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 KAZAKHSTAN International Business Magazine №3, 2006
 Step on the Gas! Prospects for the Kazakh Gas Sector
Step on the Gas! Prospects for the Kazakh Gas Sector
Sergey Smirnov, director of KATEK LPP's promising projects department
World trends clearly show that world gas consumption is growing steadily. At present its total volume is comparable to the volume of oil consumption. This means that domestic natural gas, whose proven and forecast reserves (including fields in the Caspian shelf) stand at 3,300 billion cu m and potential reserves at 6,000-8,000 billion cu m, will be in high demand.
The Kazakh gas sector is developing increasingly dynamically. For example, the country's natural gas output totalled 26.2 billion cu m in 2005 (46.6% of which was concomitant gas), the volume of marketable gas (excluding losses and injection) 14.3 billion cu m and exports 7.6 billion cu m (Table 1). This means that the volume of marketable gas increased by 12% and exports by 8.5% in 2005 against 2004.
Growth in gas output was mainly ensured by the Karachaganak Petroleum Operating company, Tengizchevroil, CNPC-Aktobemunaygaz and Tolkynneftegaz companies.
According to the Energy and Mineral Resources Ministry, the country is expected to extract 27.6 billion cu m of gas and this figure is expected to grow to 40 billion cu m and gas exports to 15 billion cu m by 2010. If these forecasts materialise, gas output will grow by over 50% and gas exports by 100% by 2010.
This is mainly thanks to the KazTransGaz company. As part of the KazMunayGaz national company, this company not only controls all the country's main gas pipelines, which are over 10,000 km long, but also develops new fields, invests significant funds in reconstructing and upgrading the gas transporting networks and is constantly expanding its activities.
Problems Match Reserves
Despite the fact that growth in gas output in Kazakhstan has significantly outpaced the average growth of domestic consumption (about 6 billion cu m in 2005), the country still has to import over 2 billion cu m of gas per year. In order to satisfy the needs of its southern regions, Kazakhstan imports Uzbek gas (the price of which grew by 31% this year). In 2005, South Kazakhstan Oblast consumed 0.43 billion cu m (0.2 billion cu m in 2004), Zhambyl Oblast 0.63 billion cu m (0.39 billion cu m) and Almaty Oblast 0.85 billion cu m (0.66 billion cu m).
The need to import gas is caused by two basic factors. Firstly, the industrial reserves of gas (like oil) are concentrated in the country's four western regions, which account for 98% of the total industrial reserves (62 out of 75 of discovered fields) and the bulk of which are in the Zhanazhol and Karachaganak (750 billion cu m) fields. Secondly, the issue of transporting this gas has not yet been solved.
The country's existing network of gas pipelines is part of the former Soviet system and is designed to transit gas from Central Asian countries to Russia. Associated gas from Kazakh oil fields was simply flared off until recently because of the absence of the necessary infrastructure, including gas-processing facilities and pipelines to supply gas to consumers. As a result, liquefied gas, which is far more expensive, is sold in eastern and central Kazakhstan and parts of southern Kazakhstan.
However, economic development, business activity growth in the regions and high levels of housing construction in recent years have boosted demand for natural gas. For example, in 2005 KazTransGaz's subsidiary KazTransGaz Distribution increased gas sales by 30% to 3.08 billion cu m in 2005. The company intends to increase this figure to 3.5 billion cu m.
In addition, strict restrictions were introduced on flaring associated gas off in oil and gas fields from 1 January 2005 (the Kazakh Law on Oil, Article 30-5, Paragraph 1). In this way, the Kazakh government forced oil and gas companies to ensure that associated gas is utilised; this should increase the volume of gas transported and sold. Environmental Protection Minister Nurlan Iskakov has said that from now on licences to extract oil and gas will be issued only when a company will utilise associated gas instead of flaring it off. "At the moment, this share has not been significant – only 15%. We will force all enterprises to utilise concomitant gas starting from next year," Mr Iskakov said.
