Oil Chronicles: a New Deal
Editorial
Despite the crisis in the world economy, Kazakhstan was steadily increasing its hydrocarbon production from January to October 2008. As compared to the same period in 2007, the production of oil and natural gas in the country has grown by 6% and 11.4% respectively, while the production of gas condensate has dropped by 1.4%.
Production and refining
According to the Statistics Agency, 48.6 million tonnes of crude oil and 9.8 million tonnes of gas condensate have been produced in the country over the ten months of 2008. These figures are 6% higher for oil and 1.4% lower for gas condensate as compared with the January to October period a year ago. The natural gas production during this period reached 27.33 billion cubic metres (+11.4%). More specifically, the production of natural gas in gaseous state amounted to 15.25 billion cubic metres (+10.4%), with its saleable output reaching 9.24 billion cubic metres (+19.1%). The production of petroleum gas shown an increase of 12.6%, as compared with the year-ago period, and reached 12.08 billion cubic metres.
Over the nine months of 2008, the Kazakh oil processing companies produced 2,057,300 tonnes (-6.4%) of petrol, including aviation petrol, 2,732,200 tonnes (+33.7%) of fuel oil, 3,713,100 tonnes (+3.4%) of diesel fuel, and 346,400 tonnes (+1.6%) of paraffin, including aviation turbine fuel.
Investments in capital assets
From January to October 2008, the investments in capital assets in the country totalled 2,969.1 billion tenge (+7.6%), with the biggest growth registered in Zhambyl Oblast (1.9-fold), Kyzylorda Oblast (1.8-fold) and West Kazakhstan Oblast (by 28.4%).
The production of oil and natural gas, as well as the provision of related services, remains as the priority sector for capital investment, accounting for 22.6% of the total volume of investment in capital assets.
Has the Kashagan dispute come to a full stop?
Kazakhstan and Agip KCO consortium members signed the final documents on the Kashagan project on 31 October in Astana. Particularly, they concluded the second supplemental agreement to PSA and a purchase contract providing for an increased share of KazMunaiGas in the project.
The documents have been signed by the representatives of the Ministry of Energy and Mineral Resources, KazMunaiGas, ENI, ExxonMobil, Total, ConocoPhillips, Shell, and Inpex.
As per the agreement, the share of KazMunaiGas has increased from 8.33% to 16.81% with the other Northern Caspian Sea PSA stakeholders' shares being distributed as follows: ENI 16.81%, ExxonMobil 16.81%, Shell 16.81%, Total 16.81%, ConocoPhillips 8.40%, and Inpex 7.56%.
Alongside this, given the scope and complexity of the Kashagan and other PSA projects, the consortium members and the Ministry of Energy have resolved to join their efforts and resources and implement the project in the following way:
· During Phase 1, ENI will retain responsibility for implementation of the Kashagan Field Development Experimental Programme;
· Phase 2 will see the following allocation of responsibilities: Shell will be in charge of the offshore development, ENI will run the onshore plant, while ExxonMobil will manage drilling;
· After the start up of the first phase Shell will control production operations with KazMunaiGas, progressively assuming greater responsibility.
· To meet their commitments, ENI, ExxonMobil, and Shell will have appropriate authority on matters such as staffing, procurement, and operation procedures, using their own management systems. KazMunaiGas will take on an increasing role in the project and will be involved in each phase of its implementation.
Following the completion of the experimental programme, a new joint operating company, North Caspian Operating Company B.V., will take over the responsibilities currently with Agip KCO as the sole operator of the North Caspian PSA. The North Caspian Operating Company B.V. will comprise all the co-venturers of the consortium with their respective participating interests.
North Caspian Operating Company B.V. will supervise all project activities, planning management, coordination, reservoir simulation, conceptual studies and early development plans, as well as liaison with state bodies on behalf of the whole venture.
The managing director of the new joint operating company will be on rotation among the partners. A Total representative initially fulfills this role, while the deputy managing director is a KMG executive.
North Caspian Operating Company B.V. will be staffed by representatives of all partner companies and will be run largely in line with the Total Company management system.
According to a transition plan that is being prepared by North Caspian Operating Company B.V., the transfer of the operator's functions should take place in January 2009.
The target date for the start of production from Phase 1 is the end of 2012. During that phase (line 1 and 2), plateau production will be 300,000 barrels of oil per day with the operation of the gas injection and will further increase to 450,000 barrels of oil per day, with the shared use of additional injection facilities which will come on stream at the beginning of Phase 2. Kashagan full field development should reach a plateau of 1.5 million barrels of oil per day towards the end of the next decade.
Samruk-Kazyna to lay the ‘Path to Europe’
Samruk-Kazyna, the national welfare fund set up in mid-October 2008, stands ready to view the possibility of purchasing infrastructure projects in the European energy sector.
This was announced during the presentation of the Path to Europe Programme Implementation Plan, held on 22 October at the premises of the Ministry of Foreign Affairs with the participation of the heads of diplomatic missions accredited in Kazakhstan.
