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 KAZAKHSTAN International Business Magazine №2, 2007
 Negotiations and Agreements. Oil Chronicles
Negotiations and Agreements. Oil Chronicles
According to the Kazakh Statistics Agency, Kazakhstan extracted 22.858 million tonnes of crude oil and 5.212 million tonnes of gas condensate in January-May 2007, up by 5.4% and 22.7%, respectively, from a year earlier.
The KazMunayGas national company extracted 6.85 million tonnes in the same period, up by 1.9% from a year ago. In total, the national company intends to extract 17.3 million tonnes of hydrocarbons in 2007.
The country produced 12.44 billion cu. m. of natural gas in January-May (up by 19.6%), including 7.2 billion cu. m. of natural gas (up by 28.8%) and its marketable volume was 3.85 billion cu. m. (down by 7.4%); associated gas output grew by 8.9% to 5.23 billion cu. m.
Kazakhstan produced 1,162,500 tonnes of petrol, including aviation fuel, in the first five months of 2007, up by 26.6% from a year earlier. Kerosene production (including kerosene for jet engines) grew by 43.1% to 181,600 tonnes and gas oil output rose by 20.9% to 1,833,600 tonnes. However, fuel oil output fell by 27.4% to 987,300 tonnes.
The cargo turnover of the main oil pipelines stood at 36,078 million tonne-km in January-May 2007, up by 0.3% from a year earlier.
The cargo turnover of the Kazakh main oil pipeline network was 17,426.7 million tonne-km. The 6.3% growth was possible thanks to transporting oil through the Kumkol-Atasu-Alashankou pipeline. The KazTransOil company transported 18,871,000 tonnes of oil through its pipeline network, up by 8.9%. The company intends to transport 43,325,000 tonnes of crude oil this year.
The cargo turnover of gas pipelines was 18,651.3 million tonne-km in the first five months of 2007. The 4.7% drop was due to the fall in domestic gas consumption.
The Intergas Central Asia company transported 49.2 billion cu. m. of gas; a 6.8% decrease due to a fall in transiting Turkmen and Russian gas. Intergas Central Asia plans to transport 124.8 billion cu. m. of gas in 2007.
Investment in basic capital reached 931 billion tenge (up by 10.6%) in Kazakhstan in January-May 2007. The most attractive sector for investment remained the oil and gas sector (32.5% of the total investment), whereas investment in operations with property accounted for 29.3%, in transport and telecommunications 9.3% and in the processing sector 9.1%. The highest growth in investment was in West Kazakhstan Oblast (90%), Zhambyl Oblast, Mangistau Oblast and Kyzylorda Oblast (50% growth). Funds were mainly invested in developing fields and building associated infrastructure. At the same time, investment fell by 17.1% in Atyrau Oblast because a number of joint investment projects were completed in this region.
Domestic investment accounted for the bulk of the total investment in basic capital – 70.7%, whereas the share of foreign investment stood at 29.3%. Foreign investment was mainly centred in Atyrau Oblast (68.8% of the total foreign investment in the country).
Investment in basic capital came from companies’ own funds (62.1%), foreign direct investment (18.2%), budget funds (8.8%) and borrowings (10.9%).
Investment was mainly placed in local private enterprises (68.3%) and foreign enterprises operating in Kazakhstan (22.5%). State-owned enterprises received 9.2% of investment.
Financial Indicators
The KazMunayGas national company pursued an active investment policy in January-May 2007, investing 53 billion tenge of its own funds, including 51.6 billion tenge in production.KazMunayGas’s consolidated revenue totalled 402 billion tenge in the first five months (up by 0.6%).
In general, the national company and its subsidiaries paid 76.6 billion tenge in taxes and collections to the central budget. The 27.8% decrease was due to changes in tax legislation that became effective on 1 January 2007.
Petrochemistry as a Growth Point
The steady growth in oil and associated gas output from existing fields and future projects on the Caspian Sea shelf requires that a number of issues relating to utilising products of primary hydrocarbon treatment should be resolved. As such, the main priority of Kazakhstan’s investment policy is to develop oil-processing capacities and petrochemistry.
One of these projects is the construction of an integrated petrochemical complex in Atyrau Oblast. The Kazakhstan Petrochemical Industries (KPI) company and its major shareholders – SAT & Company and KazMunayGas Exploration & Production (E&P) – are carrying out this project. The Basell International Holding BV chemical company is acting as an adviser on this project. The project’s feasibility study and the process of attracting foreign investment to the tune of over $3bn have already been drafted. The complex is expected to produce 400,000 tonnes of polyethylene of low and high density, 400,000 tonnes of linear low-density polyethylene and 400,000 tonnes of polypropylene a year. The construction of the complex will be launched in December 2007. The project’s first stage will be carried out within three years. According to the feasibility study, the project will cost over $4bn, which will be recovered within 12-15 years.
KPI and Tengizchevroil held talks in spring 2007 on supplying raw materials to the future complex. The general director of SAT & Company, Nurlan Abduov, believes that the project’s feasibility depends only on raw material supplies. “We intend to sign a contract with Tengizchevroil for 15 years, with the possibility of extending it,” he said. Bearing in mind that the worldwide practice of fulfilling such projects often envisages a fixed price for raw materials, “we are trying to achieve such pricing to make it possible to implement the project,” he explained. The head of SAT & Company said that, after finalising a contract with Tengizchevroil, the company would to conduct a roadshow to attract funds to build the complex. Relevant talks have now been held with international banks, such as ABN Amro, BNP Paribas, Citigroup and HSBC.
