Local Content in Kazakhstan: New Level and New Challenges
Kazakhstan Oil and Gas Exhibition and Conference (KIOGE), along with the Eurasian Energy Forum, became a key event of the autumn oil & gas week. It has been twenty years now since the time this dialogue platform began successfully operating with its mission – stirring up the interest of the global oil & gas market participants, international organizations, and financial institutions to the domestic petroleum industry.
According to the organizers of the event, the ITECA Exhibition Company, 547 companies from 23 countries from around the world participated in the anniversary event. Germany, Italy, China, Russia, and the USA presented their national stands in it. Kazakhstani companies at the exhibition accounted for about one third of all the exhibitors. Growth in the number of manufacturers from post-Soviet countries and of small and medium businesses was marked among the main trends of the exhibition. The new format of the event designed to boost its business purpose brought it fruits: over 2,500 specialists attended the exhibition during the first two days, which are exclusively intended for b2b-contacts. The Ministry of Oil and Gas of Kazakhstan, NC KazMunayGas, KAZENERGY Association and the Almaty City Administration provided by tradition their support to KIOGE.
Representatives of state agencies also took active part in the oil and gas conference where they discussed issues such as the condition and prospects of the industry, the need for large-scale projects on geological survey, more efficient exploration and production of oil and gas, implementation of innovative technologies, diversification of hydrocarbon supplies to the eternal energy market, and others.
In his welcoming speech, Nurlan Sauranbayev, Vice Minister of Industry and New Technologies, pointed out that over the twenty years of KIOGE history the approaches to operation of the domestic oil and gas industry have changed. Thus, "the further development of major oil and gas projects, such as Kashagan, Karachaganak, and TCO will proceed, taking into account the new points of view, in particular, in issues such as the development of local content and the involvement of Kazakhstani personnel.” Since an individual session was dedicated to this topic at the conference, we would like to highlight it in our review, all the more so that judging from the heated debate, it is now one of the most pressing and topical issues.
The report of Kairat Bekturgenev, CEO of JSC National Agency for the Development of Local Content (NADLoC), was a central point of the session that set the tone for further debates. According to him, the total annual volume of procurements of goods, works and services by companies, fell under the monitoring for the local content (LC), is more than KZT 7 trillion, of which KZT2.4 trillion, or 35%, were procurements by mineral producers. The predicted volume of procurements of goods, works and services by oil and gas companies alone for the period between 2012 and 2015 is estimated at more than KZT 4 trillion (about 60%).
Given the above figures, the Kazakh Government is vitally interested in the maximum involvement of local suppliers in this segment. Besides, if earlier both bureaucrats and mineral producers treated quite formally the increase in LC, in the recent years, the state, as the saying goes, “took the bull by the horns”.
First, a legal framework was developed for LC including the Law On Minerals and Mineral Production, Regulations for Purchasing Goods and Services which are mandatory for all mining companies, and also the method to calculate the LC.
Second, preferential treatment was set for Kazakh producers through the conditional price reduction by 20% and more.
Third, the information system called "Register of Goods, Works and Services for Mineral Production Operations and Mineral Producers" was developed and is already in operation, to be mandatorily used by mining companies when implementing their procurements.
However, the fulfillment by mineral producers of their obligations on LC is observed mainly in their procurements of works and services. As for the goods, here the percentage of local content in 2011 was only 8% for the oil and gas industry and 13.6% for the mining sector.
The sticking point here is the low competitiveness of the products of the domestic manufacturers rather than a poor wish by foreign companies to comply with our laws. The first of the mentioned cannot provide high quality goods, meeting international standards, to the mineral producers.
In this regard, in early 2012, Kazakhstan adopted a new law On State Support to Industrial Innovation providing for an incentive whereby Kazakhstani companies would get a 50% compensation of their costs, incurred by them when certifying their goods, works and services, and quality management systems in accordance with international standards, such as ISO, API, ASTM, etc.
According to Mr. Bekturgenev, this mechanism will start working through NADLoC as early as next year. However, obtaining quality certificates of the international level is a costly procedure that often requires modernization. Therefore, the law also provides for a guaranteed order from the national companies, including NC KazMunayGas, which will give the Kazakhstani producers an opportunity to develop new kinds of high-tech products through long-term contracting.
In addition, in 2012, amendments were made to the mineral legislation requiring mining companies to deduct 1% of total annual revenue for research and development. According to the head of NADLoC, this innovation will make it possible to increase the scope of funding of R&D to $250 million in the current year which will eventually give impetus the setting up of new innovative productions.
But, perhaps, the most important know-how is the requirement to carry out mandatory examination of the local content for all priority investment projects that apply for state support. The mandatory criteria for their approval should be the sufficient use of Kazakhstani goods, works and services that will add to the increase in the LC.
