Kazakhstan Chamber of Commerce in the USA

KazCham



Banking overview 0

Posted on March 06, 2010 by KazCham

KAZAKH BANKS ACCUMULATED $45 billion of foreign  debt in a few years of heavy borrowing to fuel their dynamic growth. As a result they became the first  victims of the global financial crisis sparked off  by the US sub-prime crisis in July 2007. Nearly two  years later, the crisis is still being worked through.  BTA, the country’s largest bank, has been virtually  nationalised; another two of the ‘big six banks’  have been partially recapitalised with state money, while two have been helped out by their new  foreign bank owners; and the sixth, Alliance Bank,  is still struggling to find a future either through nationalisation or a foreign takeovers.

BTA, the largest pre-crisis bank, has been virtually  nationalised, and Samruk, its effective new owner  after a $1.7 billion partial re-capitalisation in February, is seeking both to re-schedule its $11 billion foreign  debt and attract a new foreign owner. Russia’s  Sberbank is one interested party, but others may  come forward. The future of Alliance Bank, the fourth  largest, was still in doubt at time of writing, but  Central Bank president Grigori Marchenko hinted that  it could be allowed to fail if creditors cannot agree a  debt restructuring deal acceptable to Samruk/Kazyna,  the state holding company charged with re-capitalising and restructuring the banking system.

Halyk Bank and KazkommertzBank (KKB), the  surviving duo of the former ‘big three’ leading  Kazakh-owned banks, ceded 25 per cent of their  shares to Samruk in return for capital injections  in February, when the state intervened to restore  confidence in the battered financial system. They expect to return to full private ownership within the  next few years. The government insists that de facto nationalisation of some banks and state-financed  re-capitalisation of others is a short- to medium-term  emergency operation to cope with the effects of a  global crisis – and not an attempt permanently to  expand the state’s role in financial markets.

In the three years leading up to the crisis, Kazakh  banks grew at a phenomenal rate – virtually doubling h their assets and liabilities every year – before being  halted in their tracks in August 2007. As they struggled to recall loans or refinance at higher rates, the ensuing credit squeeze throttled the construction h industry and lending for consumer goods and mortgages, and non-performing loans, rose.

The creation of a well-regulated domestic banking system, together with pension funds, a stock market and a government-run National Fund to absorb and conservatively invest ‘surplus’ oil money for a rainy  day, was one of the biggest successes of the first years  of independence. It was therefore reassuring when  Grigori Marchenko, one of the main architects of  banking reform and probably the country’s most  experienced banker, was recalled by President Nazarbayev in January to head the National Bank,  as the wider economy reeled from the collapse of  commodity prices, which followed the demise of  Lehman Brothers.

Record high commodity prices cushioned the  impact of the first stage of the Kazakh banking crisis  and made it possible for banks to repay all their  maturing loans over the first 15 months or so of the  crisis. But the collapse in the value of the country’s  main exports ushered in a new and more acute phase  of the crisis. The partial recovery of oil, copper and  other key commodity prices in the second quarter of  2009 provided the first chink of light at the end of  what has already been a nearly two-year tunnel.

Marchenko, an acerbic free-thinker with experience of both international financial institutions (such  as the World Bank) and the private sector, where  he worked at Deutsche Bank, masterminded  Kazakhstan’s successful navigation of the post-1998  Russian rouble crisis when he was last president of  the Central Bank.

For four years before his re-appointment,  Marchenko ran Halyk Bank, the privatised former  state savings bank. In 2006 Halyk raised $748 million  from a London IPO in 2006, which brought in foreign h institutional investors while retaining control by  the bank’s well-connected main shareholders, Timur  Kulibayev and his wife.

While Halyk’s main competitors – KKB, which  had similarly raised $845 million from an IPO in  2006, and BTA – opted for foreign-funded growth at  breakneck speed, Marchenko ran a more conservative ship. He repeatedly warned of the dangers of reckless borrowing. He warned that Halyk’s own internal  research indicated that the banking sector had become “an accident waiting to happen” months  before the crisis erupted.