Energy security is among the priorities on the external policy agenda of many European states. In this context, it is critical for Kazakhstan to set up a single technological chain, from extracting hydrocarbons to supplying oil products to the end users in Europe.
Looking back, we see the Path to Europe programme was adopted by a presidential decree in August 2008 with a view to enabling the country to reach the level of strategic partnership with the leading European states. The Ministry of Foreign Affairs acts as the operator of the programme.
The state will support home oil and gas equipment production
During the enlarged session of the Nur Otan parliament fraction, held on 4 November in Astana, Vice Prime Minister Umirzak Shukeyev emphasised that the Kazakh engineering plants producing oil and gas equipment need overall support.
According to the vice prime minister, some 60 local engineering plants are already able to produce equipment for oil and gas sector with half of them being fully or partially prepared to provide for the oil companies' needs in some types of equipment and materials of world standards. Mr Shukeyev believes that these enterprises must be supported with KazMunaiGas' orders, as well as by "making foreign investors buy the products provided that the other conditions such as quality and cost are equal."
The minister's information shows that the Kazakh companies are producing more than 50 types of equipment and special machinery, materials and spare parts for the oil and gas sector. He also noted that the priority of developing home engineering sector is determined by our oil and gas sector being a huge consumer of the machinery. For instance, within the Programme for Development of the Kazakhstan’s Sector of the Caspian Sea, the investments in this field may amount to some 1.658 trillion tenge during Phase 2 (2006-2010) and 2.511 trillion tenge for Phase 3 (2010-2015).
Astana to lower export duties
The government of Kazakhstan has proposed reducing the export duty for oil and oil products. The Minister of Energy and Mineral Resources Sauat Mynbayev announced this during the government telephone conference of 10 November. According to the minister, a draft governmental resolution providing for a significant decrease in the rate of export duty for fuel oil and crude oil is currently being agreed with the state bodies. Let us recall that on 11 October 2008 the customs duty for oil export rose from $109.91 to $203.8 per tonne.
The draft resolution is supposed to bring down the export duty rate again: from $203.8 to $139 per tonne of crude oil, and from $130 to $95 per tonne of fuel oil.
Company news
Caspi Meruerty Operating Company B.V. reported that the drilling results of the second exploratory well Auezov-1 have proved the oil reserves at the Pearls field within the Kazakhstan sector of the Caspian Sea.
According to the company's announcement distributed on 4 November, "construction of a 2,465 metre deep well was completed in full compliance with the approved technical design and the environmental impact statement. The well construction process has been subject to an ongoing permanent environmental monitoring.”
PSA for the Pearls field was signed in December 2005. Today, a 55% share in the project belongs to Shell, 25% to KazMunaiTeniz (KazMunaiGas’ operator for offshore projects), and 20% to Oman Pearls Company Limited. The Pearls Contract Area, located 60 kilometres away from the Mangistau Oblast shore, is 895 square metres.
The operator for the Pearls project is Caspi Meruerty Operating Company B.V. founded in January 2007 in the Netherlands by Shell EP Offshore Ventures and Oman Pearls Company Limited.
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As a result of the board meeting of CPC-Russia and the general meeting of shareholders of CPC-Kazakhstan, held on 14 and 15 October in Moscow, the Caspian Pipeline Consortium (CPC) adopted a Resolution on the detailed design of the pipeline expansion project.
Specifically, they have determined the procedure, implementation stages, financing, and operations for the further fulfilment of the project. Drafting the detailed working documentation for the expansion of the CPC project is expected to commence in 2009, on the basis of the updated Russian and Kazakh feasibility studies.
The consortium members have also discussed the steps needed to finalise the approval of a memorandum of understanding on the principles of the project implementation.
Besides this, the consortium management bodies have discussed various aspects of the current financial and economic activities of the venture and made a number of decisions to keep the pipeline efficient and safe. They have also approved the conclusion of large contracts for pipeline maintenance.
As was noted by the chief manager of the CPC expansion project, Igor Kozin, "the estimated costs of the pipeline capacity expansion currently amount to $3.5bn and the feasibility studies for the expansion will be presented to the consortium members in late 2009, while the three-phase construction process is scheduled to start in 2010." The first phase will envisage modernisation of the existent oil booster stations, with five new booster stations to be constructed during the second phase and another five during the third one. The first phase is scheduled for 2011, the second phase will be implemented in 2012, and the third one in 2013.
CPC possesses the 1,580-km long Tengiz-Novorossiysk oil pipeline linking the West Kazakhstan oil fields with the Russian Black Sea shore. In 2007, a total of 32.6 million tonnes was pumped through the CPCpipeline. The project will see increasing the pipeline transmission capacity up to 67 million tonnes.
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In late October 2008, Trade House KazMunaiGas completed its shipments of diesel fuel for the Kazakh agricultural producers at a reduced price, thus meeting its social commitments assumed earlier.
