KazCham

AFTER SO MANY years of dependence on foreign  ! goodwill for the export of its oil, gas and mineral: the Kazakh government is insisting on a control stake in the new Kazakhstan Caspian Transport System (KCTS). This is designed to carry export pipelines south to a new port at Kuryk, south of Aktau, entirely through Kazakh territory.

New high-capacity pipelines within this corridq will run south for hundreds of kilometres from tilt giant, city-sized processing plant for Kashagan oil gas at Eskene, 30km north of the oil capital Atyrau, to a new port at Kuryk. From there oil and gas will be transported across the Caspian Sea to Baku. The new trunk pipelines running down the corridor will also be linked up to the many smaller fields being  developed either side of the route.

The oil companies, which are expected to foot  most of the bill for this multi-billion dollar project,  however, are still smarting from their loss of control  over the CPC pipeline through Russia, which they also financed and initially operated. As the main financiers and big future users of the KCTS, the international oil companies want to ensure that they retain as much  influence as possible over future managements.

A conclusion to months of hard bargaining between -government and the oil companies had not been  reached at time of writing, but a compromise deal is  expected shortly.

The main purpose of the KCTS is to ensure that  western Kazakhstan has the export capacity to cope  with the expected doubling of oil and gas production  when the Kashagan field comes on stream in four  years’ time. It will ensure that rising oil and gas  production from the country’s three biggest fields  – Kashagan, Karachaganak and Tengiz – as well as  dozens of smaller fields in western Kazakhstan will  flow down pipes, ports and railways under Kazakh  jurisdiction and not require transit payments to  foreign governments.

The KCTS will constitute a major strategic  resource for Kazakhstan, which used to be totally  dependent on transit through Russia to reach export  markets but is now rapidly developing into a major  transit country in its own right, with high-capacity  pipelines running 3,000km east to China and hopes  of developing further routes south through Iran –  international politics permitting.

The new corridor will not only carry Kazakh oil  and gas to Kuryk. It is also expected to accommodate  up to 30 billion cubic metres a year of gas flowing  north from Turkmenistan to Russia. But building  this northbound pipeline is conditional on  implementation of an agreement signed in 2007  between Russia, Kazakhstan and Turkmenistan.  This was to enable Russia to raise gas imports from  Central Asia. But Moscow seems to be reviewing this  agreement in the light of a sharp decline in demand  for gas from Gazprom’s recession-hit domestic and  European consumers.

On past performance, the end result of current  negotiations between the Kazakh government and  oil companies over how the KCTS corridor is to be  managed is likely to be a compromise that leaves both sides reasonably satisfied. The expected benefits from  the new corridor are, after all, huge for all concerned.

From the Eskene processing plant, equivalent  in size to the city of Amsterdam, the corridor will  terminate at Kuryk, a sheltered, relatively deep-water  site chosen for the large new oil and gas export  facility. From there a fleet of oil tankers will ferry oil  some 700km across the Caspian Sea to new importing h facilities south of Baku, the capital of Azerbaijans

At some point in the future, gas may also be  transported under the Caspian in pipelines and  President Nazarbayev has also expressed his interest  in a possible liquefied natural gas (LNG) facility to  freeze natural gas and transport it in special LNG  ships across the Caspian to a de-freezing plant on the  Azeri shores.

Eskene, which is some 35km north of Atyrau,  will process oil from the offshore Kashagan field,  and three other smaller fields in the concession are  currently being developed by Exxon-Mobil.

The complex will start operating when the first  oil comes from Kashagan around the fourth quarter  of 2012. Production will then build up rapidly as  Kashagan alone is expected to produce some  1.5 million barrels a day before the end of the next  decade. The hot, corrosive oil which forces its way  to the surface from the Skm-deep deposits needs to  be stripped of deadly hydrogen sulphide and other  poisonous gases as well as foul-smelling mercaptans  and other pollutantss

These involuntary by-products of making the oil  and gas safe for transport will be used as feedstock for a proposed $6.5 billion petrochemical plant, which  the government is discussing with deep-pocketed  investors from the Gulf States.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 52-53.