Those banks with foreign equity from IPOs and/or  foreign shareholders have fared best in the current  crisis. But when foreign lending dried up and  commodity prices collapsed in 2007-8, globalisation  became a double-edged weapon as Kazakhstan got  lumped together indiscriminately with much less  well-endowed and well-run economies. Fortunately  for Kazakhstan, but less so for the foreign banks who paid top dollar before the crisis broke, Italy’s  Unicredito paid $2.3 billion for ATF Bank and South  Korea’s Kookmin Bank paid $1 billion for a majority  stake in BankCentreCredit (BCC) a few months before the crisis broke. Anvar Saidenov, National Bank  president at the time, was delighted to welcome the  deep-pocketed newcomers, noting that “Kookmin  alone had more assets than the entire Kazakh  banking system put together.”

Significantly the only ‘top three’ bank not ready to launch an IPO three years ago was BTA Bank, which  has been the main casualty of the banking crisis,  together with the much smaller Alliance Bank. The  latter’s headlong leap into consumer and mortgage  finance made it vulnerable and it was unable to lock  in a foreign buyer in time.

In the months leading up to the 2007 crisis, dozens of foreign banks were looking for Kazakh  acquisitions, although many of them, such as  Austria’s Raiffeisen, were deterred by the high  multiples demanded. Now the boot is on the other  foot, as BTA spearheads the search for new foreign  investors and smaller banks seek either foreign partners or mergers as the government raises minimal capital  and other requirements.

The crunch came in early February this year when  Marchenko, who had privately advocated devaluing  the Kazakh tenge in the autumn of 2008 in line  with the Russian rouble, announced an 18 per cent  devaluation from around tenge 120 to the US dollar,  to a 3 per cent margin around a new tenge 150 central  rate. Devaluation added to the foreign currency repayment burden of all banks – but especially to BTA,  the biggest borrower of all, with over $11 billion in foreign liabilities. In March, BTA’s new chairman, Anvar  Saidenov, announced that UBS and Goldman Sachs had  been appointed as financial advisers to help the bank  re-schedule its debts and find a new owner.

Tough rescheduling negotiations lie ahead for Kazakh banks. But Marchenko told the Eurasia Media Forum  in Almaty in April that Kazakhstan’s foreign debt had  already been reduced from $56 billion, or around 50  per cent of GDP, in summer 2007 to $35 billion by  the beginning of April 2009. “The banks will still be  servicing their debts after the second quarter and by  June it will be clear that the foreign borrowings issue  will be resolved,” he added.

A leaner, wiser and temporarily smaller and more  locally-focused banking system is emerging. The  government wants banks to concentrate more on  financing small and medium enterprises (SMEs) and  institutions like the EBRD and the Asian Development  Bank are supporting this. The EBRD, for example,  recently provided two loans totalling $100 million to  support SME lending by ATF Bank. Its parent bank,  Unicredit, also stepped in to shoulder repayment of $500 million-worth of ATF’s maturing foreign loans.

Increasingly, Kazakhstan is looking to the Middle  East and Asia for finance, trade and banking links.  President Nazarbayev signed a $10 billion oil and  infrastructure investment and financing deal with  China during his state visit in April, for example,  and a month later a major South Korean delegation  came to Kazakhstan to sign finance and investment  commitments totalling $5 billion.

Meanwhile, the rise in oil prices above $60 a barrel  and a lift in commodity prices generally in April/May  helped restore liquidity to some of the banks’ main  customers and the banking system itself. It has been a  heart-stopping ride since summer 2007 – but, as markets gradually recover and new sources of finance open up,  Kazakh banks should also benefit.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 80 – 81.

Maintaining the flow 0

Posted on March 05, 2010 by KazCham

FOR LANDLOCKED KAZAKHSTAN, oil and gas pipelines  are its main export arteries. They will become even  more important once the giant Kashagan field comes -on stream, doubling oil production and opening up  a new era of offshore Caspian Sea oil and gas exports  within the next five years.

Ensuring that another 1.5 million barrels a day of  export pipeline capacity, together with new tanker  routes across the Caspian Sea, are ready by 2015 at  the latest are among the government’s most crucial  strategic goals at a time of intensive infrastructure  development in this vast, thinly populated country.

In Soviet times, and until very recently, virtually  all Kazakhstan’s oil and gas exports were transported -north through Russia. So were the more than 50  billion cubic metres of natural gas, which transited

the country from Turkmen and Uzbek gas fields en  route to eventual markets in Ukraine and Russia  itself, where state-controlled Transneft and Gazprom  stubbornly defend their near-monopoly status against  all comers.