As a result, having received a licence to develop a field, an oil company will have to solve the issue of utilising gas before starting oil extraction. However, this will demand not only funds but time, too. The situation is complicated by the fact that costs to purify and transport associated gas make its exports economically unfeasible. The conclusion is clear: utilising associated gas is a temporary economic problem in the country and its solution is in developing petrochemistry and gas-based power generation, not in increasing administrative pressure. If the Kazakh government categorically demands that oil companies should utilise gas, then it will have to assume a number of obligations too, including taking measures aimed at making the use of gas a priority before other energy sources and offering various privileges to companies involved in processing hydrocarbons.
Developing Internal Market
Of course, it will be very hard to solve the problem of supplying natural gas to all the country's regions. However, KazTransGaz has developed alternative projects for supplying gas to whole towns and regions from local natural resources. For example, the company started the commercial development of the Amangeldi field in June 2000. This investment project was important socially rather than commercially. At the moment, 18 gas wells are being operated in this field, and its gas is being pumped to the Tashkent-Bishkek-Almaty main gas pipeline through the Amangeldi field-KS 5 pipeline. Gas from the Amangeldi field makes it possible to cover the needs of Zhambyl Oblast's population to a greater extent, and the volume supplied by Amangeldi Gaz LPP totalled 0.3 billion cu m in 2005.
In 2006-2007, KazTransGaz will continue seismic research, reviving old gas wells and drilling new ones in the Ayrakty, Anabay and Zharkum fields.
In addition, it is drafting and carrying out programmes to build gas-supply networks in other regions. For example, it has successfully completed a major project to build gas-supply networks in Kyzylorda Oblast. Now the regional centre and a number of other settlements are consuming local gas from the Akshabulak field. KazTransGaz Distribution's investment in the Kyzylorda project exceeded 1 billion tenge. As a result, the company built the town gas network from scratch. It is also currently developing a programme to build gas-supply networks in Almaty Oblast.
At the moment, there is a need to develop a comprehensive programme to build gas-turbine power plants in Aktobe and West Kazakhstan Oblasts, where there are significant shortages of electricity despite the abundance of gas.
As for Atyrau Oblast, the Agip KCO company is currently building a gas-processing plant there. A petrochemical facility to produce polyethylene and polypropylene with capacities 800,000 and 400,000 tonnes respectively is expected to be built close to this gas-processing plant, 40 km from the town of Atyrau, in May 2005.
The facility will operate on gas from the Tengiz and Kashagan fields and process 6 billion cu.m. per year.
The Kazakhstan Petrochemical Industries company has been appointed as the operating company. The Basell concern will also take part in the project.
Exports and Transit
Three Kazakh enterprises exported gas in 2005: Karachaganak Petroleum Operating (5.3 billion cu m), Tengizchevroil (1.5 billion cu m) and Tolkynneftegaz (0.8 billion cu m); domestic gas was sold for $31 per 1,000 cu m on average. However, Energy and Mineral Resources Minister Baktykozha Izmukhambetov has said that the Kazakh side intended to achieve a "significant" increase in the price of gas exported. Talks with the Russian side held in 2006 resulted in agreement that the price of gas would be $140 per 1,000 cu m. In addition, from 1 January 2006 charges for transiting Central Asian gas through Kazakhstan were increased by 50% (from $0.7 to $1.1 per 1,000 cu m per 100 km).
The Central Asia–Centre (CAC) gas pipeline is the only gas route from Central Asia to Europe at the moment. Other pipelines from Asian fields go directly to Russia. As a result, the only realistic transport corridor for Kazakh gas remains Russia, which is why Kazakhstan cannot at present export its gas to the European market without the involvement of Russia.
In 2005, Gazprom and the operator of Kazakhstan's main gas pipelines, Intergas Central Asia, signed two medium-term agreements for 2006-2010. The first agreement defines conditions for transiting Russian gas through the northern regions of Kazakhstan at a level of 70 billion cu m of gas per year through the Soyuz and Orenburg-Novopskov pipelines. The second agreement plans for increasing the transit volumes of Central Asian gas through Kazakhstan through the CAC system at 55 billion cu m per year.