STEEL GIANT ARCELOR-MITTAL owns the Temirtau  steel complex, some 50km from Kazakhstan’s  mining capital, Karaganda. The bankrupt plant  was bought in 1995 by Lakshmi Mittal, the Indian  entrepreneur, together with a string of nearby  coal and iron mines. The mines guarantee supply  security at low cost and helped generate large profits at the steel plant.

Once the global steel market started to boom, cash  flow generated by low-cost Temirtau, together with  the valuable experience gained turning round the  Soviet-era giant, generated the confidence to buy a  string of similar plants in Ukraine, Romania, South  Africa and elsewhere. In this way, Mittal’s Kazakh  investment helped the company gain the critical  mass, and the cash, to win control over the Franco- Luxembourg Arcelor steel group three years ago. The  merged Arcelor-Mittal is now the world’s largest steel group, with the Kazakh company contributing about  8 per cent of the total.

However, a series of deadly methane explosions in  some of the company’s eight Kazakh coal mines over the -last three years underlined concerns that the company  had not paid sufficient attention to the poor state of the Soviet-era underground mines that had been starved of  investment for years before the Soviet collapse. Critics  said Mittal knew less about mining than it did about  steel. Certainly, when this correspondent went down  the flagship Lenin mine a few years ago, miners were  wearing little more than rags, the access shafts were  littered with broken-down machines, they were poorly  lit and had little ventilation. Working conditions in the  mine were worse than in similar mines I had visited in  South Africa.

Safety awareness campaigns designed to change  the inherited Soviet-era low priority for safety were  not enough to change the inherent dangers of  deep, sloping mines producing volatile, gaseous  coals. These are great for coking and steel making  but dangerous to mine using the inherited Soviet  technology. Sections of the mine were frequently  being closed to evacuate the methane gas and prevent dangerous accumulations.

Eventually, after a string of serious explosions,  in which 125 miners died over a four-year period,  Arcelor-Mittal turned to two US specialist companies,  EnSafe, a Memphis-based environmental engineering  company, and Dallas-based Petron Resources, to  develop a de-gasification system capable of safely  extracting the estimated one billion cubic feet  of methane estimated to be recoverable from  the coalfield.

Mittal obtained a $100 million loan from the  European Bank for Reconstruction and Development  to help finance the project, which is part of a much  wider, $5 billion scheme to double steel capacity at  Temirtau to around 10 million tonnes over the next  few years. This will also require much more extensive mining of coal, iron and limestone, all of which are  found in the Karaganda basin.

Don Cowan, vice president of international  projects for EnSafe, says: “There are three aspects to  the project – health and safety, mine productivity  and gas production.” Doug White, CEO at Petron  adds: “The first objective is to make the operations  safer, but Mittal also wants to earn greenhouse  emission credits.”

According to the Stern Review of the Economics  of Climate Change, methane has a global warming  impact 23 times more damaging than carbon  dioxide. By extracting methane from the mines,  reducing ‘fugitive emissions’ seeping out of the  mines and safely channelling the gas, using  methane mining techniques developed by the oil  and gas industry, the project will save lives, cut  costs – and provide a new fuel source sufficient  to power a 200mw power station. As a result of  Kazakhstan finally ratifying the Kyoto Treaty this  year, the company will probably also qualify for  greenhouse emission credits, which will help pay for the projects

David Vint, a veteran Scottish coal mine engineer,  is running the Karaganda methane project. His goal  is to achieve safer working conditions and make  fullest use of the gas recovered.

Explosions occur, he explains, when the methane  escaping naturally from the coal mixes with oxygen  and is ignited by a spark. Mining the methane  involves driving channels through the coal seams,  using multi-directional drilling methods and  equipment, such as blow out preventers developed  by the oil and gas industry. Channels drilled through h the coal create manageable gaps through which the  methane naturally flows into collector pipes, which  can safely transport it to the surface. “Concentrated  methane in a pipe is safe methane. You can burn  it, in a power station for example, but it lacks the  oxygen to explode,” Vint explains.

Higher productivity from modern mining  machines means that more gas can be liberated from -the cut coal. Doubling capacity of the steel plant  will require more and bigger mines. But if current  trials are successful, making the mines safer will  also deliver greater volumes of useful gas. “If the gas  potential from existing, new and exhausted mines  is added together it could provide enough gas to  generate up to 200mw of power,” Vint says.