Chevron-Texaco and its partners in the  Tengizchevroil consortium – Exxon-Mobil with  25 per cent, KMG with 20 per cent and the LukArco  joint venture between Lukoil and BP with 5 per  cent – were the first foreign companies to breach the  Russian gas transit company’s monopoly on exports  from Central Asia, when President Yeltsin reluctantly  agreed to the construction of the Caspian Pipeline  Consortium (CPC) pipeline in the late 1990s. In  return for putting up the money, the oil companies  demanded, and were granted, management control of the line to ensure it was run in the interests of  the investing partners, who were also the main  users of the pipeline. At the time it looked like a  revolutionary step – but it did not last long.

The CPC line runs from the giant onshore Tengiz  oil field in northern Kazakhstan, developed by  Chevron and partners, across southern Russia to the Black Sea port of Novorossiisk. A 600km-long spur  line from the giant Karachaganak gas condensate  field to the north east taps into the line to allow  access for BG, ENI and other investors, including  Russia’s Lukoil.

Unlike most Russian pipelines, CPC is run on a  quality bank system. This ensures that high-quality  Central Asian light crude oil and condensate can  be sold at a premium and not suffer the Ural crude  discount. This affects oil delivered through Russia’s  ageing main pipeline system, which mixes the good  with the bad to deliver a lower grade final product.  This is a major disincentive for using the ageing

Soviet-era trunk pipeline system, which Russia did  not upgrade sufficiently during the years of high  oil prices.

Chevron and partners put up more than $2 billion  to build CPC and associated facilities and the Yeltsin  administration allowed Chevron to manage it,  overruling Transneft’s opposition. The Russian and  Kazakh governments received 24 and 19 per cent  stakes in the pipeline and shareholders included  Lukoil through its Arco joint venture with BP.  Stakeholder companies gained access to the pipeline  for their oil exports in proportion to their investment.

But this arrangement did not survive President  Putin’s ambitions to make Russia an ‘energy super- derzhava’ (energy super-power) and the foreign  oil company stakeholders lost both their original  combined majority of shares and their managerial  rights as Moscow bought up the 7 per cent of  shares formerly owned by the Gulf State of Oman  and insisted that management pass into Russian  hands. Moscow argued that the former management  had run a low-tariff regime, which favoured the  international oil companies at the expense of  the Russian treasury. Once in control, Transneft  proceeded to raise tariffs.

Moscow has also made CPC capacity expansion  conditional on support for Transneft’s desire for a  controlling 51 per cent stake in the proposed Burgas- Alexandropolous pipeline. This 220km-long route  is designed to bypass the crowded and ecologically  sensitive Turkish Bosphorous and carry Caspian and  Russian oil from the Black Sea to the Greek port of  Alexandopolous in the northern Aegean, through  Bulgarian and Greek territory.

BP, which has concentrated its Caspian investments  in the Azeri section of the sea much further south,  recently sold to KMG for $250 million the 1.75 per  cent stake in CPC it inherited from its LukArco joint  venture. When added to the 19 per cent already held  by KMG on behalf of the Kazakh state, the state energy h corporation now holds a 20.75 per cent ownership  stake and has the right to export 14.3 million tonnes a -» year through the line, once capacity expansion to  67 million tonnes a year is completer

The BP sale to KMG completes a radical shift in  the power balance within the CPC consortium, with  the Russian and Kazakh state now holding a clear  majority of 54.75 per cent in the pipeline – paving the way for Moscow to give the green light for the long  promised expansion.

Oil started to flow down the CPC line four years ago and some 32 to 34 million tonnes a year can now be  transported down the pipes, thanks to the addition of chemicals to speed the flow. From the start the CPC  project was conceived as a two-stage affair. Technical  plans to double capacity to 67 million tonnes a year,  through additional investment in new pumping  stations and other facilities as production built up  from new onshore and offshore fields, have been  approved, but not the final go-ahead.

Ironically, Russian resistance to expansion proved  a blessing in disguise for the Kashagan consortium.  If Kashagan had come on stream as planned in 2008,  there would not have been the pipeline capacity  to take the oil to export markets. This is a problem  already facing Chevron and partners who have had  to invest heavily in railcars and barges to get rising  volumes of oil from Tengiz to export markets; and  the ENI/BG-led Karachaganak consortium, which  is similarly struggling to find export outlets for  rising production of high-value gas condensate.

