Kazakhstan Chamber of Commerce in the USA

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U.S. rolls out red carpet for controversial Kazakh leader 0

Posted on April 13, 2010 by KazCham

US rolls out red carpet for controversial Kazakh leader

AFP
AFP American Edition

Apr 12, 2010 12:40 EDT

Kazakhstan’s authoritarian president Nursultan Nazarbayev touted himself as poster boy of a Washington summit on nuclear disarmament Monday — and President Barack Obama, badly needing allies in Central Asia, was his main fan.

Posters of a smiling Nazarbayev hung prominently on advertising boards around Washington, where leaders of 47 countries were attending a summit on securing the world’s loose nukes.

After a one-hour meeting with Obama on Sunday, the Kazakh strongman, who has been in power since his energy-rich state emerged from the 1991 Soviet collapse, has plenty to smile about.

Washington holds up Kazakhstan, which voluntarily ceded its portion of the Soviet nuclear arsenal, as an example of a country benefiting from what Obama says should be the world’s ultimate goal: full nuclear disarmament.

Nazarbayev explains on the posters that his vast, sparsely populated nation gave up the inherited nuclear arsenal because atomic testing during the Soviet period had sickened 1.5 million people.

“That’s why we got rid of our nuclear arsenal, the world’s fourth largest. And that is why we call on the world to follow our example. There is no other way to build a safer world,” the poster quotes Nazarbayev saying.

White House advisor Mike McFaul said Obama described Nazarbayev as “one of the model leaders” on nuclear safety issues and said that the Washington summit wouldn’t have happened “without his presence.”

“By giving up nuclear weapons they went from a country that might have been isolated had they kept those nuclear weapons, and in turn was open to the international economy,” McFaul said.

On the sensitive topic of democracy, Obama was more than understanding.

“Both Presidents agreed that it?s never — you don?t ever reach democracy, you always have to work at it,” McFaul said. “President Obama reminded his Kazakh counterpart that we, too, are working to improve our democracy.”

Nazarbayev doesn’t always get such warm treatment abroad.

Though not considered as repressive as the leaders of Central Asia’s Uzbekistan and Turkmenistan, Nazarbayev has rigged elections for almost two decades and crushed media freedom, Western watchdogs say.

His country remains almost unknown to ordinary people in the West beyond the satirical send-up in the hit comedy film “Borat,” about a bumbling Kazakh journalist.

But reasons are mounting why Nazarbayev matters.

The violent overthrow of the government in neighboring Kyrgyzstan, where the United States has a military base, sharply highlighted the importance of politically stable Kazakhstan as an access route to Afghanistan.

During their meeting, Obama and Nazarbayev strengthened that route by agreeing on overflight rights for US military aircraft coming over the North Pole and directly south into Afghanistan — a significant shortcut for US-based planes.

“This will save money, it will save time, in terms of moving our troops and the supplies needed into the theater, as President Obama has already announced,” McFaul said.

Less immediate, but of equally strategic importance, is Kazakhstan’s emerging role as an energy source, both in its huge oil reserves and its ambition — despite the non-nuclear stance — of being the world’s top producer of uranium.

“The presidents reconfirmed the importance of the long-term energy partnership between the two countries,” a joint statement said. “The United States welcomed Kazakhstan?s emergence as the top global uranium producer as an important development for diversification of global energy supply.”

Kazakh Ambassador Erlan Idrissov listed a host of issues — nuclear non-proliferation, energy, Afghanistan, relations with Russia and China, and anti-terrorism — that he said make US-Kazakh relations “very important.”

“Over the first years of emergence, people didn’t realize who we are and what we are,” he told journalists Monday.

But “Kazakhstan was there for millennia and will continue to be there for millennia.”

Source: AFP American Edition

Gazprom, KazMunayGas to explore Imashevskoye condensate field – draft agreement 0

Posted on March 31, 2010 by KazCham

Moscow. March 30. Interfax – Russia and Kazakhstan have drafted an intergovernmental agreement covering joint geological study and exploration of the Imashevskoye gas condensate field, which straddles the two countries’ border.

Prime Minister Vladimir Putin signed the instruction approving the draft agreement on March 25.

Once the reserves have been calculated and registered, and the decision to proceed with development has been made, a new agreement will be drafted covering the terms for developing the field.