That will be relatively clean power – energy which  Mittal will no longer have to buy from the over-loaded national grid, which is produced mainly by polluting h coal-fired power plants. The main question still open  at this stage is whether methane mining techniques,  which have been proven successful in shallower US  and Australian mines, will work, or can be adapted  to work, in Kazakhstan’s relatively deep mines. If the  current trials are successful, not only will mining  become safer, but Kazakhstan, with its vast coal  deposits, will also acquire considerable additional  energy reserves.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages:72-73.

BEIJING, March 30 – IA News-Kazakhstan. Slovakia is to invest $ 30 million in a joint Kazakh-Slovak producer of diesel rail trains declared the press service of the “Kazakhstan Temir Joly” (KTZ).

KTZ President Askar Mamin and chairman of the Slovak company “Jos Vr?tky” Vityazoslav Moritz signed an agreement on a joint venture to produce diesel rail trains on Tuesday in Astana.

The company Jos Vr?tky expressed its willingness to invest in the joint production of 30 million dollars and provide advanced technology to produce diesel rail trains stated the press release of KTZ  on Tuesday at a signing ceremony.

Diesel rail vehicles designed to transport passengers in suburban, as well as railway workers to the place of track work. The planned productivity of the enterprise – 10 diesel rail trains in the year.

ONCE UPON A time, all six of Kazakhstan’s biggest  banks were Kazakh-owned and accounted for 86 per cent of banking assets. They stayed home-owned,  unlike most banks in central Europe, because they  borrowed to fund their headlong growth by raising  cheap equity in London and/or by borrowing lots  of money, very cheaply, from foreign banks –  $45 billion, to be precise.

By the time the fairy story ended, in August  2007, two of the ‘big six’ banks, ATF Bank and  BankCenterCredit (BCC), had already been sold, at very high multiples at the top of the market,  to Italy’s UniCredit and South Korea’s Kookmin Bank respectively. Several others, including  Kazkommertsbank (KKB), had also linked up with  foreign minority partners.

They were the lucky ones. Once Kazakh banks  became victims of the US sub-prime crisis, deep- pocketed foreign shareholders suddenly became  highly desirable and are now being actively sought by -»Alliance Bank, and above all, BTA Bank.

BTA was effectively nationalised in mid-February  when the government, in the shape of the Samruk/ Kazyna holding company, shovelled nearly $5 billion  into the banking system and took a controlling  75.1 per cent stake in BTA in return for $1.7 billion of  fresh equity.

In a conference call with BTAs investors and  creditors on 28 April, Anvar Saidenov, the former  Central Bank president who now runs BTA, explained  that Samruk had acquired the controlling stake “via a mandatory additional share issue… as a result of BTA  being in breach of liquidity and capital requirement.”BTAs ousted former president, Mukhtar Ablyazov,  didn’t see it that way. He complained that the bank  had been the victim of an egregious act of corporate  raiding, before fleeing the country ahead of the  bailiffs. He is now required to respond to accusations  of money-laundering and illegally transferring  funds to front companies. From a safe distance,  Ablyazov has started legal proceedings in an attempt  to get billions of dollars in compensation for the  bank’s former owners, although he is not formally a  shareholder in the bank himself, according to Central Bank chief, Grigori Marchenko.

Ablyazov, long viewed with suspicion by the  establishment, is a boyish-looking, hyper-active  entrepreneur, and former energy minister. He helped  finance and lead the opposition Democratic Choice  movement earlier in the decade before being jailed  for allegedly misappropriating funds. After a year in  jail he was given a presidential pardon and released,  promising to give up politics and throw his energies  into business.

By the time the global financial crisis broke two  years ago, Ablyazov and chairman Roman Solodchenko had built BTA into the country’s biggest bank. In the  process they borrowed more than $15 billion – mostly  in foreign currency – and re-lent much of the money  into property and other projects in Kazakhstan and  throughout the former Soviet Union.

