region, concentrating the nation’s largest energy deposits, accounted for the bulk of production: 8.3 million tonnes of oil were produced in Atyrau Oblast (33% of the total amount), 7.8 million tonnes (31%) in Mangistau Oblast, 4.3 million tonnes (17%) in Aktobe Oblast. The rest of the oil was produced in the south of the country.
The company breakdown of oil production is as follows.
Subsidiary companies of KazMunaiGaz produced around 4.6 billion tonnes of oil in the first half of 2005. Seventy percent of this volume was accounted for by Uzenmunaigaz, and the remainder by Embamunaigaz.
Over the same period, enterprises with KazMunaiGaz’s participation produced 7.5 billion tonnes of oil (30% of the nationwide production). These included Tengizchevroil with 88%, Kazakhoil Aktobe 9%, and Kazakhturkmunai 2.6%. Tenge JV and Embavedoil produced the remainder.
Total oil production by other large companies amounted to 10.9 billion tonnes. Mangistaumunaigaz accounted for 26%, CNPC Aktobemunaigaz 25%, PetroKazakhstan Inc. 16%, Turgai Petroleum 15%, Karazhanbasmunai 10%, and Kazgermunai 8%.
Gas production increased from 11.7 billion cubic metres in the first half of 2004 to 11.9 billion cubic metres in the first half of 2005. Just over half of this amount is accounted for by Western Kazakhstan Oblast (6.4 billion cubic metres). Atyrau Oblast produced 2.6 billion cubic metres (22%), Aktobe 1.2 billion cubic metres (10%), Mangistau over 1.1 billion cubic metres of gas (9%). Deposits in the south of the country provided for the rest of the gas.
Subsidiary companies of KazMunaiGaz produced 0.34 billion cubic metres of gas (3% of the total gas production in the first half of 2005), including Uzenmunaigaz with 61% and Embamunaigaz with 39%.
Around 2.5 billion cubic metres of gas are accounted for by companies in which KazMunaiGaz participates. It is worth noting that Tengizchevroil produced the lion’s share of this amount (96.8%).
Other large gas producers extracted 8.8 billion cubic metres of gas (74% of the total gas production over the period under consideration): 72.7% was produced by Karachaganak Petroleum Inc.; 14.2% by CNPC Aktobemunaigaz; 6.5% Tolkynneftegaz; 2.2% Mangistaumunaigaz; 1.8% Kazgermunai; 1.2% PetroKazakhstan Inc.; 1.2% Turgai Petroleum, and 0.1% Karazhanbasmunai.
According to the Statistics Agency, in the first half of 2005 Kazakhstan exported around 28.1 billion tonnes of oil and gas condensate, which is 12.1% above the parallel figure last year. In value terms, energy exports rose by 78%. Exports of Kazakhstani gas were reduced, totalling 7.4 billion cubic metres or 75.3% of the index of the previous year.
Anticipated Changes in the Oil Arena
Currently, foreign companies account for approximately 80% of the total energy produced in Kazakhstan. The structure of players in the oil arena formed long ago and is quite stable. However, it seems certain changes are coming soon.
On 22 August 2005, the country’s largest integrated oil company PetroKazakhstan Inc. announced signing an agreement with CNPC International Ltd. (CNPCI is a 100% subsidiary company of the China National Petroleum Company) on selling its shares for the price of US$55 per share. The 4.18 billion US dollar deal has been approved by the BODs of both PetroKazakhstan and CNPCI. The purchase value has been calculated with the 24.4% premium on the average price for PetroKazakhstan’s shares on the New York Stock Exchange as of 7-19 August, and the 21.1% on the closing price of 19 August. At a shareholder meeting scheduled for October 2005, the BOD of PetroKazakhstan will recommend to accept CNPCI’s offer. Sixty-six percent of the shareholder votes are needed to wrap up the deal.
Registered in Canada, PetroKazakhstan focuses on the production and refining of oil, and sale of oil products. It owns an oil refinery in Shymkent. It has the following fields: Aryskum, Kyzylkiya, Akshabulak, Kumkol, South Kumkol, North Kumkol, Maibulak, Nuraly, North Nuraly and Aksai. As of 1 January 2005, the proven reserves and undiscovered reserves of PetroKazakhstan were 549.8m barrels of equivalent oil. On 11th July, the company announced that exploration drilling in the licensed territory Kolzhan of the Southern Turgai oil basin resulted in the discovery of a new large dual-strata oil field.
It is very likely that the deal will be sealed, as it is beneficial for both sides. Shareholders of PetroKazakhstan (this company has recently had difficulties finding a common language with Kazakhstani partners and public agencies) may sell their assets for an above-market price. The Chinese company also acts in full compliance with its strategic interests. By purchasing assets of PetroKazakhstan, CNPC will receive guaranteed amounts of crude to pump via the Atasu-Alashankou pipeline, which will be completed by 16December 2005. Launching this construction (the pipeline is part of the future pipeline system West Kazakhstan-China), CNPC counted on Kumkol oil in the first place. It should be noted that the total reserves of Kumkol, Zhanazhol and Kenkiyak make CNPC one of the leaders of oil production in Kazakhstan, alongside Tengizchevroil and KazMunaiGaz Exploration and Production.
The First Step is Always the Hardest?
In early August, Lukoil Overseas announced liquidation of the first exploration well in the Tyub-Karagan area in the centre of the Caspian off Kazakhstan. The 2,500-metre hole was spudded on 30 April 2005 using the Astra jack-up rig. In July, the exploration well was drilled to the design depth. However, it was said in a press release by the company "no oil and gas-bearing reservoirs and objects of commercial importance have been discovered as a result of exploration".