The document designates Gazprom and Kazakh national oil and gas company KazMunayGas (KMG) as the authorized organizations for work at the field. They will share the revenue from joint operations 50-50. The authorized organizations will jointly appoint the operator.

The authorized bodies are the Natural Resources and Ecology Ministry, Rosnedra, Rosprirodnadzor and Rostekhnadzor on the Russian side and the Energy Ministry on the Kazakh side. They will form a joint coordinating committee with three representatives from each country. The Russian delegation to the committee will be headed by the Natural Resources and Ecology Ministry. The committee will meet at least once a year.

The sides should issue the relevant license to the authorized license holder no more than 100 days from the moment the agreement enters force.

Gazprom and KMG will prepare the program for geological study of the field. Geological information on the field will be presented to the national geological information agencies on confidential terms.

The Imashevskoye field is located east northeast of Astrakhan in Russia and southwest of Atyrau in Kazakhstan. Explored gas reserves exceed 100 billion cubic meters with a sulfur content of 15%-17%.

The Natural Resources and Ecology Ministry will sign the agreement for Russia.

SOURCE: http://www.interfax.kz/?lang=eng&int_id=10&news_id=3376

Kazakhstan: The war for talent has just begun 0

Posted on March 30, 2010 by KazCham

Natalia Kurkchi, Partner – Antal Russia, CIS Development Director

Read in Russian

The unstable economic situation in the world has forced many international companies to search for new markets. The developing countries’ markets have always represented a combination of risk and attractiveness, and Kazakhstan is no exception. Nevertheless the 2010 is already beginning to show positive tendencies on the recruitment market in Kazakhstan and other countries of Central Asia: the number of ‘start-ups has increased, the demand for qualified and experienced specialists and managers from more developed countries has increased, the interest towards Kazakhstan and Central Asia from the M&A companies has also risen. All these and many other facts prove some very serious intentions of both local and international companies to develop in this region in 2010.

The candidate market in Kazakhstan has always been very narrow, both recruiters and employers very often happen to know the same candidates who are open on the market; a lot of people hoped that the economic recession would change this situation for the better. Despite the general expectations and predictions though, it hasn’t brought many highly-qualified specialist for cheaper price on the market – simply because ‘highly quality’ is never ‘cheap’.

Of course, the inflow of candidates on the market has increased significantly over the last 1,5 years: there are now 3-4 times more responses to vacancies than before. Unfortunately we can hardly speak about an increased quality of the candidates’ market: only 1-2 candidates out of 10 get to interview stage. In turn, 80% of mid-to-senior-level managers – who are still working and are still valued by their employers – are simply not considering any other job opportunities and are not open on the market. All this statistics make the opinion regarding ‘employers’ market’ quite questionable.

The employers compensate for the lack of qualified personnel by either head-hunting candidates from the competitors on the local market or attracting candidates from outside of Kazakhstan. There is obviously another way which includes developing your own staff. This is a less expensive way, but it tends to be too long and quite risky: these specialists can be as well head-hunted by the competitors.

Companies operating on the Kazakhstan market continue to open new vacancies. Over 60% of Antal’s clients have quite optimistic views regarding market development in Kazakhstan and Central Asia, and 40% of them are already actively hiring new people. The firing process was in many cases spontaneous and quite drastic during the worst times of the recent downturn. This has led to the situation where a lot of companies found themselves lacking some crucial people within their organisations. Now when the market starts showing signs of growth again, it’s becoming clear that a company simply cannot develop without a highly-qualified team in place.

During 2009 many companies struggled to maintain market share, companies with enough working capital have taken this new competitive advantage to build their businesses at the expense or poorly run ones, filling the gaps. Likewise well run companies now need to look at the availability of the good talent, as the global and domestic economies become stronger we’ll soon see firms competing for a small pool of the best candidates. Now is a good time to review your organization chart.