The current transit capacity of the country's gas pipelines stands at over 50 billion cu m per year, of which the CAC pipeline accounts for about 42 billion cu m In 2007, KazTransGaz intends to increase CAC's capacity to 55 billion cu m per year and up to 80-90 billion cu m per year by 2010. The main construction of new pipeline sectors will be carried out on the CAC-2 and CAC-4 lines (Table 2).
Special attention is now being paid to producing liquefied gas. The country plans to increase its output from 1.25 million tonnes in 2005 to 3.34 million tonnes by 2010. Internal consumption will grow from 250,000 tonnes to 800,000 tonnes respectively. The bulk of the country's liquefied gas is being exported, and this is understandable – Kazakhstan does not impose customs duties on exporting it. The country also intends to upgrade the transport infrastructure to transport large volumes of liquefied gas by rail both within the country and to ports in the CIS (in the Baltic and Black Seas and Russia's Far East) for onward transport to foreign markets by sea.
Expansion to Foreign Markets
KazTransGaz bought the Tbilisi gas-distribution company Tbilgazi (now KazTransGaz-Tbilisi) for $12.5m in May 2006 and has launched a stage-by-stage reconstruction of the Georgian capital's gas-supply network. In the initial stage, the company intends to replace medium-pressure sectors of the gas pipeline, spending over $4.5m on the project.
In addition, the reconstruction programme sets out plans to upgrade equipment and gas meters, carry out overall repairs and build production facilities and KazTransGaz-Tbilisi's infrastructure. Simultaneously, it is carrying out an inventory of Tbilisi's gas-supply network and management reshuffles. In total, the Kazakh company intends to invest over $82m in the Georgian capital's gas-distribution network by 2011 and make KazTransGaz-Tbilisi solvent within two years.
However, this optimism gives rise to doubts. It is not clear how KazTransGaz will force Georgian consumers to pay for gas with new tariffs, if they did not manage to pay at lower prices. The BBC has reported that Tbilgazi was annually losing up to 60% of gas because of theft alone: city residents managed to reduce their meter readings several times over. In response to gas cuts for their failure to pay, the residents of whole districts staged protest rallies.
In addition, according to estimates made by specialists, the Georgian capital's gas-distribution network is "in a catastrophic state" and at least six years is needed to revive the company. For example, in order to make the Almaty gas company's infrastructure ideal, KazTransGaz's general director Serik Sultangaliyev has said that KazTransGaz needs to put in 10 years of continuous work and 600 million tenge of annual investment – and the Almaty network is in a better state than the Tbilisi one and Almaty consumers' capacity to pay is incomparably higher.
Given the low living standards of most of the population, KazTransGaz will have to solve a number of Georgia's macroeconomic problems, if not salvage the whole economy, to build a solvent market in Georgia and make business profitable. Of course, this is a noble aim, but the Kazakh company will find it difficult to achieve. As a result, the risks of investing in this Caucasian country's economy may turn out to be far higher than the dividends expected.
A gas project currently under discussion by Russia and Kazakhstan is much more attractive. It is the creation of a joint enterprise on a parity basis by Gazprom and KazMunayGaz from the Orenburg gas-processing plant, which will process gas from the Karachaganak field. The joint venture will have to increase the plant's capacity to receive gas because output at Karachaganak will only grow, and reach 25 billion cu m, by 2012. The enterprise will be able to become the "key" which will enable Astana to open up new markets for its gas.
The Karachaganak gas condensate field is located in Aksay District, West Kazakhstan Oblast, 130 km from the Orenburg gas-processing plant. Its recoverable reserves are estimated at 16,000 billion cu ft of gas and 2.4 billion barrels of oil and gas condensate. Extraction started at Karachaganak in 1984, and Karachaganak Petroleum Operating (KPO) BV, a consortium made up of oil and gas giants – Italy's ENI (32.5% of shares), Britain's BG (32.5%), the USA's Chevron (20%) and Russia's LUKoil (15%) - has been developing the field. The KPO has supplied about 8 billion cu m of gas to the Orenburg plant. The Russian-Kazakh joint-venture KazRosGaz markets this gas. Gazeksport supervises KazRosGaz's marketing policy.