While commodity prices remained high, for the  first year of the crisis, BTA, along with other heavily  indebted banks, was able to repay maturing debt and  interest by recalling maturing loans and rolling over  loans at higher rates. But when commodity prices  nose-dived in the second half of 2008, in the global  meltdown that followed the collapse of Lehman  Brothers, corporate balance sheets contracted, cash  evaporated and depositors looked for a safer home. Tenge devaluation in early February added further to  the foreign debt burden of all banks, but especially  BTA as the most indebted.

When Samruk/Kazyna took possession of their  new asset, Anvar Saidenov, the former Central Bank  president, moved in to take charge and a small army  of finance police moved in to the bank to go through  the books and computer files with a fine toothcomb.

The cultural change is dramatic – from free- wheeling, growth-orientated, entrepreneurial  whiz-bang the bank is now just ticking over in  the safe hands of a former central banker and  financial bureaucrats. Little wonder, under the circumstances, that the main priorities of the new  management are to restructure the bank’s debt as  soon as possible and find a new owner to rebuild the h bank. UBS and Goldman Sachs have been called in as financial advisers.

Their task became more difficult after the  new management was forced to default on BTAs  foreign loans in April. Morgan Stanley and another  international banks called in loans totalling $550  million, triggering what would have been an  avalanche of early repayment demands, which the  state made quite clear it was not prepared to deplete  its reserves to satisfy.

The US investment bank justified the move as  a response to changes in ownership covenants  following Samruk’s defenestration of the old regime  and downgrades by the international rating agencies.  Standard and Poors moved BTA debt to “default”  status and Fitch downgraded BTAs long-term issuer  default rating to “restricted default” as the new state  owners are continuing to pay interest on outstanding debt and repaying smaller loans, below $10 million,  as they come due.

BTA is not alone in its default. In May, Alliance  Bank requested a three-month moratorium on  debt repayments after writing down $1.1 billion  of assets linked to US Treasuries. BTA, Halyk, KKB  and other banks, meanwhile, have raised new bond  issues domestically where possible to shore up their  capital base and allow them to buy up some of their distressed bonds at a discount.

With BTA formerly scheduled to pay back  $3 billion this year out of $9 billion of foreign loans  still outstanding, the new owners have taken a  tougher line with creditors, pointing out that those  granting foreign loans and credits to Kazakh and  other emerging market banks in the boom years  were all professionals who should have been aware  of the risks.

At the annual Fitch rating conference in April,  Elena Bakhmutova, chairperson of the Kazakh Agency for Regulation and Supervision of Financial Markets  and Financial Organisations (KFSE), said: “We will use all feasible suggestions – redemption of discounts,  substitution of new debt securities and so on.” But,  she underlined “under no circumstances will state  guarantees be used.” It is on this basis that BTAs  new owners are negotiating debt-restructuring terms h with creditors to clear the ground for substantive  negotiations with potential new owners.

The leading suitor is Russia’s giant Sberbank, the  former Soviet savings bank. Ownership of BTA would  give Moscow a powerful new role in the Kazakh  economy. Russia, however, is also suffering from the  global economic crisis and Sberbank is having its own  problems with mounting bad debts. However, the  Russian state is preparing a substantial recapitalisation of Sberbank, both to strengthen it domestically and  provide it with the financial firepower to take over BTA if terms can be agreed. Whether any other suitors  emerge depends largely on the evolution of the  banking crisis elsewhere in the world.

Looking ahead, the chance to buy what was  Kazakhstan’s biggest bank, with subsidiaries  throughout Central Asia, is probably an unrepeatable opportunity. But deep pockets and strong nerves are  called for, and both are currently in short supply.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 82-83.

WITH THE BENEFIT of hindsight, the timing of the  first major foray by foreign banks into the domestic  banking market could hardly have been worse. But  from a long-term perspective, the decision of Italy’s  UniCredit and South Korea’s Kookmin Bank to  pay $2.3 billion and $1 billion respectively for ATF  and BankCentreCredit (BCC) just before the global  financial crisis erupted in the summer of 2007 could h well turn out to be prescient once Kazakhstan and Central Asia return to the path of rapid growth.

