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 KAZAKHSTAN International Business Magazine №4, 2006
 Kazakhstan’s Oil Industry Benchmark
Kazakhstan’s Oil Industry Benchmark
Early October 2006 Almaty hosted the 14th International Oil and Gas Forum KIOGE 2006. This was an important event in the world oil and gas industry. Approximately 500 participants from 38 countries put up stands in an area of 21,000 m2. Some 15,000 specialists attended the exhibition; a thousand delegates took part in a two-day KIOGE conference, which was a kind of benchmark for the national oil and gas industry. The participants summarised the major results of the industry, gave their forecasts for the sector and presented ambitious new goals.
A Slowdown in the Industry
Kazakhstan is one of the ten countries in the world with the largest proved hydrocarbon reserves. Our recoverable reserves amount to 30 billion barrels of oil and 3 trillion m3 of gas and make Kazakhstan’s oil and gas sector very attractive for major foreign investors. Foreign direct investments (FDI) in hydrocarbon production exceeded $40bn during the last decade; 72% of the total FDI. As a result, hydrocarbon production has doubled in Kazakhstan, becoming the main sector of the economy, contributing just under one third of the national budget’s total revenues.
At the conference, Kazakh Minister of Energy and Mineral Resources Baktykozha Izmukhambetov reported the following indicators that attracted particular interest, taking account the fact that practically all the main socio-economic initiatives depend on the sector. Some 47.5 million tonnes of oil and gas condensate were produced in the year to September, a 104.6% increase over the same period in 2005. It is planned to produce 62.5 million tonnes by the end of 2006. Oil production growth slowed compared to the previous years. The growth rate equalled 15.4% in 2004, shrunk to 3.6% in 2005, and was expected barely to exceed 1.8% in 2006.
Fears that abruptly establishing rigorous standards on associated gas recovery would have a heavy impact on the sector have been realised. Fortunately, high hydrocarbon prices on the world market compensate for the negative influence of this factor on Kazakhstan’s economy. However, the world prices are very unpredictable. For example, the Organisation of Petroleum Exporting Countries (OPEC) recently had to reduce oil production on 1st November for the first time in the last two years to stabilise oil prices. 
The Three Giants
The Minister predicted a bright outlook for the near future. He said that the oil and gas condensate production rate would reach 64 million tonnes in Kazakhstan in 2007 and 84 million tonnes in 2010. The figures are supported by the production plans of three oil and gas giants, including KazMunaiGaz, Karachaganak Petroleum Operating (KPO) and Tengizchevroil (TCO), which account for 66.7% of national oil production.
TCO plans to start up $4.5bn worth of sour gas injection facilities and the second generation project by the end of this year. This would resolve the problem of associated gas recovery and allow increasing production from 13.5 to 22 million tonnes in 2007, and eventually to 27 million tonnes of oil in the Tengiz field. The recovered sulphur is the only problem which spoils the picture. The company succeeded in stopping further accumulation of sulphur; however it has yet to decide what to do with the old accumulations.
The forecast for KPO is also good. The company completed preliminary design concepts for the fourth condensate stabilisation unit at the Karachaganak Processing Complex (KPC) in early 2006. The project is expected to bring additional revenues through increased production of stabilised liquid hydrocarbons and supplying them to the world market. According to the Minister, KPO plans to begin constructing the fourth line in the second quarter of 2007, which will expand KPC’s capacity to 10.3 million tonnes per year.
The Presidents of Russia and Kazakhstan issued a joint declaration on long-term co-operation in the processing and sale of gas from the Karachaganak field on 17th July 2006. This was another important event for KPO. The energy ministers of the two countries signed the relevant agreement in the presence of Presidents Nazarbayev and Putin on 3rd October in Uralsk. The document provides for setting up a joint venture on the basis of the Orenburg gas processing plant by KazMunaiGaz and Gazprom on parity terms. KazMunaiGaz will pay $350m to participate in the project. The new venture is planned to produce up to 15 billion m3 of gas in the Karachaganak field by 2012 compared to 8 billion m3 produced today. In addition, Kazakhstan will gain the opportunity to deliver its gas to the world market via Gazprom’s export pipelines. However the participants would have to invest $500m to modernise the Orenburg gas processing plant and take the final decision on prices for raw and processed hydrocarbons (which were not announced either during the negotiations in Uralsk or at the KIOGE conference).
