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 KAZAKHSTAN International Business Magazine №3, 2002
 Outlook and Necessity for Developing Small Hydrocarbon Fields
Outlook and Necessity for Developing Small Hydrocarbon Fields
Elvira Dzhantureyeva, Ph.D. in engineering, head of the department for analysis of subsoil use results at the Kazgeoinform Kazakhstan Centre for Geological Information, the Committee for Geology and Subsoil Protection of the Ministry of Energy and Mineral Resources of Kazakhstan
The investment policy of Kazakhstan encourages considerable foreign investment in the oil and gas sector of the country. This is aimed at producing hydrocarbons from large existing fields. Still, the upsurge of the world price for crude, the high export potential of Kazakhstan and the deficit of hydrocarbons in the home market, all show the necessity to develop small fields, prolonging the term of exploiting marginal reserves and developing residual hydrocarbon resources.
For the time being, small and minor fields account for 11% (210.2m tonnes) of recoverable reserves of Kazakhstan (2.1bn tonnes as of 1st January 2001), or over 90% of the total fields in the country (table 1). A number of such fields are on the balance-sheet of the State Fund and are not currently being developed.
The small and minor fields are as a rule located in the Atyrau region, with a small number situated in the Mangistau, Aktobe and Western Kazakhstan regions (table 2). Since these are the main oil-producing regions in Kazakhstan, with a developed infrastructure, a pipeline network and a system of railways and highways, investors have the opportunity to make a considerable reduction in the capital that needs to be placed when developing small hydrocarbon fields.
Oil is an irreplaceable natural resource. In Kazakhstan large companies own over 80% of the recoverable oil reserves. Their supply of resources averages 25-30 years (table 3). Investments placed into subsoil use of hydrocarbon fields have grown almost fourfold over the past six years. From 1996 to the first half of 2002 they came to $15.6bn, which is over 80% of total investment in the mineral resources complex of Kazakhstan. The breakdown of investment in the oil and gas sector is characterised by the following indicators: 92% are accounted for by foreign investment (8% fall to home investment), 84% are placed into production of oil, gas and condensate in previously developed fields; large companies comprise 96% of subsoil users. Two thirds of the investment placed in geological exploration is accounted for by OKIOC and Tengizchevroil. The investment by other large subsoil users does not secure sufficient growth to replenish the deficit in energy reserves.
Therefore, the activities of small and medium-sized companies in small-reserve and exhausted fields are becoming especially important. It should be noted that additional development of residual reserves in large fields at a late production stage is typical of small oil companies. Given that the operation of exhausted fields and those from which extraction is complicated requires additional investment, the state should take measures to foster this activity.
There is a worldwide practice of providing tax exemptions to operators of low flow-rate wells. For instance, zero-rate excises are levied on companies working with hard-to-extract and highly watered oil. The legislation of Kazakhstan does not provide for such exemptions. As a result, the only state support to small oil companies is privileged access to export pipelines.
The point is that, as a rule, small companies are only engaged in extraction and their only commodity is crude. Large, vertically integrated companies profit from various links in the oil production chain, including sale and export of black oil, gasoline, straw oil, oils, and other products. However, the only choice open to small ones in order to boost their profits is to increase crude exports. In fact, they are only compelled to sell crude to Kazakhstani refineries if they cannot export it.
The existing situation is due to the fact that oil exports to non-CIS countries are subject to a zero rate of VAT, but oil sold in the home market has a 20% tax levied. Therefore the growth in export supplies from small fields (as a percentage of the total amount extracted) from 25% in 1997 to 64% in 2001 is quite natural (graph).
To a certain extent, such a policy leads to a reduction in supplies of crude by small companies to Kazakhstani refineries. The bulk of oil exported (91%) is transported via the Atyrau-Samara oil pipeline. 4% goes to Russian refineries, 3% is sent to Russia as mutual exchange supplies, and 1% is shipped by each of sea and rail. These indices testify to the impact that the natural monopolies’ tariffs have on the activities of small producing companies.
A comparative study of the activities of a number of small home oil producers in 2001 shows that small hydrocarbon fields may be developed quite effectively, even with very low investment. However, it should be taken into account that the reserves in the majority of these fields are hard to extract and require additional investment during production; this leads to an increase in the specific prime cost of the crude. For instance, in the initial stage of production, profit will make up only a third of all costs, with the average prime cost of crude standing at $35 per tonne. It is forecast that subsequently, operational costs go down and the specific prime cost of the crude falls to $28 per tonne, due to a reduction in the costs related to developing local infrastructure to 20-25% in total expenditure, and a decrease to 15-20% in the total amount of taxes and subsoil use payments (if taxation privileges are introduced). If oil production and sales grow, profits will also rise and catch up with expenditures within four or five years of developing a field.
To develop a mechanism for bringing small hydrocarbon fields into operation, it is crucial that several problems connected with shortcomings in the regulatory, legislative, legal, institutional and (last but not least) the taxation system, are solved.
Positive factors            
• Activation of developing mineral resource fields
• Additional development of residual reserves and boosting oil recovery factor
• Improving fiscal indices and encouraging investment
• Curtailing operational costs
• Increasing the oil recovery factor
• Boosting production of strategic minerals
• Increasing exports• Increasing the loading of domestic refineries
• Replenishing the budget through taxes
• Developing social services and local infrastructure
• Creating new jobs due to development of the oil and gas sector
• Improving the quality and competitive edge of workforce through training or retraining, taking account of market requirements
• Attracting Kazakhstani subcontractors• Applying advanced, optimal technologies for maintaining stratal pressure
• Support of small oil businesses
Negative factors
• Hard-to-extract resources and complicated natural and geographical conditions• Increased specific prime cost
• Cutting budget revenues due to introduction of tax exemptions
• Violations of environmental protection by the activities of oil producing facilities• Equal specific tariffs for oil transport
 Altogether, the success of small companies in small hydrocarbons fields depends solely on the effectiveness of state policy for supporting small and medium-sized businesses. In developed countries, some 40% of the budget comes from small and medium-sized businesses, and 70% of jobs are created by them.
Proposals to Stimulate Development of Small Fields
• It is proposed to take a number of measures on the state level to amend and correct the tax legislation or to create a special tax exemption regimen for companies developing small fields and fields with hard-to-extract reserves, taking account of the complicated natural and geographical conditions that these subsoil users have to work under.
• To streamline the procedure of signing subsoil use contracts and that of assignation of rights by large companies to small ones.• To include small and medium-sized companies in the PSA system and set strict regulations controlling the relations of small/medium-sized businesses with large corporations, local authorities and natural monopolies.
• To develop a state programme to implement a mechanism for bringing small-reserve fields into operation.
• To ensure efficiency in commissioning small-reserve fields, and entrust to local authorities the function of competent body in contract signature.
• To approve at government level the procedure for establishing and operating committees for developing subsoil use terms and preparing draft PSAs for small fields.
• To develop documents related to increasing reserve quotas and the specifics of developing small fields, and pass these through legislation.
• To implement micro-loan programmes to support business initiatives by members of the public.
If the above measures were taken, oil production by small companies would increase to 10m tonnes per year in the near future, whilst energy provision in the country would be enhanced, export opportunities broadened, and a more rational use of natural resources ensured.

Table of contents
Invest in Astana!  Adilbek Dzhaksybekov 
Helios Means First!  Shukhrat Danbai 
Certain Environmental Aspects of the Activities of Subsoil Users  Aigul Kenjebayeva, Yuliya Mitrofanskaya 
Issiue Deductibility of Interest on Foreign Currency Loans  Bill J. Page, Gaukhar Iskakbayeva 
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