Trade House KazMunaiGas has ensured the safe supplies of oil products to carry out harvesting in the following oblasts: Aktobe (15,967 tonnes), West Kazakhstan (12,933 tonnes), Kyzylorda (14,774 tonnes), as well as in the grain sowing oblasts such as Kostanai (57,760 tonnes) and Akmola (18,861 tonnes). All in all, the Atyrau oil processing plant supplied a total of 120,295 tonnes of cut-price diesel fuel to satisfy the needs of agricultural producers during the harvesting period.
It should be noted that the amount supplied in 2008 is 11,000 tonnes higher than the previous year’s figure. With the cumulative monthly demand of 130,000 tonnes, the company has provided for almost one third of all necessary diesel supply – 40,000 tonnes per month.
Trade House KazMunaiGas’ subsidiaries were also supplying diesel fuel at a fixed price to the companies engaged in passenger transport, municipal services of Astana and Almaty, as well as to Kazakhstan Temir Zholy and KazAvtodor facilities and other huge consumers.
Trade House KazMunaiGas is a 100% subsidiary of the KazMunaiGas National Company. Its assets comprise the Atyrau oil processing plant (99%), the Shymkent oil processing plant (50%), and Rompetrol (75%). The Trade House overviews oil processing assets, export operations for oil and oil products, and the development of oil product retail chains.
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At the end of October 2008 Tengizchevroil JV started transporting oil along the Baku-Tbilisi-Ceyhan (BTC) pipeline. The oil from the Tengiz field is shipped by tankers from the Aktau port to the Apsheron Peninsula and then is pumped into the pipeline.
Until recently, Tengizchevroil JV was producing some 300,000 barrels of oil per day, which accounted for more than 20% of the total oil production in Kazakhstan. In 2007 only, the company extracted 13.9 million tonnes. In 2008 this indicator is expected to reach 18.7 million tonnes with a further increase of up to 24 million tonnes of oil per year.
The negotiations concerning oil transportation from the Tengiz field along the BTC pipeline have been ongoing since 2006 when Tengizchevroil was planning to start pumping already in 2007. An agreement was signed in 2008 providing for the pumping of 100,000 barrels of Tengiz oil per day.
The length of the BTC oil pipeline is 1,767 kilometres, out of which 443 kilometres lie in Azerbaijan, 248 km in Georgia and 1,076 km in Turkey. The projected transmission capacity of the BTC line is 50 million tonnes of oil per year. The project stakeholders are: BP (30.1%), State Oil Company of the Azerbaijan Republic (25%), Chevron (8.9%), Statoil (8.71%), TPAO (6.53%), Itochu (3.4%), Amerada Hess (2.36%), ENI (5%), ConocoPhillips (2.5%), Inpex (2.5%), and Total (5%).
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The start-up of the Russian-Kazakhstan joint venture, based on the Orenburg Gas Processing Plant facilities, has been delayed due to the assessment procedure for the property that must be transferred from Gazprom to the joint venture. The Vice Minister of Energy and Mineral Resource Lyazzat Kiinov reported this during the second meeting of the parliamentary group for the cooperation between the Senate of the Kazakh Parliament and the Federation Council of Russia. Saying this, the vice minister explained that the joint venture will be using only a part of the plant, namely the facilities to clean the gas from sulphur, process it and obtain the liquid part.
Russia and Kazakhstan signed the interstate agreement on establishing the Orenburg Plant-based joint venture to process the Karachaganak gas in October 2005, and both countries ratified this document in 2008. In June 2007, Gazprom and KazMunaiGas endorsed/signed an agreement on the main foundation and participation principles; the sides have stated that the joint venture would be launched during the current year. KazMunaiGas is expected to pay $350m for its 50% share in the venture while the Russian side will participate with the plant assets. Besides this, each side shall invest $250m into the modernisation of the plant (a total of $500m).
The joint venture envisages obligatory conclusion of long-term (not less than 15-year) contracts for the purchase and processing of at least 15 billion cubic metres of the Karachaganak gas per year, for the sale of the processed gas in Russia and Kazakhstan as well as its shipment through the single export channel, Gazprom.
With the Orenburg gas processing capacity of 37.5 billion cubic metres per year, the plant uses its own raw materials of some 17 billion cubic metres – therefore the supply of additional gas from Karachaganak will allow the maximum utilisation of the processing facilities. The expected ultimate volume of processed gas at this plant (30.6 billion cubic metres, including 15 billion cubic metres of the Karachaganak gas) will be reached in 2012.
At present, the Karachaganak crude gas is supplied to the Orenburg plant by KazRosGas, a joint venture of Gazprom and KazMunaiGas.
Table of contents
Competitiveness: Our Place 66 Sergey Gakhov, Elena Zabortseva
Experts recommend. How to increase the rating Margareta Drzeniek Hanouz
Business Forum. In Quest of a Panacea Editorial
Investors and the State: Kazakh Content Editorial
Oil Chronicles: a New Deal Editorial
PetroKazakhstan: Policy of Stability Wang Zhongcai
KIOGE 2008: Autumn Revelations Editorial
Mining in Kazakhstan: Russians Coming Vasily Lukyanchikov
