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 KAZAKHSTAN International Business Magazine №6, 2011
 Global Energy Partnership Connecting East and West
Global Energy Partnership Connecting East and West

The Sixth Eurasian Energy Forum, set up under the auspices of KAZENERGY Association, was held in early October in Astana. Launched in 2006 as one of the discussion platforms of the industry, the forum has already acquired a global status by its importance and range of discussed issues. Taking into account that the year 2011 is a jubilee year for Kazakhstan, special focus at this forum was made on recognition of the progress achieved over the past two decades by the domestic oil and gas sector.

Opening the forum, Prime Minister of Kazakhstan Karim Massimov noted that the energy industry has always played a key role in the development of the country. This sector is exactly the one where the first foreign companies came to and today still remain the largest investors in our country. Although Kazakhstan and its foreign partners have already something to be proud of, a lot of work is still ahead. In this regard, Mr. Massimov said that the global energy sector is still in limbo. In early 2011, following an increase in demand, the energy prices significantly increased; there were some interruptions in supplies due to political conflicts in North Africa. Today the market is under pressure from the deteriorating situation within the global economy.

"In recent months, the global economy has again gone through a difficult period. A slowdown in economic growth, deterioration of the financial situation in the U.S.A., and an escalating debt crisis in Europe have destroyed the confidence and revived the risk of a recession ... Obstacles have arisen in the developing economies as well, which played the role of the driver in the global economic recovery. External debts of the countries are increasing, equity markets have collapsed, capital inflows slowed down ... Put simply, the path to sustainable global economic recovery will be longer and more bumpy than expected".

For the energy industry, whose development is impossible without significant investment inflows, this situation is especially painful. So, the Government of Kazakhstan recognizes the need to be proactive in attracting and retaining investments, and therefore aims at improving the business climate so as "to help the industry grow and challenge the risks." Among the measures taken by Kazakhstan, the Prime Minister acknowledged funding in the development of human capital, infrastructure and technologies, as well as regulatory reforms to remove administrative barriers and reduce bureaucracy.

The head of the government also assured that, as a reliable energy partner, connecting East and West, Kazakhstan will continue promoting the diversification of energy transportation routes and end-markets. In this concern, he highlighted the beginning of the first stage of expansion of the CPC pipeline, which will increase its capacity by more than 40 million tons, and the start of construction of the Beineu – Bozoy – Shymkent gas pipeline, which "eventually will be connected to the China – Central Asia gas pipeline".

Summing up his speech, Mr. Massimov noted that our country realizes the significant role the energy sector plays in improving the living standards and enhancing economic development. "Currently, the industry has faced unprecedented challenges. But I am confident that working in the Government, Business and Society team we will be able to withstand the energy challenges of the 21st century."
Oil alignment

Minister of Oil and Gas Sauat Mynbayev outlined a complete picture of the current situation in Kazakhstan's oil and gas industry and its development prospects. He stated that Kazakhstan by proved oil reserves, as of June 2011, ranks 9th in the world. In this regard, taking into account the geological reserves estimates and large-scale exploration programs, "there is every reason to expect the reserves will increase." Concerning production levels, Kazakhstan ranks just 16th in the world. During the years of independence, oil production grew from 20 million tons in 1994 to 80 million tons in 2010. By 2020, the level of production is expected to exceed 132 million tons, making the republic be among the top ten largest oil producing states. "In addition, Kazakhstan is one of just a few hydrocarbons producing countries which have not reached their peak of production."

Speaking of the particular projects, due to which it is planned to make a breakthrough to be among the top ten, Mr. Mynbayev, called the Tengiz oilfield, above all. The so-called "project of future development" is currently under development, with a possible increase in annual output from current 26 million tons to 36 million tonnes. "I suppose this project in the near future will be submitted for consideration to the authorized body."