Main Tendencies on the Kazakhstan Recruitment Market

  • The recent global recession has forced employers to take a different view of the quality of the employees that they hire, as well as prioritising in terms of which of the structures within the organisation need to be reinforced. A good example is the Controlling function – whether it’s Finance, Internal Control, Risk Management or any other departments controlling the company’s activities and setting up limits to prevent the company from too risky or even threatening situations. Sales positions have probably received the greatest attention and development in the last several months – as was said before, no development is possible without professional Sales and Business Development people. The HR function has also developed considerably: it became clear that a proper HR Manager should not be performing only recruitment and admin functions, but should play a very important role in implementing the correct motivation and career plans for staff, thus increasing their loyalty and effectiveness. The role of IT Managers has also risen from a simple knowledge of IT programs to the implementation of the complex IT solutions for the company, data protection, secure storage of information, etc.
  • Replacements of existing employees is another noticeable tendency on the market at present. This current crisis has become a serious reason for companies to replace ‘quantity’ with ‘quality’, even though this sounds rather harsh. Such occurrences were frequent in 2009, and around 30% of Antal’s clients in Kazakhstan are still planning to replace some members of their existing teams with more professional and experienced ones in 2010 who can develop the company faster and more efficiently.
  • The present situation on the market has resulted in serious corrections in salaries from both employers’ and candidates’ perspectives. In spite of the general perception, salaries on the market have not fallen as dramatically as they were expected to. The main change has been not in the salaries themselves, but rather in the candidates’ expectations when moving to another job. In the pre-crisis times candidates would normally expect a pay rise of 50% – sometimes even 100% and more – these expectations have now fallen down to around a 15% – 40% increase on average during tougher times. Of course if talking about people who have lost their jobs, then the situation is considerably different: these candidates would usually be much more flexible in terms of their salary requirements. However, those candidates who are employed and are not actively looking for a job would have no reason to move to another job unless the salary and package are much more attractive.
  • The employment process has changed too: collecting recommendations for selected candidates is now an integral part of the recruitment process while in the past less attention was paid to speaking to referees; candidate motivation is now checked very thoroughly; professional qualifications and personal qualities are now being seriously tested by many companies. All of this is done to make sure the person fits into the organisation well and stays with the company for a long time. In turn, candidates are also paying much more attention to the company’s stability, its strategic plans, their potential career growth within the oraganisation for the next 3 – 5 years whereas before they would have given such matters less thought.
  • Owners of small businesses are re-entering the recruitment market as candidates again. Amongst these were businesses that were founded in 2008 and 2009 by managers who have lost their jobs and whose employers went bankrupt. Naturally some of these business owners have set up their companies deliberately, they continue to develop them and are willing to stay with them for years, but the main task of about 60% – 70% of these companies was to earn some money temporarily while there were not enough jobs on the market. Now as the amount of interesting vacancies is growing, these businessmen are ready to change their ‘private practice’ and become employed again by larger organisations.
  • The interest in non-CIS candidates (mainly from European and North American countries) has grown significantly. The developed markets are ‘overheated’, and experienced people from these countries are looking for new opportunities in the developing markets. Kazakhstan and Central Asia are looked at as very perspective markets for many industries. At the same time, there are not enough qualified and experienced candidates, especially within new developing industries. This gives specialists from the developed market some privilege in terms of experience, as well as a great opportunity to develop their career, although lack of language skills, coupled with potential difficulties in adapting to local culture can present a logistical issue.
  • Oil & Gas, as well as other mining industries have been traditionally very strong in Kazakhstan and Central Asia. The economy in this region is growing wider by developing such industries as FMCG, Retail, Pharmaceutical and others – which is a very positive sign for the economy.
  • Private Equity funds have to be mentioned separately. These companies are now actively growing and hiring top-class experienced specialists from all over the world to bring the best practices into the local market. As many of the Private Equity industry representatives have mentioned, 2010 will give a lot of great opportunities for the M&A activities in Kazakhstan and Central Asia.

Source: http://news.antalrussia.com/2010/02/02/kazakhstan-the-war-for-talent-has-just-begun/?dm_t=0,0,0,0,0

Kazakhstan overview 2010: Oil & Gas 0

Posted on March 17, 2010 by KazCham

Kazakhstan has the Caspian Sea’s largest recoverable crude oil reserves. The Government of Kazakhstan and foreign investors continue to focus heavily on the hydrocarbons sector, which so far has received approximately 60% of the estimated $76 billion in foreign direct investment in Kazakhstan since 1991, and constitutes approximately 53% of its export revenue. Existing oil extraction sites offshore in the North Caspian, combined with onshore fields currently under development, mark Kazakhstan as a potentially major near-term oil exporter. Over the past seven years, oil
production in Kazakhstan has more than doubled and reached 1.62 million barrels per day (bbl/d) in 2009. Major producers include Tengiz, Karachaganak, CNPC Aktobemunaigas, Uzenmunaigas, Mangistaumunaigas, and Kumkol, all of which account for 1 million bbl/d. Output solely from the country’s three major fields (offshore Kashagan, onshore Karachaganak, and onshore Tengiz) is set to grow to 1.7 millionbbl /d by 2011 and to 2 million bbl/d by 2015.