Commenting on the above innovations, Zhandarbek Kakishev, Chairman of NADLoC, noted in the area of standards and certification we could go much further: "Now Chinese companies design in accordance with their own standards, the U.S. companies apply their own standards, and European companies also apply their own standards, and then our companies, when supplying goods to mineral producers in our market, have to certify these products every time to different standards. Same standard should operate in Kazakhstan, and same documentation for all projects. Then our suppliers will not be second-class”.
This is where the following problem stems from. Since the design is carried out abroad, then when the matter comes to practical implementation it turns out often that in the design and estimate documentation (DED) itself, everything is written, including the names of the suppliers. Therefore, as our officials explain, the mandatory examination for the local content is introduced so that as early as at the phase of the DED development, the investors would attract those domestic design institutes which know the market, domestic products, and production capacity.
However, the representatives of foreign companies attending the Conference put in doubt the possibility of implementing this principle in practice. According to one of the participants, at present, when its company needs engineers to work in Kazakhstan, they hire expatriates from Germany, Austria and other countries of Europe. "We would like to hire a local engineer with 10 to 15 year experience in the oil and gas industry. Unfortunately, there are no such professionals in Kazakhstan. However, according to the local laws, we are obliged (by the way, in breach of the WTO regulations) to hire nine local engineers per one expatriate employee. I do not think that such a "penalty" practice will in the long run lead to the development of local content. The government should actively encourage the training of local technical staff. "
As a counter argument, Oleg Gershtansky, General Director of Aktau-based Research & Design Institute Oil and Gas (NIPI Neftegaz) cited a history of its Institute which was established in the late 60-ies of the last century, and till the time of collapse of the Soviet Union, the institute carried out the entire of its engineering here, in Kazakhstan. "Our problem was not that we had poor training, or that our standards were different from those in the West. The problem was that we lagged in the petroleum engineering sector... When the foreign investors came, we had to quickly start up projects and extract oil. Our engineering staff simply could not manage with that task. We were poorly aware of the achievements of the western industry. "Today all those difficulties are left behind. Kazakhstani engineers and designers are able to participate in the most complicate projects. For example, the design for development purposes, the construction operations, and the procurement of equipment at the Chinarevskoye oilfield were fully implemented by NIPI Neftegaz.
Along with that, Mr. Gershtansky recognizes that our universities have lost their previous success, so special attention should be given to training of mid-level professionals and skilled workers. "All this is achievable, if there is wish. What the Government is doing today is probably right. I do not think that Western companies, who are working with us today, take offence at the engineering sector of Kazakhstan. It has huge potential."
In his turn, Mr. Bekturgenev reminded that any mineral producer which runs long-term projects in the country, has production plans, and is well aware of its needs in one or other specialists. Moreover, this mineral producer is charged with an obligation to develop local personnel as prescribed in the contract. "Here, the investors organize training for the lawyers and financiers, whose are more than enough in number in Kazakhstan. They organize short-run seminars abroad which more look like guided tours."
By the way, according to the Ministry of Industry, various mining companies spent about $2 billion for training over the years of Kazakhstan’s independence. In spite of this, in the Atyrau Region alone, 17,000 foreign specialists were engaged in mineral production projects in 2010, while in 2011 their number decreased to 13,000 people.
Apparently, in order to somewhat reduce the intensity of emotions among the audience, Zhandarbek Kakishev, the session moderator, recognized that the Kazakhstani side was likely to dramatize the situation: "If we were too tough sometimes, we apologize. All this is done on purpose to make you feel a little pressure on you. Let us say the truth: five, ten years ago, the issue of the local content was neglected. Now, thanks to the amendments in the law and through this technique, we have managed to make foreign companies address this problem. We want to inform you when supplying products within Kazakhstan, the four criteria have to be taken into account: quality, price, term of delivery, and the availability of local content."
It should be added only that the efforts of our officials are starting bearing fruits. According to the Lord Waverley, Advisor to the Chairman of the Board of NC KazMunayGas and coordinator of KazSupplyChain, on the eve of KIOGE and as part of the regional investment forum, the Aktau declaration on joint actions between the KMG and the three major oil and gas operators, TCO, NCOC and KPO, was signed. It should provide a mechanism to combine individual programs of the operators, investors and state institutions for the development of local industries. The document provides for the creation of a coordinating unit of KazSupplyChain and a working group which will determine the synergistic effect, provide accelerated implementation of the operating programs on LC development and set new goals to support the growth of the local suppliers potential. Every major company, the member to the Declaration, has already determined what products it will procure. Based on this information, a general list was developed enabling to understand what kind of businesses are really in demand and need to be set up in Kazakhstan.