As for the main offshore hopes of Kazakhstan, the Minister confirmed that the commencement of commercial production at Kashagan is still scheduled for December 2012 – June 2013. The first phase of the project involves the output of 370 thousand barrels of oil per day with a possible increase to 450 thousand b/d. However, he did not hide the fact that it feels some uncertainty about the second phase of Kashagan. "I think with close interaction between the contracting companies and authorized body, and with compliance of the proposed solutions with the world's best practices and respect for mutual interests, the project can become much more successful."

It is noteworthy that in his speech Mr. Mynbayev did not mention the third largest oil and gas project in Kazakhstan – Karachaganak. However, following the lack of any certainty about the progress of negotiations between the government and partners on the consortium, it was not a surprise. Later on, during a press conference for mass media, Executive Vice President and Managing Director for Europe and Central Asia of BG Group, Chris Finlayson, as well as Chairman of Samruk-Kazyna and KAZENERGY Association Timur Kulibayev made some clarity to the situation on Karachaganak.

The first one stated that the partners have plans before the end of this year to close the question they are currently discussing with the government. Also, Mr. Finlayson added that for BG Group "Kazakhstan is an extremely important and long-term portion of the portfolio. This is an asset, in which the company has invested a lot of efforts, an asset with great potential. Therefore, BG intends to cooperate at the highest level for the next 50–60 years."

In his turn, Mr. Kulibayev explained that the negotiations have two phases: the first one involves the settlement of tax issues at dispute, and the second one commercial negotiations for the purchase.

Returning to the statement of Mr. Mynbayev, it should be noted that announcing future production growth, Kazakhstan largely relies on the successful development of offshore projects in the Caspian Sea. According to him, they already have positive results. In particular, following the results of drilling, they got first confirmation of the occurrence of hydrocarbons in the Rakushechnoye Sea structure, which the National Company KazMunayGas is developing in partnership with ConocoPhillips and Mubadala. The oil and gas bearing capacity of the Khazar and Auezov geological structures at the Zhemchuzina site (KMG, Shell and Oman Oil) was proved. Work continues on other sites as well.

The total number of exploration contracts currently in the Ministry of Oil and Gas’s registry is 61. "Of course, there are some geological risks. Dry wells of the Tub-Karagan and Kurmangazy sites are the evidence to this. Nevertheless, you see, we certainly have grounds to expect a substantial increase in the reserves and, as a result, increased production of hydrocarbons", – the Oil and Gas Minister emphasized.

Speaking of the system of transportation of extracted hydrocarbons, he noted that at the current moment "all routes are covered, in principle." The existing export pipeline system consists of the Atyrau – Samara oil pipeline which goes as transit through Russia to the markets of Eastern Europe, the CPC pipeline with access to the Black Sea ports, and the Atyrau – Kenkiyak and Kumkol – Atasu – Alashankou oil pipelines, directed to China. There is also a route through the port of Aktau to Makhachkala and Baku with access to the Black Sea, while the Baku – Tbilisi – Ceyhan pipeline has access to the Mediterranean Sea. There is a possibility to carry Kazakhstan’s oil via Baku to Iranian Nekka, from where through swap operations the oil can be carried to the Persian Gulf. With the commissioning of the second phase of Kashagan it is planned to launch a new logistics route, known as the Kazakhstan-Caspian Transportation System.

Concerning the prospects of further expansion of export capacity, here the focus will be on the CPC and Kazakhstan – China pipelines. The CPC expansion project is already commenced, and it is expected that by the first quarter of 2015 it will become possible to annually pump 52 million tons of Kazakhstan’s oil via it. Regarding the Kazakhstan – China pipeline, the increase in its capacity to 20 million tons is only a matter of construction of additional pumping stations, while the project itself will be implemented with the growth of the resource base. "Thus, taking into account the potential use of the KKTS, we believe the issue of export routes is quite clear for us. Of course, there are questions of strategic and technical nature on each of the projects which we and our partners are ready to solve on time," – the Minister said.