Kazakhstan now accommodates significant investment in its vast upstream oil and gas resources and government forecasts predict that oil exports could reach as much as 3.5 million barrels per day in 2015. Most of this year’s production increase will come from the onshore Tengiz and Karachaganak fields.

The huge offshore Kashagan field, with an estimated 7-9 billion barrels of recoverable oil, is expected to come on stream by the end of 2012, but first commercial oil production will not exceed 100,000 bbl/d. The magnitude of the resource could result in Kazakhstan becoming one of the world’s major energy exporters by the end of the next
decade. This jump in production has also stimulated planning for processing plants and pipelines to come on-line in time for the start of production.

Best Prospects/Services

Return to top Oil industry sources estimate that Kazakhstan could eventually attract up to $140 billion of foreign investment in its oil infrastructure. The current market for oil and gas field equipment and services slowed in 2009 due to, 1) low oil prices and the economic crisis and 2) cuts in capital expenditures by oil and gas exploration and production companies.

But overall demand remains strong with opportunities for U.S. companies in virtually every sub sector associated with oil extraction, processing, and transportation. Best prospects include: drilling, research and data management, laboratory studies, oil spill cleanup technologies, and pipeline equipment and services.

Kazakhstan as yet has no experience in offshore production and operations. This experience gap offers many opportunities for U.S. service companies in rig work, support infrastructure, and environmentally sensitive technologies. The Caspian Basin’s oil-bearing formations are generally quite deep (15,000 feet), under considerable
pressure, and often contain a high degree of sulfur and other contaminants, making special Western-made drilling and processing equipment necessary.

U.S. oil and gas field equipment suppliers have the potential for solid growth over the next decade as new fields are brought on-stream and secondary recovery methods are introduced to existing deposits. The most promising sub-sectors are the following: offshore/onshore oil and gas drilling and production equipment; turbines, compressors
and pumps for pipeline applications; measurement and process control equipment for pipeline applications; industrial automation, control and monitoring systems for refineries, gas processing and petrochemical plants, seismic processing and interpretation, petroleum software development, sulfur removal and disposal technologies, well stimulation and field abandonment services.

Plenty of other opportunities exist for U.S. companies producing oil and gas field equipment and machinery such as drilling and wellhead equipment, Christmas trees, valves, pumps, motors, compressors, electrical submersible and jet pumps, underwater repair equipment, and oil spill containment equipment. Good prospects also exist for U.S. small- and medium-size firms offering downstream engineering and services such as fabrication, welding, engineering services and testing in accordance with API and ASME standards.

Opportunities

The Government of Kazakhstan is pursuing a development program for oil fields in the Caspian Sea that calls for increasing offshore oil production to about 2 million bpd by 2015, and for development of terrestrial infrastructure. The offshore development program also calls for more than 100 offshore blocks to be privatized through open
tenders. These future projects, combined with current production and exploration, should provide opportunities for interested U.S. exporters over the next few decades.

Resources

North Caspian Operating Company: http://www.ncoc.kz/
Atyrau Oil & Gas 2010 – http://www.oil-gas.kz/ru/
Caspian Pipeline Consortium: www.cpc.ru/
Kazakhstan International Oil & Gas Exhibition and Conference (KIOGE) 2010 – http://www.kioge.com/2010/
Kazakh Institute of Oil and Gas (KING): http://www.king.kz/
Kazakhstan Petroleum Association: www.kpa.kz/
KazEnergy Association: http://www.kazenergy.com/
KazMunayTeniz: www.kazmunayteniz.kz/
KazStroyService: www.kazstroyservice.kz/
KazTransGas: www.kaztransgas.kz/
KazTransOil: www.kaztransoil.kz

SOURCE OF PUBLICATION: Kazakhstan O&G overview 2010 by Country Commercial Guide for U.S. Companies. http://www.buyusainfo.net/docs/x_7387330.pdf

The Caspian basin’s biggest gas condensate field pauses for breath 0

Posted on March 10, 2010 by KazCham

KARACHAGANAK, ONE OF the world’s largest gas  condensate fields, with estimated reserves of more  than 1.2 billion tonnes of oil and condensate, was  discovered and initially operated in Soviet times, as  was Tengiz some 650km to the west. But coping with h the complexity and high pressures of both fields  was way beyond the technical and organisational  capabilities of the Soviet oil and gas industry.