The $400m project to modernise the Atyrau oil refinery in Kazakhstan has been completed. The acceptance certificate was issued by the State Commission on 25th September 2006. The refining degree increased from 57% to 70%. The plant operates in compliance with the EURO-3 European standard on petrol and EURO-4 on diesel fuel. In April 2006, Japan’s Marubeni Corporation and Cosmo Oil completed a feasibility study for the second phase of the Atyrau oil refinery modernisation, which provides for setting up the plant for production of benzol, an essential raw material used in petroleum chemistry. The investments are expected to reach $250m. 
The past year has been very successful for KazMunaiGaz in regard to the development of production facilities and the increase in its resources. According to Zhakyp Marabayev, managing director of KazMunaiGaz, the company was able to increase its reserves by over 200 million tonnes thanks to the recent transactions. Apart from purchasing an 8.33% share in the North Caspian Project last year, the company purchased 33% of shares in PetroKazakhstan from the China National Petroleum Corporation (CNPC) in the middle of this year. PetroKazakhstan produces approximately 7 million tonnes of oil per year in the group of Kumkol fields, which have total proved reserves of over 71 million tonnes.
The transaction also provided for setting up on parity terms with China a joint enterprise on the basis of the Shymkent oil refinery (PetroKazakhstan’s assets). On 16 November 2006 the parties signed a comprehensive share purchase contract and a shareholders’ approval to complete the deal. KazMunaiGaz gains access to South Kazakhstan’s oil refineries and control over regional distribution of oil products.
KazMunaiGaz made another important purchase of a 50% share in KazGerMunai in July. The latter produces approximately 3.5 million tonnes of hydrocarbons per year in Nurali, Aksai and Akshibulak fields (Kyzylorda Oblast).
Today, KazMunaiGaz holds shares in over 30 companies. KazMunaiGaz participates in production of some 35 million tonnes of oil, just over a half of the total hydrocarbon production in Kazakhstan. The company controls approximately 60% of oil pipelines, 100% of main gas pipelines and 30% of oil refineries. Kazmortransflot and TenizService, KazMunaiGaz’ subsidiaries, respectively hold a monopoly position in Kazakhstan’s tanker transportation and services provided to offshore oil operations.
Long-awaited IPO
Razvedka Dobycha KazMunaiGaz, KazMunaiGaz’s oil producing subsidiary, made the initial public offering (IPO), which was the most important event of the year. It announced that it had completed placing its global depositary receipts (GDR) and ordinary shares among investors at $14.64 and 11,163.39 tenge respectively on 29th September. ABN AMRO Rothschild and Credit Suisse acted as underwriters of the placement; Windsor Capital acted as the lead manager inside Kazakhstan. Razvedka Dobycha KazMunaiGaz offered public investors 23,860,791 new ordinary shares and 3,463,019 existing shares held by KazMunaiGaz, its principal shareholder. The latter block of shares was offered to underwriters for the purpose of stabilisation and redistribution. 
The coincidence of the initial GDR trades at the London Stock Exchange and the trading of ordinary shares at the Kazakhstan Stock Exchange (KASE) with the KIOGE conference opening was seen as highly symbolic. Razvedka Dobycha KazMunaiGaz announced that it had completed stabilising its shares on 30th October. The stock amount, including 2,589,442 shares used by underwriters for distribution and stabilisation, reached approximately $2.3bn, meanwhile capitalisation exceeded $6.2bn. Therefore, the number of ordinary shares totalled 70,220,935; KazMunaiGaz will hold 43,087,006 shares (61.36%) after underwriters implement their option for selling shares back; the remainder has been distributed among Kazakh and foreign investors.
