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 KAZAKHSTAN International Business Magazine №1, 2009
 Oil Chronicles: A Tradeoff is Inevitable
Oil Chronicles: A Tradeoff is Inevitable 

In the background of the world economic recession, official Astana is planning to change the game rules in the Kazakhstani "petroleum field". At the same time, the challenging economic situation forces the government to make some tradeoffs in its relationships with investors.

Astana changes the rules

It was announced that on January 15, 2009 the Ministry of Energy and Mineral Resources directed the draft law On subsoil and subsoil use that aims to alter the current same-name law and law On oil. According to Sauat Mynbayev, the head of the Energy Ministry, "the goal of draft law development is the systemization and improvement of legislation, abatement of its defects, as well as securing the principles of direct action of law On subsoil with minimization of the number of blanket and reference rules".

Moreover, as per the Minister, the draft law aims at maximum state interest protection as the owner of the subsoil that will be maintained "through setting more operative and transparent control over the activity of subsoil users, abatement of existing defects in the procedures of priority right of the government and issuance of authorizations by the Ministry for the transfer of subsoil use rights as well as the introduction of other effective measures".

The draft law also assumes to simplify the procedure of granting the subsoil use rights as well as to shorten the list of authorization documents. Specifically, the authors suggest abolishing the contracts for joint exploration and production of mineral products.

In the opinion of Sauat Mynbayev "given the combination of exploration and production operations in a single contract at the moment of signing the agreement, it is impossible to impersonally plan the forthcoming works, certain terms of their implementation and financial expenditures". As a result, the competitive offers of subsoil parts under the rule of joint exploration and production can not certainly define clear criteria for granting the subsoil use rights while, as a general rule, the competition commission is not based on real production figures.

The draft law assumes the cancellation of the contract division into subsoil, specifically PSA, concession, service and combined ones.

Also according to the estimate of authors, the document gives the regulation details of granting the subsoil use right both on the basis of competition and on the basis of direct negotiations. At the same time, the tender winner selection criteria are reduced to two norms: 1) the size of subscription bonus, 2) the size of transfers to the local budget, directed to the socio-economic development of the region and infrastructure. According to the statement, this was done with the purpose to guarantee adequate transfers to the budget, financed by the raw material sector.


The Energy Ministry also suggests introducing deadlines for all competition procedures. Therefore the general term for signing the exploration and production contracts will be 18 and 24 months respectively from the moment of public announcement of tender results.

Moreover, the new law defines the order of transferring the subsoil use rights as well as participating shares and stakes in the legal entities, owning the subsoil use right. The new law also abates the defects in the issuance of authorization for transferring the subsoil use right.

There is a new norm on ensuring the economic security of the state. It regulates the legal setting of the detailed procedure for realization of the priority right of the government to acquire the subsoil use rights as well as its parts, participating shares and stakes. The important mechanism, employed for minimization of cases when the priority right of the government is passed by, is setting the rules, according to which the right of the Republic of Kazakhstan is applied in relation to deals and other actions, targeted at the transfer of subsoil use rights, participating share in the legal entity, owning the subsoil use right.

Along with that, the draft law assumes the possibility of early cancellation of the contract, initiated by a competent authority. It will be used in the following cases: threefold and higher violations of the contract conditions in cases where they are not corrected after notification from competent bodies; non-observance by subsoil users of the priority right of the government or alteration of economic interests of the republic, causing threat to the national security when it is impossible to reach consensus with the subsoil users.

Understanding the problems of investors

Along with legislative initiatives, the Energy Minister proposed the government not to break contracts with subsoil use companies, not executing the contract duties because of the financial crisis.

Sauat Mynbayev believes that there is a possibility of faded investment activity of subsoil users that will be reflected in incomplete execution of the contract duties. In this concern, in order to provide an objective and, in his words, "single approach to the subsoil users, the agency proposed not to break the subsoil use contracts with the degree of financial duties performance, equal to 50% and more".

In addition, the Minster requested the Head of the government, Karim Masimov, to cancel the moratorium for organization of tenders, granting the subsoil use rights. Sauat Mynbayev notes that this measure is necessary "for attraction of additional investment and development of the own sector".


Astana and Moscow agreed to raise the tariff for gas transit through Kazakhstan…

KazMunayGas and Gazprom companies, representing the state interests, agreed to raise the tariff for gas transit through Kazakhstan from $1.4 to $1.7 per 1 thousand m3 for 100 kilometres. This was announced by Sauat Mynbayev at the Energy Ministry session on January 21.

It is common knowledge that, today, Gazprom purchases Central Asian gas in Kazakhstan, Uzbekistan and Turkmenistan. Its average price reached $340 per thousand m3 in the first quarter of 2009.