Doubling capacity of the CPC oil pipeline and  raising capacity on the traditional Russian export  pipelines north via Samara to connect with the  Druzhba, and other ageing Soviet-era pipelines,  remains an essential part of the planned doubling  in overall export capacity from the North Caspian  basin. Russia will continue to play an important  transit function – and earn increasing transit  revenues – from central Asian oil and gas exports.

But the development of alternative, non-Russian export routes has been accelerated by Moscow’s  delaying tactics over CPC expansion. Moscow will

shortly lose an export pipeline monopoly, which is  a legacy of Soviet times and increasingly resented  throughout central Asia and the Ukraine.

Until now, Moscow has gained most of what it  sought, but at a potentially high longer-term price.  Some analysts say that had Russia kept to the spirit of the original CPC deal and allowed the pipeline to be  expanded as planned, central Asian governments and h oil companies might have been far less determined to h seek alternative export routes. They might also have  been less responsive to the growing interest shown  by China to acquire oil and gas assets in Central Asia,  and build and finance new oil and gas pipelines from  Central Asia east to the Chinese border.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 44-50.

Tengiz on the rise 0

Posted on March 05, 2010 by KazCham

PAYBACK TIME HAS arrived at last for the two biggest onshore oil and gas fields in the prolific Pre-Caspian basin in north-west Kazakhstan – Tengiz and  Karachaganak – which are now delivering nearly  half the 70 million tonnes of oil produced annually  by the oil industry in Kazakhstan.

For the best part of a decade, some of the world’s biggest oil and gas companies have been pouring  money, labour and technology into the two complex fields, laid down over several geological time  periods, before being covered by a vast ocean. All that remains of that ancient ocean are the Caspian and Aral seas and the western half of Lake Balkash.

The salt domes and rock reservoirs of the ancient coral reefs, which hold the oil and gas, are now up to 5km below the land surface. But it was the later ocean that laid down the thick cap of flexible, but  impermeable, salt and kept the oil and gas in place.  There it remained under great pressure and mixed  with a lethal cocktail of hydrogen sulphide and  other gases. The rich soup includes ‘mercaptans’,  the volatility and revolting smell of which requires  extensive processing before either oil or gas  can be transported thousands of kilometres to  export markets. Just to make things difficult, Moscow has so  far stubbornly refused to give its assent to the  planned doubling of the 1,600km Caspian Pipeline  Consortium (CPC) export pipeline, specifically  designed to run from Tengiz across southern Russia -» to Novorossiisk on the Black Sea. Karachaganak,  which is closer to the Russian oil and gas town of  Orenburg just over the Russo-Kazakh border than  to Uralsk, the nearest Kazakh town, is linked to the  CPC by a 650km spur line.

A decision on doubling CPC’s capacity to 67  million tonnes a year is believed to be imminent,  but it will take at least two years to build and might  not even be finished in time to transport first oil  from the third giant Caspian project, the offshore  Kashagan ‘elephant’ field, due to start production  around the end of 2012.

Frustrated by Moscow’s delaying tactics, Chevron- Texaco, the operator and 50 per cent owner of  the Tengizchevroil (TCO) consortium set up to  develop Tengiz under a 40-year production-sharing  agreement, has had to invest heavily in thousands of new railcars to export oil the expensive way.

In October 2008, Chevron sent a significant first shipment of oil from Tengiz by rail to the port of  Aktau and pumped it into a small tanker bound  for Baku in Azerbaijan on the western coast of the Caspian. From there it was fed into the 1,750km Baku-Tbilisi-Ceyhan (BTC) pipeline, which runs  through Azerbaijan, Georgia and Turkey.

As capacity builds up in the northern Caspian oil fields, Chevron expects to export up to 5 million tonnes a year to the Turkish port on the eastern  Mediterranean through the BTC pipeline in coming  years, although the bulk of oil from all three of the  giant fields in the Northern Caspian will continue to flow through Russia, once the CPC line’s capacity  is doubled.

Until that symbolic first shipment to Baku and beyond, Chevron shipped surplus oil from Tengiz by rail to Aktau and across the Caspian to  Machachkala, in Russia’s Dagestan province. From there, the oil passed through Russia, either by rail or the re-routed pipeline to central Russia that used to run through the Chechen capital Grozny, but now bypasses it.

