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KIOGE 2008: Autumn Revelations
The regular oil and gas exhibition and conference KIOGE 2008 took place in Almaty in early October. Over the past sixteen years, this forum has gained recognition as one of the major platforms for opinion exchange between the official Astana and foreign oil investors. It is here that the parties' positions are compared, and the plans and projects are first announced. The event organisers – the Kazakh exhibition organising company Iteca and international ITE Group (Great Britain), as well as the KIOGE exhibitors, contribute to this dialogue. This year, the exhibition, with the total area of 25,000 square metres, has featured over 550 companies from 30 countries worldwide. The national stands have been set up by Great Britain, Germany, Italy, China, the Netherlands, Norway, Poland, Turkey, France, and, for the first time, Russia. The number of visitors has exceeded the expected estimate of 15,000 people. It should be noted that the forum has lived up to the expectations and has determined a range of new development trends in both the Kazakh and world oil industry.
Old questions…
In the past decade, the Caspian littoral states have systematically increased their hydrocarbon production. In 2007, some 67.2 million tonnes of oil and gas condensate and over 29 billion cubic metres of gas have been extracted in Kazakhstan only. According to experts, in five to seven years the volume of regional production can reach 180 to 240 million tonnes of oil and 200 to 250 billion cubic metres of gas. Given this it is no surprise that the Caspian region is in the focus of geopolitical and geoeconomic interests of the USA, EU, and Russia. Therefore, none of the KIOGE conferences goes without participation of the official representatives from these countries.
Ambassador Steven R. Mann, representing the U.S. Department of State, highlighted in his speech that the American companies have played a major role in the development of the oil and gas sector of Kazakhstan by participating in practically all big sector projects launched since the country's independence. According to Mr Mann, our country has managed to join the list of the world leaders in hydrocarbon resources by realising the common initiatives at the global level. The ambassador assured the forum that the American energy policy would receive a new strong impetus with the new president coming in. He noted the development of the Caucasus-bound Trans Caspian transport system with the possible construction of an underwater oil pipeline, and the creation of new routes to supply Central Asian gas to Europe as the priority projects for the USA in the region.
Great Britain holds a similar position to that of the USA. As was noted by Angus Miller, Caspian Energy Adviser, Climate Change and Energy Group, no other large oil-exporting region in the world has been confronted with such significant supply problems as ours. In light of this, Kazakhstan and its neighbours need to develop marine transport, since it is the only way to ensure a certain flexibility of energy relations with other countries. Mr Miller believes that in the Caspian region a well-elaborated system for overseas transport management should be introduced, along with the implementation of international marine standards. In addition, he affirmed that Great Britain stands ready to assist in the development of such infrastructure.
Besides this, the western representatives think that there needs to be some competition between the regional systems delivering gas from Central Asia to Europe. So far, the only operating route is to transit the gas through Russia, which does not appeal to the West at all.
While actively using energy shipments as a 'special argument' in its relations with Europe, Russia, in turn, does not try to conceal its interest in maintaining the dominant position in the transit route. Furthermore, Russia is ready to regard Kazakhstan as an equal partner. Given the sums at stake, this is quite understandable. According to Vadim Gustov, Chairman for the CIS Affairs Committee, Federation Council of Russia, those who possess energy resources will be determining the whole structure of the world economy and policy during the 30 to 50 years to come. "In regard to the national interests of both Russia and Kazakhstan, the creation of some kind of Russian-Kazakh oil alliance would, at the very least, strengthen the positions of Moscow and Astana as sellers in the world oil markets".
Besides this, Mr Gustov believes that today's geopolitical structure of the global oil market is changing along with its price structure. The major 'centres of gravity' in the energy sector are emerging in the countries of Asia. As a result of this, he has proposed jointly developing the export of hydrocarbons to the dynamically growing markets of Eastern Asia, particularly to China. "As is known, the Chinese leaders anticipate that over half of the oil imported to China must come from Russia and Kazakhstan. Considering our current agreements, one can already note the formation of the new long-term Eurasian oil programme envisaging a merging of separate Russian and Kazakh projects."
Mr Gustov has also pointed out that the industries of fuel and energy are in urgent need of development as they lack innovative technologies and energy saving projects. Therefore, at the suggestion of the Russian president, a working group has been established to step up Russian-Kazakh cooperation in the field of innovative development. "It appears that in the presence of readiness for joint action, the oil producing countries of the CIS should start cooperating for the production of up-to-date equipment to modernise their oil and gas processing facilities. Gazprom, for instance, is now actively engaged in the development of innovative technologies to produce oil and gas equipment at Russian facilities, and could share its experience in this field." It should be noted that Mr Gustov has deliberately raised this subject. Given the drop in production volumes in Russia itself, its technology and service companies show an increasing interest toward the new projects in Kazakhstan. The fact that the share of exhibitors from Russia has amounted to 25% from the total number of KIOGE participants serves as an indirect proof to that.
Actually, this 'tug-of-war' between the market makers has not been altogether surprising for the permanent attendants of KIOGE conference. In other years, the representatives of many countries, including Iran, joined this ‘big game’. The only exception is China, which is building up its presence in the region on the sly, avoiding any public debates.