In addition, in June 2007, KazMunayGas took back its shares in KPI, which it had previously sold. It sold a 35% stake out of its 50% stake in KPI for 3.2 billion tenge in December 2005. However, the purchaser – SAT & Company – did not make a payment, and the stake was returned to KazMunayGas E&P with a fine worth 0.1% of the purchase price for failing to fulfil obligations. As a result, KazMunayGas E&P again owns a 50% stake in KPI.
Gordian Knot
Experience to date shows that official Astana has managed to match private companies’ demands and the state’s capability in supplying energy resources to world markets. In other words, having obtained access to extracting Kazakh hydrocarbons, production companies have not faced capacity shortages in transporting these hydrocarbons through Kazakhstan and foreign countries. Independent experts believe that this circumstance is a condition for preserving the investment attractiveness of Kazakh oil and gas projects over the long-term.
The issue of increasing the Caspian Pipeline Consortium’s (CPC) design capacity to 67 million tonnes of oil a year was raised again in late June 2007. As is known, Russia is ready to increase the CPC’s capacity only after increasing the tariff to pump oil through the pipeline. In this regard, the Russian oil-transporting monopolist Transneft raised the issue of the immediate increase of the tariff from $24.5 to $38 a tonne at the consortium’s meeting on 3 July 2007. Moreover, Transneft suggested that shareholders issue eurobonds to the tune of $5bn to pay off the consortium’s debts. The meeting was held in Moscow and it was the first meeting to be held after the Russian stake in the CPC had been transferred from the Russian Federal Property Agency to Transneft. Experts expected that the meeting would be tense because the head of Transneft, Semyon Vainshtock, received Russian President Vladimir Putin’s go-ahead for putting forward these demands. The Kremlin believes that in this situation Russia, as a major shareholder of the consortium, remains without dividends and, as a lender to the CPC, without payments on loans, and, as a state in whose territory the CPC is operating, without a profit tax.
Russian experts estimated that Russia’s revenue could total $1bn from the CPC in 2007. However, with the current capacity, it is only possible to make $800m; even then, the majority of the earnings will go to private shareholders and to cover operating costs.
Moscow's position is: “Since the CPC was put into operation, its foreign management has offered shareholders not a single efficient way of improving the project’s economics, except increasing its capacity."
Despite the resolute stance adopted by Russia, the CPC shareholders rejected all the proposals made by Transneft at the meeting. In particular, they opposed three key issues: increasing the tariff to transport oil, cutting interest on loans, and issuing eurobonds to restructure debts. As a result, the CPC issue has again become “suspended in mid-air”, as some observers predicted.
The 1,580-km-long CPC pipeline links the Tengiz oil field in western Kazakhstan with the Russian Black Sea port of Novorossiysk. It transports oil from Tengiz and gas condensate from the Karachaganak field (which is linked to the CPC by the Aksai-Bolshoy Chagan-Atyrau pipeline).
The CPC shareholders are Russia (represented by Transneft) with 24% of shares, Kazakhstan 19%, Oman 7%, Chevron Caspian Pipeline Consortium Company 15%, LUKArco BV 12.5%, Rosneft-Shell Caspian Ventures Ltd 7.5%, Mobil Caspian Pipeline Company 7.5%, Agip International (NA) NV 2%, BG Overseas Holding Limited 2%, Kazakhstan Pipeline Ventures LLC 1.75% and Oryx Caspian Pipeline LLC 1.75%.
The Stumbling Block of the Caspian Sea
The main obstacle countries and private oil and gas companies face in the Caspian Sea region is the problem of achieving agreement on the new legal status of the Caspian Sea, without which the littoral countries are limited in terms of realising their investment potential.
Foreign ministers from the Caspian-littoral countries made another attempt to solve Caspian problems at their meeting in Tehran in June 2007.
Kazakh Foreign Minister Marat Tazhin said that in order to develop the Caspian region’s energy potential intensively these countries would have to realise the significance of a solid and long-term legal basis for cooperation, especially when the situation in the Caspian Sea is developing faster than the negotiation process.
He also reminded his colleagues about Kazakhstan’s position on the Caspian Sea’s legal status. For example, establishing territorial waters, fishing zones and a common water body in the Caspian Sea will make it possible to efficiently ensure the political and economic interests of the littoral states. At the same time, negotiators should focus not on the form but the width and legal regime of these zones. The end of territorial waters should be a state border, within which littoral states will have full sovereign rights. This will guarantee security in the context of inviolability of borders and territorial integrity.
Discussing dividing the Caspian Sea’s bed, Mr Tazhin noted that the principles established in agreements between Kazakhstan, Azerbaijan and Russia on dividing the northern part of the Caspian Sea through bilateral agreements could serve as a good basis for further developing the negotiation process. The Kazakh foreign minister expressed the hope that other Caspian-littoral countries would follow this example to finally solve the problem of dividing the Caspian Sea bed in order to exercise sovereign rights to develop natural resources.
At the same time, Mr Tazhin believes that a future convention on the Caspian Sea’s legal status should reflect the right of landlocked Caspian-littoral countries to freedom to transit goods using all transport means and the right to access other seas and the World Ocean. In this regard, underwater pipeline routes should be agreed upon with the countries in whose sector of the seabed the routes will be laid. Kazakhstan is ready to discuss proposals made by Iran and Russia on the need to conduct expert environmental assessments of these projects by all of the Caspian countries.

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Where Does the Brand Start?  Yevgeniy Zharkin 
Atlas Copco. Growth Strategy  Hans Hedensjö 
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