The agreement on cooperation between Russia and Turkmenistan in the gas industry was signed on April 10, 2003 for a 25 year term. Under its framework, Gazprom export LLC (100% subsidiary of OJSC Gazprom) and STC Turkmenneftegas signed a long term contract for the purchase-sale of Turkmen natural gas for the period of contract validity. The supplies are carried out by the system of Central Asia – Center transit gas pipelines, covering Uzbekistan, Kazakhstan and Russia. In accordance with intergovernmental agreements, Gazprom manages the transit of Turkmen gas through Russia and the Ukraine. Furthermore, under medium-term contracts, Gazprom performs the function of Turkmen gas transit operator in Uzbekistan and Kazakhstan.

… and planning to sign new agreement on oil transit

In 2009 RF Energy Ministry is planning reinitiate the preparation of the intergovernmental agreement with Kazakhstan on oil transit till 2020. Earlier, Moscow announced that it would have prepared this document by the end of last year.

This agreement is directly linked with the issue of expanding the carrying capacities of the Atyrau-Samara oil pipeline to 20 million tonnes per year as well as with the expansion of the Caspian pipeline consortium system and construction of the Bourgas-Alexandroupolis pipeline. By now, Russia and Kazakhstan have agreements on increasing the volume of oil transportation by the Atyrau-Samara pipeline from the current 17 million to 17.5 million tonnes.


The government of Kazakhstan to enhance state management in the area of oil processing…

The Prime-Minister, Karim Masimov, believes that in these challenging times for the state economy it is necessary to enhance state management in the oil processing industry. He made this statement in Astana at the extended session of the Ministry of transport and communication on January 15, 2009. The Head of government gave the appropriate orders to the management of the Energy Ministry and KazMunayGas National Company.

"Earlier, we impetuously believed in the market mechanism solutions of those or other issues; however, in the period of world economic decline that belief fades away. In these challenging times, the state, represented by the government and appropriate national companies, must play a more active role in the management of the economy. We will play this active role in order to painlessly overcome this period", Karim Masimov noted in his speech.

Considering all these, the Ministry of Energy and Mineral Resources initiated a development program, targeted at three domestic oil refineries. This program assumes the increase of crude oil processing capacities by 2.5 million tonnes with the improvement of oil products manufacturing structure. The total volume of investment in the modernization and oil processing capacities expansion projects will reach $3.1 billion.

At the same time, in accordance with the governmental decree, dated December 26, 2008, Kazakhstan introduced zero oil export duty on January 27, 2009.

The attachment to the document states that the zero rate is set for crude oil, liquid fuel, light and medium condensates, some types of gas oil and liquid fuel, except for heavy distillate liquid fuel.

In addition, the governmental decree mentions that the duty rate for petroleum bitumen is lowered to $41.42 per tonnes (it was $95.49 before), while the rate for some types of heavy distillates is lowered to $61.86 per tonne.

It has to be reminded that prior to that, in accordance with the decree, dated December 5, 2008 the government intended to lower the oil export duty rate from $203.8 to $139.79 per tonne as of January 20, 2009. Additionally, from now on the duty will be reconsidered on a monthly basis, not once in the quarter as it used to be before.

… and utilization of casing head gas and sulphur

On January 21, 2009 a group of Mazhilis deputies directed a statement to the Prime-Minister of the republic, Karim Masimov, indicating that the new Tax Code includes unreasonably low penalty rate for the release of casing head gas flaring products by oil producing companies.

"The article 495 of the new Tax code nearly frees oil producers from the responsibility for causing irrecoverable damage to ecology and public health. The calculations, based on the Aktobe Oblast, indicate that major air pollutants will pay 50 times less than last years sum, having the same volumes of gas flaring", the deputy, Maral Itegulov, informed, announcing the statement of deputies at the plenary session of Mazhilis.

Herewith, the delegate noted that analogous losses will be incurred in other oil producing regions of the country. Thus, the deputies counted that the budget losses, incurred by Aktobe, Atyrau, Western Kazakhstan, Mangistau, Kyzylorda oblasts will be over 15, about 4.5, over 4, 4.6, about 1.5 billion tenge respectively.

"We have the impression that the authorized bodies’ representatives, which developed this Tax Code section, lobbied the interests of oil companies, since it is impossible to believe that this is the product of negligence", Maral Itegulov emphasized.

Besides Maral Itegulov, the statement was signed by the following deputies: Elena Tarasenkova, Gulnar Seytmagambetova, Askhat Bekenov, Shavkat Utemisov, Murat Abenov, Amanzhan Zhamalov, Victor Kiyanskiy, Kabibola Zhakypov, Zeinulla Alshymbayev and Ualikhan Konyrbayev.