This modest opening up of a new cross-Caspian route is the start of something much bigger – the development of an entire new export route to  the west which, for the first time, does not need  to pass through Russian pipelines, railways or  ports. TCO, together with the Karachaganak and Kashagan consortia, is preparing to play a key role  in developing the $3 billion Kazakhstan Caspian  Transportation System (KCTS), now at an advanced  state of planning.

The government’s ambitious southern energy  corridor will run from the giant Kashagan  processing plant at Eskene, 30km north of Atyrau,  more than 600km south to Aktau, and on to the  new oil and gas export facility to be built at Kuryk,  100km beyond Aktau.

From Kuryk, a growing fleet of tankers will take the oil across the Caspian to Baku for onward transit either through the BTC pipeline or by rail and smaller pipeline through Azerbaijan to the Georgian ports of Batumi and Supsa. “With  Kazakhstan expected to add a minimum of 1.5  million barrels a day over the next 15 years,  it needs a new, dedicated and reliable export  capacity, and it needs it urgently,” according to Ian -MacDonald, Chevron’s senior business development and transportation managers

Chevron’s partners in TCO are KazMunaiGaz  (KMG), the state oil and gas company, with 20  per cent and Exxon-Mobil with 25 per cent. The  remaining 5 per cent is held by the Lukarco joint  venture between Russia’s Lukoil and BP. Over the  last five years the partners have invested more than  $3 billion in their ‘second-generation development’  which was completed last year.

Tengiz is operated on the basis of a 40-year  production sharing agreement. The second stage  of its development involved building a small town  to house an army of 6,500 skilled workers. It also  required new road and rail connections, 39 new  drilling wells, a high-tech field production gathering system and eight sour gas re-injection plants.  These house powerful compressors to force sour  gas back into the field. This is required to keep up  the pressure needed to ensure that oil will flow for  decades. Re-injection and related investment has  virtually doubled oil output from 13 million tonnes  in 2004 when construction started, to the current  capacity of 25 million tonnes a year.

Last year’s collapse in oil prices to around $30  a barrel led to many oil companies cutting back  on investment, but Chevron’s board recently  committed to push ahead with ambitious global  development plans and specifically pledged not to  cut back in Kazakhstan.

A series of new wells are being drilled at Tengiz,  together with further exploration of the nearby  Korolyov field. TCO is also planning a state-of-the- art refinery at Tengiz , which fits in well with the  government’s strongly expressed desire to add  value to Kazakh natural resources and develop  downstream processing and refining. A new sulphur processing plant has also removed a source of  friction with the environmental protection agencies, and constant fines. The new pelletisation plant has  converted what used to be embarrassing mountains  of yellow sulphur, which runs blood red when mixed with rainwater, into a valuable by-product.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 38-39.

Kashagan: key to Kazakhstan’s future 0

Posted on March 05, 2010 by KazCham

Once it comes on stream, the giant Kashagan field will establish Kazakhstan as a major oil exporter, says Oliver Adderley

AS KAZAKH AUTHORITIES grapple with the global  recession, politicians and bankers privately comment that things would look a lot different had the  Kashagan project come on stream as planned in  2008. This is because Kashagan, the huge 38 billion  barrel offshore ‘elephant field’, in shallow waters  some 70km south of the city of Atyrau, will double  the country’s oil production to more than 3 million  barrels a day within a few years of coming on stream  in the last quarter of 2012 or early 2013.

That will mean a huge ongoing boost to the  country’s export income and a shot in the arm for  government revenues big enough, and durable enough, to transform the country’s balance of payments and  turn the country into a net capital exporters.

At last year’s annual Kioge oil and gas conference  in Almaty, Energy Minister Sauat Mynbaev  summarised the outcome of many months of often  fraught negotiations between the government and  the consortium of international oil companies developing the Kashagan project. In return for  pledges of heavy continuing investment by the oil companies, and a deal to double the shareholding  of state energy corporation KazMunaiGaz (KMG),  the government, he said, reluctantly accepted both  higher cost estimates and a new timetable for first oil, which will now start to flow eight years later than the original target date of 2005.

The negotiations were sparked off by the oil  companies’ admission, two years earlier, that costs  had once again spiralled way beyond previous  estimates and that another five years of heavy  investment were required before oil could start to  flow safely from the offshore field to the onshore  processing facilities at Eskene, north of Atyrau.