As for Razvedka Dobycha KazMunaiGaz, it regards this event as the beginning of a new era not only for the company, which can use the attracted funds to replenish its reserves, but for the entire oil and gas sector of Kazakhstan as well. This was the first stock exchange offering by a Kazakh oil producing company on an international level. Besides, according to Zhaksybek Kulekeyev, the First Vice President of KazMunaiGaz, the IPO promotes the domestic stock exchange. Over 60% of the total ordinary shares issued by Razvedka Dobycha KazMunaiGaz have been placed; 40% were purchased by the Kazakh pension funds.
It is noteworthy that this successful IPO shows that Kazakhstan’s extractive sectors are approaching a new level of corporate transparency.
Projects and Outlook
The second phase of the development of the Kazakh sector of the Caspian Sea started in 2006 and is expected to end in early 2011. Over the past three years, several substantial projects have been completed in preparation for the shelf development. In particular, Kazakhstan purchased three tankers (named Astana, Almaty and Aktau) with a displacement of 12,000 tonnes each, extended Aktau sea port’s capacity to 12 million tonnes of oil per year, and constructed a new runway at Atyrau airport. The port terminal with a designed capacity of up to 250,000 tonnes of rock per month was commissioned on the eastern shore of the Tyubkaragan bay in 2005. Also in 2005, KazMunaiGaz’ subsidiary TenizService set up a disposal site for toxic industrial wastes 16 km offshore from the Bautino port. The drilling waste from the Tyub-Karagan and Kurmangazy offshore exploration wells were disposed there.
Construction of naval bases for the maintenance of offshore oil operations continued in the northern and central parts of the Kazakhstani sector of the Caspian Sea in 2006; refuelling depots are being constructed as well. Construction of the North Caspian base for rapid response to oil spills will begin near the Damba rural area 22 km from Atyrau in 2007. The $40m project will be carried out by TenizService and Agip KCO.
All in all, preparation for development of the Kazakh sector of the Caspian Sea is proceeding at full speed. However, the last two years indicated that problems can occur here. The first exploration well in the Kurmangazy structure of Tyub-Karagan last year did not show an occurrence of hydrocarbons. KazMunaiTeniz offshore oil producing company and Rosneft, who operate the exploration, decided to update the geological model of the structure. That is why drilling of the second well in the Kurmangazy field will not begin earlier than 2009.
The recent news of another delay in commercial production from the Kashagan field to 2009 or 2010 did not cause a sensation. At least there is no doubt about the occurrence of hydrocarbons; four oil production wells have been put into operation and tested. Kashagan’s recoverable reserves are estimated at 2.2 billion tonnes of oil. The project operators refer to the same causes for the delay as in 2005, i.e. adverse climatic and geological conditions and the necessity to introduce changes in the project. We hope that these changes are not due to any intention to meet the long-awaited oil production target by excessively accelerating the construction timetable.
Nevertheless, the current difficulties did not affect foreign investors’ interest in the potential of the Kazakhstani sector of the Caspian Sea. Zhakyp Marabayev said that Production Sharing Agreements (PSA) on six offshore oil and gas fields are being implemented in Kazakhstan. Apart from the North Caspian Project, Tyub-Karagan and Kurmangazy, there are Atash (operated by KazMunaiTeniz and Lukoil Overseas Shelf on parity terms), Zhemchuzhiny (KazMunaiTeniz holds 25%, Oman Oil Company 20% and Shell 55%), and Zhambai. Even though KazMunaiGaz is developing the latter on its own, Kazakhstan’s government is currently negotiating an agreement for selling 25% of the shares each to Lukoil and Repsol of Spain.
As for the outlook, there are plans to sign a PSA on the H sector, operated by KazMunaiTeniz, and the Zhambyl, operated by KazMunaiTeniz and the consortium of Korean companies by the end of this year. Another four PSAs will be concluded next year on the Abai (of KazMinaiTeniz and Statoil), Isatai (of KazMunaiTeniz), Darkhan (of KazMunaiTeniz, CNPC and China National Offshore Oil Corporation), and Satpayev (of KazMunaiTeniz and Oil and Natural Gas Corporation Limited of India) projects.
It is planned to drill a total of 144 offshore wells from 2006 to 2010, and 469 wells from 2011 to 2016. Foreign investments in Kazakh sector of the Caspian Sea are expected to reach $12.9bn and $16.8bn in 2006-2010 and 2011-2016 respectively, compared with $3.5bn invested during the first phase.