For UniCredit, the move into Central Asia’s richest h and most dynamic economy was an extension of its  previous foray into Central Europe as the acquisitive  Italian bank looked to diversify beyond slow-growing western European markets. For Kookmin, expansion  into resource-rich Kazakhstan reflected both  expectations of faster growth than Korea itself and  a chance to position itself for an expected influx of  South Korean investment in energy and commodity projects – including nuclear. In May 2009, Kookmin’s  chairman was a prominent member of a South Korean business delegation which earmarked projects worth $5 billion for investment by Korean companies  and banks.

“We strongly believe that a strategic partnership  will bring us competitive advantages and make it  easier to deal with any financial wobbles,” says Timur  Ishmuratov, managing director of BCC’s international  department. “Kookmin, like our bank, has a focus  on the retail and SME [small- and medium-sized  enterprises] market. It offers some very good products,  based on sophisticated IT infrastructure, which could  potentially be very good for our clients, too.”

Kazakh banks grew by focusing on corporate  finance and the construction sector. In both cases,  personal contacts were often key to business. While  local banks were active in the corporate market, their  understanding and penetration of the retail market,  especially mortgage lending, was low. Just as they  were developing expertise in these areas, retail and  mortgage lending became the first casualties of the  sub-prime crisis.

Some foreign banks spotted the opportunity to  expand, while local banks pulled back to focus on  repaying debts. HSBC, for example, one of several  foreign banks working in Kazakhastan for more  than a decade, recently decided to open several  new branches and make an additional $100 million  available for mortgage finances

Before the entry of UniCredit and Kookmin into  mainstream banking, most foreign banks, including Citibank and ABN-Ambro, concentrated on servicing the Kazakh subsidiaries of international companies  and expats and facilitating foreign borrowing for  Kazakh banks and companies. ABN was acquired  by Royal Bank of Scotland and its former Kazakh  subsidiary is now looking for a new owner following the virtual nationalisation of RBS itself in the UK  banking meltdown.

Before the global crisis brought banking back  to Earth, dozens of foreign banks were seeking to  get a foothold in the market by buying a Kazakh  bank. But prices were sky high and several potential  foreign buyers, such as Austria’s Raiffeisen, which  first sought to buy BTA several years ago, were unable to find suitable acquisition targets at an acceptable  price. “We observed the market but the prices did  not reflect the environment and potential risks, so  we decided to start from scratch,” a bank spokesman  said. The alternative plan to start a greenfleld bank is  currently on hold.

Now may be a good time for potential buyers  to look again, however. While the government is  focused on finding a new foreign owner for BTA, new  regulations setting a tenge 5 billion ($3.5 million)  minimum capital requirement for Kazakh banks  come into force in July, putting pressure on smaller  banks to consolidate or put themselves up for sale.  International Bank of Alma ty, with a capital of just  tenge 1.5 billion, was recently taken over, for example,  and is now being re-branded as Home Credit.

Ironically, just as Kazakh banks have become open  to takeover and more attractively priced, most foreign banks have drastically scaled back their expansion  plans. “Without the international crisis I would say  that we could expect more investment in Kazakhstan, h because prices are now optimal,” says Alexander  Picker, the Austrian president of ATF Bank. “But,  while any bank not looking to expand in Central and  Eastern Europe used to get a bad mark from analysts,  now it’s the opposite. I don’t know how many banks  will be brave enough to see the potential and act. It  depends very much on the bravery and anti-cyclical  ideas of boardrooms – many of which are in survival  mode at present.”

Several investment banks, including JP Morgan,  which has an important advisory role with Kazakhmys h and other big corporates, and Deutsche Bank, have  recently set up representative offices in Almaty,  to show the flag and be ready for more ambitious  moves, when the time is right. There is currently high  demand for advisory services – with UBS and Goldman h Sachs, for example, recently taken on as advisers to the government on settling the future of BTA.