Repairing the legacy of leaking pipes, abandoned  equipment and ecological devastation was one of the first tasks facing UK-based BG Group and Italy’s ENI,  the operators of the Karachaganak field, who brought Texaco (now absorbed into Chevron) and Russia’s  Lukoil into their consortium, before signing a 40-year production-sharing agreement with the government  in 1997.

Over the intervening 12 years, Karachaganak, like  Tengiz, has changed out of recognition to become  one of the most modern and productive oilfields in  the world. It delivered around 12 billion cubic metres (bcm) of gas last year, more than six times the Soviet  peak level, and around 230,000 barrels a day of oil  and condensate. But after more than a decade of  heavy investment, the consortium operating the field has decided to take a breather and see how the global economy develops before pushing ahead with stage  three of the field’s developments

The initial $1 billion rehabilitation programme  got underway in 2000 after BG and ENI set up the  Karachaganak Petroleum Operating consortium  (KPO), in which the joint operators held 32.5 per cent each, while Chevron-Texaco took a 20 per cent stake  and Lukoil the remaining 15 per cent.

KPO remains the only one of the three Caspian  mega-project consortia to be entirely foreign-owned.  But the combination of a 65 per cent majority  holding in the hands of the joint operators, and  supportive minority stakeholders, appears to  have contributed to the smooth running of what  has become one of the most successful foreign  investments in the country.

Prior to the onset of the global crisis, KPO was  bracing itself for a government-backed bid by the  state energy corporation KMG for a minority stake  in the project, along the lines of KMG’s stakes in the TengizChevroil and Kashagan Consortia.

But faced with a severe banking and construction ^ sector crisis, and a collapsing oil price, the  government appears to have quietly backed away  from a policy that threatened to load KMG with  another heavy investment commitment it would  struggle to deliver. KPO also argued against the risk  of unsettling a proven successful operation, which  was generating tax revenues and creating skilled jobs for thousands of Kazakh citizens in an otherwise  backwater region of the country close to the  Russian border.

Important as its Kazakh operations are to BG,  senior management also indicated that developing  its deep offshore gas fields south of Brazil’s Rio de  Janeiro, and producing methane gas from coal in  Australia, were actually more attractive investment  propositions than producing more gas in landlocked  Kazakhstan in the global scheme of things.

BG alone claims to have invested $2.5 billion  in Karachaganak over the last eight years when  production of high-value gas condensate and gas  for sale to Russia’s Gazprom has risen on average by 18 per cent a year since 1998 to around 136,000 barrels of  oil equivalent a day. Export volumes of condensate are  expected to rise to 10.3 million tonnes a year after a  fourth ‘stabilisation train’ is completed by 2010.

Development is continuing at Karachaganak,  where up to 20 wells are being drilled in the first  stage of phase three of the field’s development.  This will improve oil recovery by increasing both  gas production for sale and re-injection. But the  consortium has called a halt for the time being on  the fuller implementation of stage three, which  entails construction of a $1.5 billion gas refinery and  development of gas sales to the domestic market and  possibly to China, as well as the traditional sales to  Russia’s Gazprom via Orenburg.

Successful completion of both the initial  rehabilitation of the existing field and the $5 billion  second stage has raised volumes and stabilised the  long-term production profile, thanks to powerful  sour-gas re-injection compressors and complex  gas treatment equipment the size of a small city.  Investment to date ensures efficient long-term  exploitation of the unique l,450m-deep column  of gas underground and the 200m-thick rim of oil  beneath it. Together the reservoirs hold an estimated -» l,200bcm of gas and more than 1 billion tonnes of gas condensate and oil.

At present, Karachaganak sends the bulk of its  gas to Gazprom’s processing plant at Orenburg, just  across the Russian frontier. This continues a practice  that began in Soviet times when Karachaganak was  essentially a subsidiary of the Orenburg complex,  with which it shares the same geological structure.  But in order to get a better return than what  would come from merely selling gas to the Russian  monopoly purchaser, KPO has built a 125mw gas-fired power station to satisfy Karachaganak’s own power  needs and a 165km pipeline to supply gas to the  nearest Kazakh town of Uralsk.