Also, he told about the specifics of operation of the oil and gas industry of Kazakhstan in the condition of the Customs Union and Common Economic Space. Firstly, Russia, Belarus and Kazakhstan agreed that after 2014 Kazakhstan will provide the domestic market with its domestic oil only. This is due to retaining of various tax regimes in the three countries, in particular, that the payment and the export duties rates will not be unified. Secondly, we will be trading oil freely, without any duties. Thirdly, a transition to common technical regulations and standards in this area is provided for. Fourth, "we agreed on the national tariffs on oil transportation, including on exports." According to the Minister, the latter is especially important, because Kazakhstan is an oil exporting country, depending on transit. Therefore, "this is a stabilizing factor for supplies of Kazakhstan’s hydrocarbons to external markets and, especially, outside the Customs Union area."
Won’t be any gas?

Meanwhile, international forums, such as KAZENERGY, are not just a good occasion to tell about our own achievements, but, above all, an opportunity to learn what foreign partners are expecting from us. Here, the matter concerns, first of all, the European Union, which provides more than half of the total foreign direct investments and is the largest, united investor in Kazakhstan. Two-thirds of these investments were made in the energy and mining sectors of the domestic economy.

The European Union’s vision of prospects of further cooperation was presented by European Commissioner for Energy Günther Oettinger. According to him, the EU is the largest unified regional energy market in the world, which with time will cover the network of energy supplies from Eurasia in the east, the Arctic in the north, Sahara in the south and the Atlantic Ocean in the west. "All of this creates enormous business opportunities and a great common interest to support and cultivate a favorable investment climate, as well as to ensure a stable and predictable energy supply base." Today, the EU imports more than 80 % of oil and 60 % of gas. Moreover, production of their own fossil fuels in Europe is reducing. However, despite the current economic recession, and regardless of to what extent the EU countries will turn out to be successful in promoting the renewable energy development, their dependence on imports will be increasing in the coming decades.

Mr. Oettinger noted that energy cooperation of the EU with Kazakhstan is based on a solid foundation. However, in his opinion, much more can be done in this direction. In particular, he suggested that our country will join the Trans-Caspian gas pipeline project, which will ensure the transportation of gas from Central Asia to Europe. "A few weeks ago, all members of the European Union gave the green light to the European Commission to create necessary conditions for the agreement between the European Union, Azerbaijan and Turkmenistan on construction of the Trans-Caspian gas pipeline. For the EU, such a pipeline would be a very important contribution in the development of the Southern Gas Corridor. It is not a commonly known fact that this is the first case when the EU proposed to conclude an international treaty to support the infrastructure project. This shows how this project is important for the EU and all its 27 member states. We are also assured that the Trans-Caspian pipeline will add to stability and prosperity in the region. We welcomed the participation of Kazakhstan in the Budapest Summit on Nabucco and in the Prague summit on the Southern Corridor, and therefore we welcome the relevant participation of Kazakhstan in the future."

The focus of Mr. Oettinger on cooperation in the gas sphere is quite understandable. According to the forecasts presented by the Minister of Economy, Energy and Tourism of Bulgaria Traycho Traykov, in 2025–2030 gas consumption in the EU, even taking into account the impact of the economic recession, will be 600 billion m3. At the moment, the EU heavily depends on gas supplies from Russia; the latter accounts for 23 % of the world’s natural gas proven reserves. Meanwhile, about 47 % of the world’s gas reserves are located in the Caspian region, Central Asia, and Middle East.

And yet, specifically with regard to our country, the EU can rather expect political support only. Although, on the one hand, the proven gas reserves of Kazakhstan are 3.3 trillion m3, while in the next ten years its output is expected to grow from the current 40.5 billion m3 to 92.2 billion m3. However, on the other hand, production of marketable gas, according to the predictions from the Oil and Gas Ministry, will increase during this period just slightly from 26 billion m3 to 28.6 billion m3.