Russian banks are also stepping up their presence. Sberbank, currently eyeing up BTA, leads the pack  while VTB, Russia’s former foreign trade bank, has  pared down its expansion plans for the CIS generally to concentrate on what it sees as the most attractive  markets – Kazakhstan and Azerbaijani

On the investment banking side, Russia’s Troika  followed Renaissance Capital into Kazakhstan  last year through the acquisition of local asset  management house Almex, and there is also  interest from further afield. Israel’s Bank Hapoalim,  for example, completed its acquisition of Demir Kazakhstan Bank (since re-branded Bank Pozitiv) in  November 2007, and Bank of Tokyo Mitsubishi is due -to set up a representative office in early 2009, with  the initial aim of serving Japanese companies.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 84-86.

SAMRUK, THE POWERFUL state holding company  which controls the ‘commanding heights’ of the  Kazakh economy, from pipelines and power lines  to railways, telecoms and oil companies, also  sponsors KazNex, an export promotion agency set  up specifically at President Nazarbayev’s request to  encourage small and medium-sized enterprises (SMEs) to raise quality and compete in export markets.

The government is keen to encourage small  companies to help diversify the economy and reduce  reliance on the extractive industries. SMEs currently  account for well under 20 per cent of GDP and  limited knowledge and penetration of export markets is one of their biggest weaknesses.

“Our vision is to become a driving force for  building support for exports. We already export  raw materials, and we want to develop exports  with higher value added,” says the KazNex agency’s  dynamic deputy chairwoman, Saule Akhmetova.  “We started with a study of best practice in other  countries, especially South Korea, Singapore,  Australia and Malaysia where growth was export led,” Akhmetova says.

“The problem in Kazakhstan is very low  awareness of the importance of exports on the  part of government, society and business. As more  international companies, including multinational  corporations such as Procter & Gamble, enter the  market, local businesses have to raise their game and focus on quality and marketing to compete effectively on both domestic and export markets,” she adds.

One company that addressed this issue was  Bekker & Co, a Kazakh-German joint venture in the  food processing sector. Bekker’s general director,  Ivan Kravchenko, says that from the moment  of independence in 1991 he realised that local businesses would not be able to compete with foreign imports. He went to the head of the German food  company, Bekker GmbH, who agreed to create a joints venture, which almost two decades later employs 770 people with an annual turnover of ?35 million.  Every 24 hours, Bekker produces nine tonnes  of sausages and 1.5 tonnes of bread and bakery  products, as well as traditional foods such as Russian pelmeni and Kazakh manti (dumplings) – always with h the emphasis on high-quality ingredients and  hand preparation.

“We employ lots of people for our relatively small  output. Most is prepared by hand, which we think is a major contributor to quality – we want our products  to be the same quality as home-cooked foods,”  says Kravchenko.

“Quality begins with raw materials in the food  industry. If you buy poor meat, no amount of effort  will improve it. Therefore we work with the best  suppliers. We buy our meat in Kazakhstan but other  products are imported,” he adds.

Almaty and the surrounding area is the main  market, but Kravchenko says the company wants to  export to the EU. “We have a large territory and a  relatively small population so we can feed ourselves  and have enough left over to sell abroad without  heavy use of chemical fertilisers. If we produce  ecologically clean products, we can sell them anywhere,” he says.

Ms Akhmetova of KazNex believes there is very  good potential for companies in the food processing,  textiles, chemicals, pharmaceuticals and paper  products sectors to boost exports but admits that  the crisis has slowed things down. “Companies  have limited access to funds, and some have even  suspended their activities temporarily,” she says.

One successful exporter is Textiline, which  produces a line of sportswear for Swiss clothing  manufacturer Assos at its state-of-the-art factory  in Talgar near Almaty. The company is one of a  new breed of Kazakh businesses where focus on  quality makes it possible to compete effectively with -international firms both at home and abroad.

Producing workwear for blue chip customers  such as TengizChevroil, KazMunaiGaz and KazZinc  accounts for around 65 per cent of its business, but Textiline also provides children’s clothes for the  domestic market and niche projects such as  making costumes and fabrics for the epic Kazakh  film, Nomad. According to sales and marketing director Inna  Apenko, investing in technology and staff training  was the only way Textiline could compete with low  cost exports from China – a perennial problem for  Kazakh businesses. High labour and operating costs  mean it costs five times more to produce a simple  t-shirt in Kazakhstan than in China or Turkey. “A  cheap labour force is a big competitive advantage for clothes manufacturers, but unfortunately, we don’t  have this. Unlike Vietnam or Indonesia, we also have  a shortage of specialists in this field so we had to set  up special courses,” Apenko explains.