This helps to improve relations with the local  community and conforms with the government’s  overall strategy of reducing dependence on imported  gas. Since Soviet days, Kazakhstan has imported  gas from Russia to supply northern Kazakhstan,  and from Uzbekistan to supply gas to the populous  southern cities of Almaty and Shymkent, as well as to Kyrgyzstan and Tajikistan.

Within a few months, southern Kazakhstan will  be able to tap into the lObcm of gas being carried  from Turkmenistan and Uzbekistan across more  than 1,000km of southern Kazakhstan to the Chinese h border, 200km east of Almaty. The capacity of this  new southern export route to the east will triple to  30bcm in a few years. The route will also completely  transform the domestic gas supply situation for  southern Kazakhstan and open up a bottomless  market in China, ending Gazprom’s former  monopoly-buyer advantages.

Once growth returns to the global economy, KPO is  expected to give the green light to full implementation of stage three of Karachaganak. But in the meantime,  both shareholders and the government benefit from  this breathing space, as it allows shareholders to get  a return on their investment to date and boosts tax  revenue for the government.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 40-41.

NCOC and the Kashagan new deal 0

Posted on March 09, 2010 by KazCham

A KEY ELEMENT of the new Kashagan deal thrashed out by oil companies and the government last year is a greater role for the state oil and gas corporation KazMunaiGaz (KMG) after the ‘big four’ (ENI, Exxon-Mobil, Shell and Total) bowed to government demands for KMG to acquire parity in the new North Caspian Operating Company (NCOC), which has replaced the former AGIP-led KCO consortium.

Under the new arrangements, the oil majors agreed to allow their individual stakes to drop to 16.8 per cent as they sold shares to KMG, whose own share more than doubled from 8.3 per cent. This arrangement converts the ‘big four’ into the ‘big five’ and gives the Kazakh state both symbolically important parity status in the country’s greatest natural asset and equal status in decision-making.

At the same time, however, KMG assumed an equal share in the heavy financial burden of financing another five years of project development, with no return on the investment until 2013 and beyond.

But times have changed. Back in 1998 the predecessor of KMG was forced to sell the state’s original stake in Kashagan to Conoco-Phillips and Inpex for $500 million, precisely because the cash- strapped government needed money in the wake of the rouble crisis in neighbouring Russia. But this time China has come to the rescue, thanks to a $5 billion deal in April under which the China National  Petroleum Corporation will take a 49 per cent stake  in the 500 million barrel Mangistau Munaigas (MMG)  oil and gas field on western Kazakhstan alongside  KMG. Under this deal, China gets access to coveted oil and gas reserves and KMG gets development money for MMG and finance to retain its stake in Kashagan.

Campbell Keir, Shell’s representative in Kazakhstan, spelled out just what this burden entails when he  revealed that Shell, which has already invested more  than $3 billion in Kazakhstan, would be investing  some $900 million a year over the next few years,  most of it in Kashagan. But it is also developing the  Pearls field further south, together with the Oman  Oil Company and KMG, and other smaller projects.  Rather more cheerfully, he added that sharply falling steel and other input prices, thanks to the recession,  meant that it should be possible to contain or reduce  costs, which had spiralled at Kashagan and elsewhere  while the global economy was booming.

The new NCOC arrangement essentially boils down to a division of labour agreement between the ‘big five’. ENI will concentrate on bringing the Eskene processing complex on stream, Shell and Exxon will take a much more hands-on role in managing specific operational aspects of the project, together with KMG. Total, meanwhile, will concentrate on the logistical problems associated with building new export capacity and developing new export routes for the 1.5 million barrels a day of oil expected to flow from the field before the end of the decade. The French are particularly interested in the potential for exporting oil and gas south through Iran at some stage, politics permitting. But they are also working on the other large, new export route projects.

These include the KCTS export pipeline corridor between Eskene, Aktau and Kuryk; and building up tanker, and possibly sub-sea pipeline, routes across the Caspian to Baku and on to Ceyhan in Turkey.  Expansion of the CPC pipeline route through Russia is the other main priority – not only for Kashagan, but also for Chevron, BG and ENI, which already have rising oil and gas condensate production to export from their Tengiz and Karachaganak fields and badly need new capacity fast.