Mr Marabayev revealed the following figures concerning forecast offshore oil production: 3 million tonnes per year by 2008, 18 million tonnes per year by 2010 and 89.2 million tonnes per year by 2015. However, KazMunaiGaz’ managing director lowered expectations at once, saying that these are merely current plans, the schedule can change, and production can be postponed by a year or two due to security and risk issues. Evidently, with allowance for Kashagan…  
Not a Tale, yet not an Accomplished Fact…
With the slowed growth of domestic oil production, Kazakhstan is moving ahead of schedule in the diversification of export routes. In recent times Kazakhstan transported oil only via the Caspian Pipeline Consortium (CPC) and the Atyrau-Samara pipeline, and by tankers from Aktau port. In 2006, two new routes were opened up.
On 29th July, the State Commission issued an acceptance certificate on the Atasu-Alashankou oil pipeline, which is expected to transfer up to 10 million tonnes of hydrocarbons per year to China. During the second phase, when the construction of the Kenkiyak-Kumkol part is completed, the capacity of the Kazakh-Chinese pipeline will be extended to 20 million tonnes.
Azerbaijan and Kazakhstan signed an agreement on transportation of oil via the Baku-Tbilisi-Ceyhan (BTC) pipeline this summer. The agreement provides for setting up the Kazakhstan Caspian Transportation System (KCTS) which comprises construction of a pipeline from Yeskene (where Agip KCO’s oil pre-treatment plant is located) to the port of Kuryk, where an oil-loading terminal will be constructed. Afterwards, Kazakhstani oil will be shipped by tankers to the Baku terminal and loaded into the BTC system via the connection line. Five million tonnes of oil will be exported via the KCTS on the initial phase; the amount is expected to eventually increase to 25-38 million tonnes per year.
Kazakhstan’s projects for the transportation of gas are becoming more ambitious. This is connected with the plan to boost gas production from today’s 25 billion m3 to 80 m3 by 2015. Considering the fact that gas can be exported only northwards via Russia, Kazakhstan and China are now drawing up a feasibility study of the Kazakhstan-China pipeline. The completion of the first phase of the project (with a capacity of 10 billion m3) is scheduled for 2009; afterwards the capacity will be extended to 30 billion m3 by 2012. Gas supplies are guaranteed over 30 years.
In addition, Kazakhstan is considering the Transcaspian gas pipeline project in connection with the construction of the Baku-Tbilisi-Ceyhan gas pipeline running across South Caucasus. According to Astana’s plan, the Aktau-Baku-Tbilisi-Erzurum route will allow Kazakh gas to be exported to the European countries via the territories of Azerbaijan, Georgia and Turkey.
Returning to the issue of oil transportation, Kazakhstan still considers the CPC pipeline as its key route. However, due to protracted negotiations with Russia on extending the pipeline capacity to 67 million tonnes, alternative routes like Kazakhstan-Turkmenistan-Iran seem to be more and more realistic.
The report contributed by Mohammad Souri, Managing Director of the National Iranian Tanker Company, was very interesting in this regard. He said that Iran, which is actively developing its oil treatment facilities, will be ready to accept from 370,000 to 1.1 million barrels of oil from the neighbouring Caspian countries in the near future. Now, Iran compiles a fleet of large tankers with a displacement of 63,000 tonnes each for this purpose. According to Mr Souri’s calculations, Iranian tankers will enable the cost of transporting oil by sea (from any port of the Caspian sea to the Iranian area of Nekka) to be cut to $6 per tonne compared with $28-50 per tonne of oil transported by all other export routes available in the region. Therefore, even if Iran carries out SWAP transactions with the Persian Gulf instead of purchasing oil on its own, transport expenses will only reach $16-22 per tonne which is also below the rates of any alternative Caspian route available today. However, Mr Souri did not include an important geopolitical aspect in his economic equation, namely US strategic interests in the region. That is probably why this appealing proposal did not produce an appropriate response from the delegates to the KIOGE 2006 conference.

Table of contents
Kazakh Banks: Growth Risks  Dmitriy Angarov, Aleksey Kechko, James Watson 
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