On 26 August, at an annual briefing for journalists arranged by the Association Kazakhstan Petroleum, a Lukoil Overseas representative, Vladislav Mikhailov, commented on this announcement. He said that a negative result is also a result. Global statistics demonstrate that only one in five to seven exploration wells proves to be a success, therefore the company is by no means going to abandon the project. However, since the structure’s geology has turned out to be very complex, drilling results will be analyzed, and geological and geophysical research conducted throughout all of 2006.
Answering journalists’ questions at an earlier meeting in Astana, the company’s Kazakhstan Director, Boris Zilbermints, noted that if any “unclear moments remain regarding the research results”, a test hole is most likely to be drilled in the Atashskaya structure in 2007. It will be designed to provide sufficient geological data needed to make a final decision on Tyub-Karagan.
The Tyub-Karagan project was developed under a 40-year PSA. It is the first project implemented within the Programme for Developing the Caspian off Kazakhstan. During an official visit of Vladimir Putin to Kazakhstan, an agreement was signed by the Lukoil and KazMunaiGaz companies in January 2004. Under the agreement, the Russian company got 50% in the PSA. The area of Tyub-Karagan surpasses 1,300 sq km. Prospective geological reserves are estimated at 324 million tonnes of oil. The maximum annual output is possible at 7 million tonnes. The contract area is operated by the Tyub-Karagan Operating Company B.V., founded by KazMunaiTeniz and Lukoil Overseas on a parity basis. The Russian side bears all exploration period costs on this project until the commercial discovery of hydrocarbons.
New Rules of the Game
At the beginning of August, President Nazarbayev signed the law On Offshore Oil PSAs. Under the document, PSA terms are established as per the Kazakhstani legislation, effective as of the date of signature. However, they cannot surpass 35 years for combined exploration and production operations, 25 years for production operations and 45 years for development of unique reserves. The law entitles KazMunaiGaz to a share of at least 50% as a contractor in all offshore PSAs signed by Kazakhstan. In addition, a provision is included that the Kazakhstani government will assign an authorized body to act as contractor in agreements signed by more than two organizations. The national company may act as the authorized body only if it transfers the mining right to its subsidiary company or sells its share in the project. In other cases, the government assigns these functions to a public agency or another legal entity of Kazakhstan that is not a contractor under this PSA. In addition, the new law regulates terms of tenders for the right to conduct oil operations. In particular, mandatory participation of the Kazakhstani side is envisaged during joint exploration and production of oil, as is the mandatory supply of a certain amount of oil to be refined in Kazakhstan. The law outlines that proposals of potential contractors on the development of high technology, establishment of new processing facilities, laying of mains and other pipelines, as well as construction and joint use of infrastructural and other facilities should be the key criterion for choosing a tender winner.
It should be noted that the law On PSAs is generally indicative of the Kazakhstani government’s policy targeting a tougher public check of the extractive sectors and making the legal framework meet national interests. This course was clearly defined in the amendments to the laws On Oil and On Subsoil Use, passed in December 2004. Oil producers have had time to understand that Astana is serious in this regard. As the December amendments came into force, the requirement to fully utilize associated gas when developing oilfields also came into force. Gas flaring is now prohibited except in emergencies. As a result, PetroKazakhstan has received warrants to cut oil production to a level where such flaring is not necessary. Although the legality of requirements to meet environmental standards raises no doubts among oilmen, they are anxious because of the lack of time to adapt to the new conditions. Since quickly creating essential infrastructure for gas utilization is a problem, many extractive companies might have to reduce or suspend production in the near term and this will have a negative impact on the dynamics of oil production in Kazakhstan. Joel Benjamin, a representative of the Denton Wilde Sapte Law Firm, articulated foreign investors’ position on this issue. At the briefing hosted by the Association Kazakhstan Petroleum, he said that the companies propose amending the legislation to adjourn the requirement for gas utilization under the existing contracts for three years.
One of the key events at the upcoming oil forum KIOGE 2005 must be the signature of a memorandum of understanding between public agencies, companies, and NGOs of Kazakhstan on introducing the Extractive Industries Transparency Initiative.
British Prime Minister Tony Blair announced the Extractive Industries Transparency Initiative (EITI) in September 2002 at the World Summit on Sustainable Development in Johannesburg. Its objective is transparency of both taxes paid by extraction companies and profits received by the governments of natural resource-rich countries. The initiative was supported by Britain, Norway, France and the USA (they are donor countries), several transnationals (such as BP, ExxonMobil, Shell, ChevronTexaco, Statoil, OGP, and API) and international NGOs. Currently, the initiative is being implemented by over twenty governments in Africa, Latin America and Asia, including Kazakhstan’s CIS neighbours, Azerbaijan and Kyrgyzstan.
For the first time, Nursultan Nazarbayev announced Kazakhstan’s intention to join the EITI in June 2005 at an international business conference of the Asian Community in Almaty. The government of Kazakhstan decreed to create a working group for developing Kazakhstan’s recommendations and positions regarding the initiative implementation. The group, headed by Minister of Energy and Mineral Resources, Vladimir Shkolnik, comprises representatives of key ministries, parliamentarians, top managers of KazMunaiGaz and members of the NGO coalition, Oil Profits Checked by the Public. It was decided to utilize Azerbaijan’s experience (this country joined the initiative in 2003) for developing a draft memorandum. Vladimir Shkolnik noted on 29 July at an enlarged session of the working group that thirteen mining and forty-eight oil and gas companies had been identified to sign the memorandum. These companies have been selected taking into account their tax payments to the budget. According to Shkolnik, signing the memorandum is voluntary, but the working group is free to make public the names of companies that refused to do so.
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