Again, on February 11, 2009 the Environmental Protection Ministry (EPM) announced its requirement for the international consortium, developing oil-bearing field of Kashagan, on the storage of sulphur, extracted from hydrocarbon raw material, in the enclosed space.

Timur Rakhimbergenov, the Chairman of EPM environmental and control Committee, informs that Kashagan developers submitted the design of an open facility for the storage of 4 million tonnes of sulphur to the Ministry for examination. In their turn, the experts of environmental protection agency demanded to ensure the enclosed storage space.

Meanwhile, Mr Rakhimbergenov stated that the issue of sulphur utilization in the republic is "very problematic". In his words, "today, only Tengizchevroil accumulated over 8 million tonnes of this sulphur". Nonetheless, at the beginning of 2009, EPM stiffened the requirements and brought an action against TCO for 37 billion tenge. After that, sales volume exceeded the volume of sulphur accumulation in the company’s facilities.


The production summary for 2008

According to the Statistics Agency, in 2008 Kazakhstan produced 85.7 million tonnes of crude oil and 12.02 million tonnes of gas condensate. Respectively, this is 6.2% and 1.4% higher than in 2007.

At the same time, due to the drop of the world prices the production of Kazakhstani oil may be reduced by 3 million tonnes in 2009. This was announced by Bakhyt Sultanov, the Minister of Economy and Budget Planning, at a governmental session on January 20, 2009. He specified that, given the forecasted world price for oil at $40 per barrel, some of the Kazakhstani fields may see the reduction of oil production profitability. Therefore, the possibility of reduced hydrocarbon production by several companies is not excluded. As a result, in 2009 Kazakhstan will produce not 77 million tonnes of oil as it was expected earlier, but about 74 million tonnes.

Regarding natural gas, its production in the republic in 2008 reached 33.38 billion m3 that is by 12.9% higher than in 2007. Specifically, 18.71 billion m3 (+12.2%) of natural gas in gaseous state was produced while its commercial production reached 11.27 billion m3 (+15.1%). The production of casing head gas reached 14.67 billion m3 (+13.9%).

According to official data, the volume of petroleum transportation by Kazakhstani trunk pipelines grew by 3.9% in 2008, comparing to the previous year, and reached 47.467 million tonnes. The increase of transportation volume is reasoned by the production growth and petroleum transfer by producing companies. As an outcome, the oil cargo turnover by the oil pipeline system increased by 3.7% in one year, reaching 32.3 billion tonnes/kilometre. In 2008, the capital investment in the Kazakhstani system of trunk pipelines increased by 13% and accumulated 31.3 billion tenge.

The oil refineries, operating in the republic, processed 12.3 million tonnes of oil in 2008. Of this volume, 2,506.2 thousand tonnes of gasoline, including aviation kerosene, was produced and that became 4.8% lower than in 2007. At the same time, the production of reduced fuel oil increased by 23.5%, reaching 3,191.1 thousand tonnes. The production of kerosene, including jet engine fuel such as aviation kerosene, increased by 4% and reached 400.4 thousand tonnes. The gas-oil output grew by 1.7%, totalling in 43,693 thousand tonnes.

In 2008, Kazakhstan exported about 60.71 million tonnes of oil and gas condensate, which is 0.1% less, comparing to the previous year. In the price value the export increased by 54.7% or $43,507.9 million. Along with this, the republic exported 3,727.9 thousand tonnes of oil products (90.3% of the 2007 level) for the amount of $2,003.2 million (145.9% respectively). At the same time, 2,199.8 thousand tonnes (107.6%) of oil products was imported for $1,563.4 million (147%). The export of natural gas reached 17,370.7 million m3 (114.1%) for the amount of $1,074.5 million (165.7%) while its import volume reached 6,685.1 million m3 (93.1%) or $479.3 million (127.3%).

The Statistics Agency reports that last year investment in fixed capital reached 3,836.1 billion tenge, 4.6% higher than in 2007. The growth of capital investment is reported in 12 regions of the republic. The highest indicators were reported by gas producing oblasts – Zhambyl (by 1.8 times) and Kyzylorda (by 1.4 times).

It is worth noting that hydrocarbon production as well as supply of associated services still remains a priority and an attractive industry for investors – it accounts for 21% of total investment volume in fixed capital.


Table of contents
Mining Tax Thaw  Editorial 
Macroeconomy. April 2009  Macroeconomy. April 2009 _KAZAKHSTAN International 
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