Exxon, meanwhile, is now in charge of drilling operations at the three smaller, and shallower, above-salt fields – Aktote, Kairan and Kalamkas – which are contained within the Kashagan concession area. Shell, which sees considerable synergies in  developing the Pearls field together with nearby  Kalamkas, is working closely with KMG on continuing developments at the main Kashagan project, while  ENI’s Agip, having been relieved of its sole operator  responsibilities, is now concentrating on developing  the complex on-shore facilities at Eskene and the  logistics base at Bautino.

The more focused and co-ordinated approach to developing Kashagan came just in time. Negotiations dragged on against the background of sharply rising global oil prices. But by the time the deal was officially announced, oil prices were plunging below $40 a barrel. The price collapse was partially recouped towards the middle of 2009 as oil prices recovered to around $50, but even at these levels all shareholders, including KMG, will be funding Kashagan and other Kazakh projects from much reduced global cash-flows.

The delayed start of production to 2012/2013  also means that the earning life of the 45-year  Production Sharing Agreement (PSA), which set out the tax and other parameters of the deal back in  1997, is eight years shorter than the oil companies  calculated when first oil was due to flow in 2005. In vain, the companies, especially Exxon, argued for a prolongation of the PSA timeframe, under which the entire project will revert to the state in 2042. The government refused.

Having been denied this extension, the best the oil companies can hope for now is that by 2013 global oil prices will have recovered and remain high for the next generation. The government is also -» hoping for such an outcome – because financing the  government’s long-term development plans, and  ambitions to turn Almaty into a regional financial  centre, are all heavily dependent on high and  rising oil and gas revenues from Kasha an – which,  ironically, is also the key to financing growth of a  more diversified economy.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 36-37.

Light at the end of the tunnel 0

Posted on March 06, 2010 by KazCham

Kazakhstan is heading for economic recovery nearly two years after the country’s heavily indebted banks became the first foreign victims of the global financial crisis, which began in the US. Economic growth fell from near double digits to around zero by the end of 2008 as commodity prices nosedived. The collapse in global prices for oil, copper and other export commodities reifoced the effects of the original banking crisis, which had sent shock waves through the construction and related industries as banks recalled loans and scrambled to repay maturing foreign debt.

Nearly two years after the onset of the banking crisis, the fate of two of the largest six banks – BTA and Alliance Bank – still hangs in the balance. Creditors face heavy losses from tough restructuring terms designed to keep the banks alive without saddling the state with heavy bailout costs. This is bad news for investors in Kazakh bank debt. But, paradoxical as it may seem, the hard line now being taken by the National Bank with the foreign banks and institutions which lent so freely to Kazakh banks in the boom times reflects a growing sense that the Kazakh economy has already come through the worst.

When the Kazakh tenge was devalued 18 per cent against the US dollar in February, foreign exchange markets factored in further weakening, which newly re-appointed National Bank President Grigori Marchenko insisted would not happen. Since then, oil prices have virtually doubled to more than $60 a barrel, copper prices have risen 60 per cent to more than $5,000 a tonne, and whatever the shape of the expected global recovery, Kazakhstan, with its rich resource base ,strategic position between China, Europe and the Middle East and rising investment in basic infrastructure will be one of the principle gainers. The next movement in the tenge is more likely to be up than down.

Commodity prices are not the only factor affecting confidence. A spate of top-level personnel shuffles and the arrest of senior officials in Kazatomprom, the state-owned nuclear mining and engineering corporation, on theft and corruption charges which many see as controversial, have unsettled both domestic and foreign investors.

President Nazarbayev, who presided over Kazakhstan’s seamless 1991 transition from Soviet Republic to sovereign state, is 68 years old, still active and vigorous. The next presidential elections are not scheduled to take place until 2012. But the last decade of rapid economic growth and the emergence of a new middle class is reflected in the maneuvering of the rising generation preparing to take greater power and responsibility in the years ahead.

The economic crisis of the last two years has inevitably impacted on this on-going transition process. The tensions are reflected in part by the recent concentration of economic power in the hands of Samruk/Kazyna, which doubles as a de facto sovereign wealth fund and industrial holding company. Samruk, which is headed by Kairat Kelimbetov, former head of the Presidential  Administration, was originally set up to inject modern, market-oriented management methods into the state sector of the economy.