“Our advantage over China is in technology  and intellectual property,” she adds. “When Assos  selected Textiline, the company said it needed to  be confident of quality production, and we could  guarantee this. We employ a team of specialists in  design, engineering and technology, whereas in  Chinese companies this work is typically carried out  in Europe.” Today, Textiline is the largest clothes  manufacturer in Kazakhstan, with six factories,  employing 1,200 people.

In recognition of the difficulties of raising  funds for investment, or even working capital,  the government has set up a new fund, called  Damu, which works with banks to finance smaller  companies. It has 117 billion tenge to lend at a preferential 12.5 per cent interest rate and a further  3 billion tenge specifically to help small companies  take part in state tenders or produce goods for export. The EBRD has also been an active provider of finance  to Kazakh banks for on-lending to SME customers,  and ATF Bank President Alexander Picker says that  the UniCredit-owned bank is using its international  experience to develop small business lending in  Kazakhstan, partly thanks to EBRD fundings

Bekker and Textiline have both had to adapt to  the economic slowdown, like most other Kazakh  companies. “Before the crisis, demand exceeded  supply, so we don’t plan to reduce output or cut  staff. But we have paid more attention to marketing  recently,” says Kravchenko.  Ms Apenko agrees on the importance of  enthusiatically promoting the company’s products.  “We plan to work actively towards exporting our  products,” she says. “But our major customers have  reduced orders by around 30 per cent, so we intend  to use this spare capacity to launch new consumer products for the domestic market.”

A study by KazNex found that funding was  actually not the main issue facing SMEs. “Our  research showed that the top problem was not  a lack of money but the need for better access  to information, better marketing skills and an understanding of international trade procedures. The most important thing is to change people’s mindset,” Akhmetova concludes.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 88-90.

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

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.

WHEN THE TWO most dynamic sectors of a relatively  small open economy nose-dive at the same time  the impact on overall economic activity can be very  depressing. That is what happened to the $100 billion Kazakh economy nearly two years ago when over- borrowed Kazakh banks became the first victim of  the global credit asphyxia which followed the US sub- prime mortgage crisis in August 2007.

Economic growth, which had been running at  around 8/9 per cent on an annualised basis over the  first eight months of the year, about average for the  last seven years, dropped like a stone. Cranes stopped swinging on construction sites and a ripple effect  spread right through the supply chain and into the  shops as tens of thousands of building workers were  suddenly laid off. Pressure on the rest of the economy rose as banks, suddenly cut off from foreign capital,  scrambled to recall loans to bank customers, or roll  them over at higher rates, as they struggled to repay  their own maturing foreign loans.

For the Kazakh economy as a whole, recourse to  cheap foreign borrowing by its entrepreneurial,  privately-owned banks in the boom years was a way  of monetising the expected future flow of funds from huge offshore oil and gas fields, such as Kashagan,  whose development is proving more expensive – and  taking longer – than originally expected. Cheap bank -loans for mortgages, large cars and consumer items  generally were a way for hitherto lowly-indebted  Kazakh consumers to access the higher standard of  living that seemed to be assured by the apparently unstoppable rise in the global price of Kazakhstan’s  main exports – oil, gas, minerals and grain.

But the second stage of the global economic  slowdown, which followed the collapse of Lehman  Brothers in September 2008, sparked off a precipitous fall in the traded prices of natural resources of  all kinds. What had begun 15 months earlier  as a construction crisis triggered off by a credit  crunch became a generalised slowdown as miners,  steelmakers and smelters mothballed marginal mines and/or cut output. Only the oil and gas producers  and the uranium miners continued ramping up  production, but even they were hit by lower prices  as oil dropped to just over $30 a barrel and copper to  below $3,000 a ton before starting to recover in the  second quarter of 2009.