The government accepted that a large part of the  cost inflation reflected the steep rise in global prices  for steel and other key construction materials and  the competition for scarce and expensive drilling  rigs and specialist services, as oil prices soared to  a peak of $147 a barrel in July 2007. Kashagan was  especially exposed to cost inflation because of the  huge logistical difficulties involved in getting men  and equipment to the offshore site of what one senior oil man describes as “the most complex engineering  project in the world”.

Even so, the rise in ‘life of project’ costs from an  originally estimated $29 billion to $136 billion has  been eye-watering and forced the oil companies  themselves to review their own shortcomings over  the first years of the project. But with so much money already sunk in the project, and so much hanging  on a successful outcome, the government finally  agreed to accept the higher estimates, after imposing financial penalties and a deal under which KMG  emerged as a co-equal in the consortium set up to  exploit the field. The two sides also agreed that first  oil production of around 150,000 barrels a day (b/d)  would start flowing from the offshore production  platforms in the last quarter 2012, or early 2013.

The fact that the initial flow will be both later and  only a third of the originally expected 450,000 b/d  is compensated for by a major up-rating of the full  regime flow, which is now scheduled to rise to 1.5  million b/d before the end of the decade and stay that way for at least two decades.

But for that to happen, several billions of dollars  worth of drilling and processing equipment still have to be installed and all concerned have to be absolutely sure that the deadly sulphurous gas associated  with the oil can be re-injected safely into the field  5km below the shallow Caspian Sea at super- high pressure. The fact that similar techniques  have already been successfully introduced at the  onshore Tengiz and Karachaganak fields, which  are geologically similar in key respects, has raised  confidence in a successful outcome.

The government was not the only party to be  dissatisfied with slow progress at Kashagan since  commercial quantities of oil were confirmed in  the summer of 2000. Shareholders and senior  management of the oil companies have been even  more dismayed at the prospect of another five years  of investing around $3 billion a year without a return on the investment until 2013.

Confirmation that the bone-shaped field, some  75km long and up to 45km wide, was indeed one  giant structure triggered the go-ahead for the first  stage of a project which, at the time, was expected to cost around $10 billion and produce first oil by 2005,  although that date was only reluctantly agreed by the oil companies in the face of heavy political pressure  for an early date.

The unhappiness of both government and the oil  companies with the delays and spiralling costs since  then meant that last year’s protracted government/ consortium negotiations were as much a forensic  examination of what had gone wrong for the oil  companies as for the governments

Painfully, members of the AGIP-KCO consortium  set up to manage the project in 2000 came to the  conclusion that much of the blame lay with the way  the oil companies themselves had underestimated  the technical and logistical challenges and cobbled  together a compromise solution to the big question  of who would be in charge of operating the project.  France’s Total made clear it would not accept  management control passing to Exxon, and the  US company was adamant it would not be pushed  around by the French. Shell was preoccupied with  other problems. In the end, Italy’s ENI was chosen as  operator as the compromise candidate acceptable to  the other three members of the ‘big four’ stakeholders.

The ‘big four’ were ENI, Exxon-Mobil, Shell and  Total. They each held an 18.5 per cent stake in the  consortium alongside smaller shareholders Conoco- Phillips, Japan’s Inpex and the Kazakh state energy  corporation KMG. After passing what was soon  to become a poisoned chalice to ENI’s operating  company, AGIP, and setting up the AGIP-KCO  consortium, the other oil majors failed to put in the top-level managerial and technical talent needed to supplement ENI’s own technical and other skills. The oil majors had only formed a consortium  because the task of developing a massive oil deposit in a greenfleld offshore site, with huge climatic,  logistical and safety challenges, at the frontier  of several advanced technologies was clearly way  beyond the resources of any one of them on their  own. But although Italy’s privatised former state  oil company is a global operator, it has nothing like the deep pockets, managerial depth and technical  expertise in deep and offshore drilling of its bigger  partners. Given the scale of the task, each of the  partners should have put in their best people and  applied their most developed technology to the  project – but they didn’t, leaving ENI to struggle  with a task beyond its capabilities. The shallow upper Caspian Sea, where Kashagan  lies, is ice-bound for more than four months a year,  while the main access to the inland sea is through  the Russian canal and river system, which is also  ice-bound for months, or the over-stretched Russian  road and rail system. The alternative is a complex  multi-nodal passage involving several transhipments  from Bulgarian or Romanian ports across the Black  Sea to the Georgian ports of Poti or Batumi, and then by road or rail across Georgia and Azerbaijan to Baku. Only from Baku can cargoes be shipped across the  Caspian to ice-free Aktau or the Kashagan supply base at Bautino all year round.