However, the response from the Kazakh official circles' representative was somewhat more surprising. During the previous meetings, our state servants used to be rather restrained and politically correct in their comments on strategic cooperation issues; normally, their speeches were confined to the traditional formula that 'we are for multiple vector approach'. However this time the speech of the Vice Minister of Energy and Mineral Resources, Lyazzat Kiinov, has showed that, from now on, the official Astana will tackle the issues with maximum pragmatism being guided primarily by its economic interests.
Thus, while replying to the question about a possible construction of the underwater pipeline in the Caspian Sea, Mr Kiinov noted that this was not quite expedient. Firstly, the underwater mountain ridge near Baku makes it impossible to lay the pipeline directly from Kazakhstan to Azerbaijan and it will necessitate the operations near the Russian-Azerbaijani border, which will lead to multilateral talks. Secondly, such a project is associated with increased environmental risks, since in case of oil pollution casualties it will be particularly difficult to skim it off. This is precisely why the tanker option has been chosen for the Kazakhstan Caspian Transportation System(KCTS).
On the other hand, when commenting on the British representative's statements on the need to attract external players to the development of tanker fleet in the Caspian Sea, the vice minister made it clear that the creation of a supranational regulation structure for transport control will suit neither Kazakhstan nor Azerbaijan. Moreover, the intergovernmental agreement on assistance in the oil transport envisages that only the vessels flying the flags of Kazakhstan and Azerbaijan will operate within the KCTS. "Many companies would like to bring the tankers sailing under the flag of Nigeria or any other states here, to carry the oil. But we do not agree with such approaches. Why should we miss our profit?" summarised Mr Kiinov. According to him, the parties are now considering the possibility of constructing tankers in Russia, Kazakhstan or Iran.
Mr Kiinov was also quite direct in regards to the question about the principle of energy market openness raised by the Western participants. He noted that by speaking of this publicly, they obviously meant the openness of the Kazakh market to foreign companies, and this was a lopsided approach. Kazakhstan is now ready to enter the markets of Europe – in the meantime, the only EU state where we have achieved certain success (with no small effort) is Romania.
Then the Kazakh side voiced its position on the development of alternative gas routes to bypass Russia. According to the vice minister, there is no current need to construct new pipelines since the country does not have additional volumes of gas. An alternative for the mere sake of having an alternative makes no sense. "We have a powerful system called 'Central Asia–Centre' which can pump up to 120 billion cubic metres of gas, and this transit gives us no little money. If we leave for another gas transmission system then this one will be undercharged. Why do we need this?" Furthermore, in 2007, Kazakhstan already signed an agreement with Russia and Turkmenistan on shipments of up to 20 billion cubic metres annually through the Caspian Transportation System. "We assume that in several years, ten billion cubic metres of this volume will account for Kazakhstan gas," stated Mr Kiinov. While saying this, he did not deny that there was a period when the Russian side was paying for the gas of Central Asian states for notably less than it was received from the sale of this gas in the EU, but this issue has been already settled. Now the price will be determined according to a clear and transparent formula, viz. a price in Europe minus the tariff and margin of Gazprom.
For all that, Kazakhstan is not yet a huge player in the global gas market and is mainly acting as a country of transit. Along with this, our country has the main preconditions to consider its natural gas as a potential export product. The actual and estimated reserves (considering the newly discovered gas fields in the Caspian shelf) amount to some 3.3 trillion cubic metres and the potential resources reach 6-8 trillion cubic metres. This makes for 1.7% of the global reserves. However, one should note that our gas is mainly the associated gas, and therefore its volumes are directly dependent on the volumes of oil and condensate produced. The extraction of liquid hydrocarbons involves the application of the re-injection technology. Up to 50% of extracted associated gas is used for these purposes in Kazakhstan. Thus, to obtain a principally new position of a huge gas supplier in the world market, the country needs to cut the volumes of re-injected gas. To that end one need to deploy new technologies and seek for a new working agent. And here Kazakhstan will not hide its interest towards interaction with its Western partners. "It is difficult but the largest companies that spend up to $1bn on research are working in our country. I hope that in the near future they will find a solution to this problem", noted Mr Kiinov.
On the whole, after analysing the comments of the vice minister, one can draw an important conclusion: Astana has visibly become cooler towards the new 'global' initiatives and grown focused on increasing efficiency, reconstruction, and expansion of existing projects and transport routes. And this is quite natural. The world business climate does not favour large-scale investments 'from scratch'. It is already obvious that the consequences of the global financial crisis will seriously impact the real economy of both developed and developing countries. Given the expectations of a drop in industrial production, the world oil prices have considerably decreased. Indeed, the extraction will not grow at the pace that was forecast five years ago, all the more so that the launch of Kashagan has been postponed once again. It was not without good reason that the Minister of Energy and Mineral Resources, Sauat Mynbayev, directly stated during the press-conference before the exhibition opening that the volumes of production, and the terms indicated in the State Programme for the Development of the Kazakh Sector of the Caspian Sea, will need to be revised. This means that the official Astana thinks not of the two birds in the bush – it is more concerned with keeping the one in the hand.

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