The government reacted angrily to the first phase  of the crisis. Bankers said President Nazarbayev  castigated them as “greedy traitors” and, with the  benefit of hindsight, it soon became clear that  the banks had indeed financed far more palatial  mansions and luxury apartments than the number of oligarchs and aspiring middle class able to buy them- but too few flats that working people could afford  in the fast-growing cities. The short-lived craze for  buying top of the range SUVs and Porsches on credit  also looked over the top – especially as the Almaty  Metro project dropped even further behind schedule  and road construction generally failed to keep up  with the growth in traffic and air pollutions

But the real crunch in what is now an almost two  year long crisis came in February 2009, always a  bleak month in the heart of the Steppe winter, when  the government issued a blizzard of instructions –  and put the resources of the National Fund to work  shoring up bank balance sheets. The Fund, flush  with $24 billion set aside from oil revenues in the  fat years for just such a rainy day, transferred $10  billion to Samruk/Kazyna, the state holding company  and de facto sovereign wealth fund. Further billions  were shovelled into financing nearly completed  construction projects, converting luxury flats  into more affordable properties for civil servants,  especially in Astana, and replacing banks as financiers to some credit-starved construction companies.

But the clearest sign of a new determination to  tackle an economy heading for zero growth – or  worse – came with the appointment of Grigori  Marchenko as chairman of the National Bank. One  of his early acts, in February, was to decree an 18  per cent devaluation of the Tenge, with a 3 per cent  fluctuation margin either side of the new Tenge  parity of KZT150 to the US dollar. It was KZT120  before devaluation. This helped the export orientated minerals sector – but aggravated the foreign debt  burden of the banking system.

The most controversial move was virtual  nationalisation of the country’s biggest and hitherto  fastest-growing bank, BTA, as Samruk defenestrated  the bank’s former president, Mukhtar Ablyazov, and  injected $1.7 billion in return for a controlling 76 per cent stake. At the same time Samruk poured another h $3 billion into the two remaining ‘big three’ banks – Kazkommertzbank and Halyk Bank, in return for  a quarter of their equity, and warned creditors of  Alliance Bank that re-financing the smaller of the top six banks would only happen if they first agreed debt-n restructuring terms.

Samruk’s role in the bank re-capitalisation  underlined the accumulation of wealth and power  into its hands over the last three years or so. Set up  ostensibly to improve the standard of management  in state owned companies, critics see its hydra-like  control over the ‘commanding height’ of the Kazakh  economy – railways, telecoms, power distribution,  airlines and the state oil and gas corporation KMG – as a reincarnation of Soviet-style control over the  economy, a sort of Gosplan designed by McKinsey.

Inside the arched Astana headquarters of Samruk, h and the ‘Golden Horn’ building housing formerly  autonomous Kazyna, now merely the financial arm of the merged Samruk/Kazyna, planners and strategists  have swapped the obtuse language of Soviet  bureaucracy, which older staff grew up with, for the  equally impenetrable jargon of US-style management consultancy speak. Samruk, say some of its fiercest  internal critics, has become like the UK’s BBC – a system of outdoor relief for the children of the elite,  setter at analysing problems than deciding and  executing decisions.

One of the big questions over the future of the  economy is whether the rise of Samruk/Kazyna,  headed by Kairat Kelimbetov, points to ever greater  state control over the economy, and a more crypto- soviet future, or whether the accumulation of  economic and financial power in its hands –  Kazatomprom was the latest big corporation to come  under its control – marks a temporary expedient  until a new generation of political leaders emerges  md controls can be relaxed.

Whatever the outcome, which is of great interest to foreign investors, the macro-economic developments  of the last two or three years already point to the  possibility that a much stronger and better balanced  economy will emerge from this crisis.

The big developments now taking place include  major modernisation of the road, rail, port and  Dther transport infrastructure to create a shorter,  modern transit route between China and Europe and  an to Iran. At the same time Kazakhstan’s export  pipeline arrangements are being transformed with  new 3,000km-long oil and gas export pipelines from  the Caspian Sea to Western China, expansion of the  ZPC and other pipelines through Russia – and a new  southern energy transit route across the Caspian Sea  to Azerbaijan and Georgia. China is rapidly raising its  profile and weight in the economy alongside Russia,  Europe and the US. Next year Kazakhstan will become the world’s biggest producer of uranium. All these  themes, and more, are treated, in greater depth,  inside this edition.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 23-24.