The Russian and Kazakh presidents approved the creation of this joint venture back at the beginning of 2005. However, until recently there were two problems preventing this project from working. The first was the absence of a feasibility study to upgrade the Orenburg gas-processing plant to double its capacity. This problem has now been solved. The second problem concerned agreeing the price of purchasing gas with the Karachaganak Petroleum Operating BV consortium, and this seems to have been solved too – an agreement is expected to be signed in October 2006. The issue of Kazakh gas's access to the Russian gas pipeline system should also be solved positively. Of course, this agreement has become a major victory for Kazakhstan's gas diplomacy.
The Russian leadership's attention to cooperation with Kazakhstan is understandable. If Gazprom does not manage to commission new extracting capacities, Russia will face gas shortages, and in this situation Kazakh gas supplies will be badly needed. Let us recall that thanks to the KazRosGaz joint venture Gazprom managed to ship our gas to Europe back in 2002.
 Russian-Kazakh cooperation in the gas sector is regulated by the following intergovernmental agreements: on cooperation and development of fuel and energy systems signed on 25 December 1993 (and annual protocols to it); on technical and economic cooperation in the gas sector signed on 28 November 2001. In June 2002, Gazprom and KazMunayGaz set up the KazRosGaz joint venture on a parity basis in Kazakhstan to buy and market natural gas and process it at Russian gas-processing plants.
KazTransGaz also plans to buy gas-transporting networks in Kyrgyzstan. The main argument in talks with this country's new government was about debts to Kazakhstan accumulated by Kyrgyz consumers, caused by unauthorised withdrawals of gas from a pipeline. These debts stand at $20m now. In particular, KazTransGaz officials have said that the company has been showing an interest in buying the assets of the Kyrgyz gas-supply company, KyrgyzGaz.
KazTransGaz is now expecting a decision from the Kyrgyz side about privatising KyrgyzGaz. As soon as the tender is announced, the company intends to submit an application. At the moment, the Kyrgyz government owns 82% of shares in KyrgyzGaz. The purchase of this company will enable KazTransGaz to remove the threat of unauthorised gas withdrawals.
Gas Pipeline Projects
Energy security demands that the Kazakh government take steps to diversify transport routes. The government is continuing to work on the Kazakhstan-China gas pipeline. A feasibility study to build this pipeline is expected to be drafted this year. This project will certainly improve the situation regarding price policy and gas supplies to the country's regions.
One of the scenarios for this export route envisages a gas pipeline to link the Zhanazhol and Karachaganak fields from the Bukhara-Urals pipeline with Shymkent through Kyzylorda. The existing Shymkent-Almaty pipeline will become part of the export route and a 750-km sector from Almaty to China is to be built later. This scenario will make it possible to solve the problems of building gas-supply networks in Kyzylorda and Almaty Oblasts, improve the development of the Amangeldi group of gas fields and carry out projects to utilise concomitant gas from the Kumkol field.
Another gas pipeline project is linked to the Agip KCO consortium's plans to extract oil in the Kashagan field. The project plans to construct a Kashagan gas-processing plant and a gas pipeline to link it with the CAC pipeline, with a capacity of 9 billion cu m of gas per year.
The implementation of these projects will make it possible to export Kazakh gas to European and Chinese markets. New challenges forces KazTransGaz to widely develop its networks and bring investment, equipment and services which make it a promising partner for investors and suppliers.
In general, the new resources and pipeline policy expands Kazakhstan's geopolitical influence. In addition, the growing demand for natural gas in EU countries and cuts in gas output in Russian fields give every reason to forecast a significant increase in Central Asian (including Kazakh) gas supplies to the European market in the next 10-20 years.

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· 2014 №1  №2  №3  №4  №5  №6
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· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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