It controls the ‘commanding heights’ of the economic system – Temir Zholy, the state railways; Kegoc, the national power grid; KazMunaiGaz, the state oil and gas corporation; KazkhTelecom, the main telecoms provider; and Air Astana, the national airline. This year it added to this ‘traditional’ portfolio by becoming the main shareholder in BTA Bank, a major shareholder in both Halyk and Kazkommertz Bank, and also took over the former direct state holding in Kazatomprom.

This concentration of ownership reflects the President’s choice of Samruk as the main instrument for carrying out the rigorous anti-crisis policy unveiled in February. Faced with a drying up of foreign bank finance, the government decided to deploy the billions of dollars prudently stashed away in the Norwegian-style National (Oil) Fund and central bank reserves during the boom years. Oil revenues were scrupulously separated from the budget and invested conservatively abroad under the watchful eye of the central bank and the Ministry of Finance.

Some $10 billion of these ‘rainy day funds’ of around $47 billion were transferred to Samruk in February in order to recapitalize the main banks and channel fund into selected support for the construction industry, finance for small and medium enterprises and agriculture.

At the same time, however, President Nazarbayev came back from a recent state visit to China with a $10 billion package of financial assistance, including a $5 billion investment by the Chinese state oil company in a joint venture with KazMunaiGaz. This financial boost from China was followed shortly afterward by a $5 billion investment and financing package from South Korean banks and enterprises. This shift in emphasis towards closer ties with Asia is a part of a global re-positioning in economic power away from the traditional sources of capital and technology in Europe and the US towards China and other dynamic financial surplus countries in Asia.

Two years ago, just before the boom collapsed, South Korea’s Kookmin Bank paid a total of $1 billion for contral of BankCenterCredit (BCC), while Italy’s Unicredit paid $2.3 billion for ATF Bank. Both new foreign owners have since injected further capital into their Kazakh acquisitions,  which both  see as potentially profitable investments in Kazakhstan’s long-term future. International investment banks have also been quietly building positions in the country with JP Morgan, Deutsche Bank and UBS prominent amongst recent arrivals keen to potion themselves for Kazakhstan’s expected emergence as a regional financial hub by the middle of the next decade – a prospect also attracting banks from Russia, Asia and the Middle East.

This quiet positioning of long-term investors contrasts with all the superficial signs of an economy in temporary crisis – idle cranes on early-stage construction sites, a steep fall in formerly boated property prices, a collapse in car sales, rising unemployment, falling inflation – which have imposed real pain on many families and individuals. The statistics indicate negative growth in the first quarter of 2009 and only optimists think 2009 will produce 1-2 per cent GDP growth overall – and that hinges on a global recovery in demand for the commodities, which make up more than 80 per cent of the country’s exports.

But 2010 and beyond should be a different story. Next year Kazakhstan’s international profile will rise as it becomes the first post-Soviet state to chair the Organization for Security and Co-Operation in Europe, which was set up to promote democratic development and economic and political co-operation between countries formerly divided by the Cold War. At the same time, China, Kazakhstan’s populous, resource- and energy-hungry but capital-rich neighbor, should be back on its long-term path of rapid economic development, and taking advantage of new pipelines and road and rail links connecting China and Kazakhstan and other Central Asian resources.

This reflects the key fact that throughout this tough recession the big international oil companies have continued to invest billions of dollars in world-size oil and gas fields in the west of the country, such as Karachaganak, Tengiz and Kashagan, while China has pushed ahead with a 3,000 km gas pipeline to carry Turkmen and Uzbek gas through southern kazakhstan to western China. At the end of 2012 the offshore Kashagan oil field is scheduled to come on stream and oil production and revenues will virtually double as production builds up to 1.5 million barrels a day from the new field.

Kazakh gas will also flow east to China when the new export line reaches full capacity of 30 billion cubic meters over the next few years, while construction companies are also building new oil and gas pipelines south and west to Europe via Azerbaijan, Georgia and Turkey. At the same time, Kazakhstan is poised to become the world’s largest miner and exporter of uranium for nuclear power stations as Kazatomprom powers ahead with operative investments with foreign companies in nes mines and processing plants.

With finance from China as well as the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and others, Kazakhstan is also gearing up to build a new motorway linking China and Europe. Heavy investment  in new rail links, powerful diesel locomotives from a GE locomotive plant in Astana and new oil and gas export facilities at the ports of Aktau and Kuryk are transforming the basic economic infrastructure and preparing for decades of future growth. The last two years have been tough, but the have not been wasted.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 18-20

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



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