Sauat Mynbayev explained that the reason for this is that our gas is mostly associated petroleum gas. This means that for the complete extraction of liquids, the greater part of this gas is injected back into the reservoir. We should not forget that during the years of Kazakhstan’s independence, the internal gas consumption has doubled. Moreover, this figure could rise in the near future. On this background, the assurances of Mr. Mynbayev that in case of changes in the commercial terms of selling of gas, or the introduction of technological innovations, allowing giving up the gas injection method, the output of gas will easily increase, hardly seem to be consolation for the West, especially considering that last year the Turkmenistan – Uzbekistan – Kazakhstan – China gas pipeline was commissioned into operation.
Problems and prospects

In our opinion, speeches of other participants of the forum did not seem of less importance. In particular, the good news was the statement by the Managing Director of the Eurasia Strategic Business Unit of Chevron Scott Davis, who announced that, according to IEA, the upward trend in the world’s population and rising living standards will spur global demand for energy resources. By 2035, it will grow by almost 40 %. Moreover, according to the most optimistic predictions of renewable energy development, 75 % of this demand will still be met due to oil, natural gas and coal.

In his turn, President of the World Petroleum Council Randall Gossen emphasized the increasing role of Kazakhstan among the oil supplying countries: "Given the geopolitical shift in gas production, the main drive forward for hydrocarbons is large, huge investments in energy infrastructure, which should meet this growing demand." According to the IEA estimates, the investments to be made in the global system of energy during the period of up to 2035 have to be about $33 trillion.

In view of the above, according to Senior Vice President of ExxonMobil Mark Albers, Kazakhstan can and should make maximum use of the global trends in order to pave the way for economic growth, job creation, technological advance, and increase in export potential.

Michael Wilson, Managing Director of the consulting company Michael Wilson & Partners, drew attention to another aspect related to the topic of financing of oil and gas projects. "I think one of the reasons in the condition of debt crisis, given the global financial turmoil for the oil industry, is that we need to shift to small- and medium-scale projects. Kazakhstani companies often apply to us, as they have oil blocks for development, which are very interesting, but they need additional funding. Large transnational players can borrow at the international rates, but the complexity we have faced is how to make the debt financing and equity investments accessible for the medium and small Kazakhstani projects."

Vyacheslav Mishchenko, Director for Business Development for the CIS countries of Argus Media agency, recalled that the global exploration and production is increasingly moving toward heavy conditions, and this increases costs for companies to produce and deliver energy to the key markets. The era of cheap energy is really coming to an end. Therefore, a speculative component will undoubtedly be part of the oil price.

In his speech, the Secretary General of the International Energy Forum, Noe Van Hulst, told how to reduce the impact of that speculative component of oil prices. According to him, today oil is not only a raw material, but a financial asset, such as gold or securities. "The bad news is that we have not reached a consensus on what actually is the drive that moves oil prices. Is it the financial market or oil itself as a product? However, the good news is that there is a consensus on measures that will help avoid substantial volatility."

Firstly, it is necessary to strengthen cooperation between the consumers, producers and transit countries. Secondly, the countries need to share the analysis of future trends and data on their own markets, to cooperate and analyze them, and then following the conclusions made, to build up a uniform coordinated policy. "If the markets do not know what's going on, for example, with the demand in China and India, they are lost in conjecture; this makes the ground for speculations and greater volatility." Today as never before we need transparency of the financial and commodity markets and harmonization of the regulatory standards for trading in oil derivatives.

The first step has been already made in this direction. In February 2011, under the auspices of the World Economic Forum, 86 countries became signatories to the new charter. There was achieved a 90 % coverage of the producers, transporters and consumers of hydrocarbons in the world. Unfortunately, our country did not enter that list. Therefore, Mr. Hulst urged Kazakhstan, as quickly as possible, to join the new global energy dialogue at the governmental level.

His speech like many other statements made at the KAZENERGY forum demonstrated that the globalization of economic processes is covering more and more new horizons. Kazakhstan will always be the focus of the world's major players. In this regard, as was aptly noted by the legendary American television host Larry King, while speaking as a moderator of a few sessions of the Forum, the main thing for Kazakhstan is to be self-sufficient and do not let anyone control this process. So far we have been coping with this challenge quite well.

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