This logistical nightmare gives the consortium  only a six-month window each year through which  to funnel outsized cargoes too big for road or rail.  Another serious problem has been obtaining visas  and work permits for the key foreign personnel  needed to push forward such a complex, high-  tech project. With highly specialised engineers  costing up to $18,000 a day to hire, any delay proved  hugely expensive.

Any failure to get men and equipment on-site as the weather window opened added hugely to costs. But  so did major mistakes, such as under-estimation of  the number of drilling islands that were needed and  the location of offshore accommodation modules too ^ close to production areas. These had to be expensively re-located away from the wells in view of the extra- stringent health and safety rules in force at all the  deep, sub-salt oil and gas projects in the region.

The toughest rules are required because of the  deadly nature of the hydrogen sulphide and other  poisons that make up more than 17 per cent of  the hot, sour and corrosive gas which reaches  the surface together with the oil. The need to  secure zero leakage and 100 per cent protection  for personnel is an even stronger imperative at  an offshore operation such as Kashagan, where  sleeping and working quarters are pressurised and  sophisticated emergency evacuation vessels are on- call and on-site 24 hours a day. The need to re-think, re-locate and re-engineer the offshore housing  configuration alone led to an estimated extra $2  billion of costs, but there were other costly mistakes as well.

Once oil starts to flow, some of the associated  gas will be carried ashore by pipeline, processed  and used to power the huge refining complex at  Eskene some 30km north of Atyrau. But the bulk  will be re-injected into the deposit at over 800 times atmospheric pressure. Reinjection is needed to  keep up the high pressure that must be maintained -» to make sure that 9 billion barrels of oil can be  recovered from the field over its lifetime.

All these issues, and others, were thrashed out  during lengthy negotiations. The soul-searching  allowed all sides scope for self-criticism and serious  re-thinking as well as mutual recrimination – but  the freezing of all new contract signing for the  duration of the talks itself added an estimated 30  months of delay to the project. It was probably  worthwhile, however, as the eventual outcome was a radically different organisational plan – and a much greater sense of realism all round.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 30-34

Chamber of Commerce and Industry of the Republic of Kazakhstan in the USA 9

Posted on January 05, 2010 by Sergey Sek

We are proud to announce the opening of an official representative office of the Chamber of Commerce and Industry of the Republic of Kazakhstan in the USA (“KazCham”).

Chambers of commerce have traditionally been the associations of enterprises engaged in trade, manufacturing and services. The predecessors of the medieval guild houses were merchants and artisans. The overall objective of the chambers around the world – protecting the interests of business and promoting their development.

Kazakhstan Chamber of Commerce and Industry (“Chamber”) was established in 1959 by decree of the Council of Ministers of the Kazakh Soviet Republic.

The Chamber represents interests of the Kazakhstani business community and provides a set of essential business services. The Chamber serves as the social and economic partner for small and medium-sized businesses in the dialogue with government, big business, as well as partners in foreign trade activities. The Chamber has signed over 70 cooperation agreements with foreign countries: Italy, UAE, Russian Federation, India, Turkey, Jordan, Syria, South Africa, Egypt, etc.

Each year, the Chamber, which has 16 regional chambers, provides 70 thousand services. Included are a number of expert and inspection services, consultations on foreign trade activities, assessment services for the customs value of goods, confirmation of documents on foreign trade transactions, the consideration of disputes arising between the partners.

When conducting business forums in Kazakhstan and abroad, visiting foreign markets as part of trade missions is a proven and cost-effective way to grow your business. A business visit, professionally planned and managed by Chamber specialists, allows one to achieve results much more efficiently than a few self-organized trips.

The practice shows that the majority of business contacts, organized and implemented by the Chamber, are effective.

Membership in the Chamber is voluntary.

After decades of hard work, the Chamber gained tremendous experience and serves for the benefits of your business.

In 2009 the Chamber of Commerce of the Republic of Kazakhstan celebrates its 50th anniversary.



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