Archive for October, 2007
Kurmangazy: A Risky Proposition
Kazakhstan has been praised and courted for its unexplored energy resources ever since its independence in December 1991. The hope was that its unexplored fields in and around the Northern Caspian and its welcoming attitude towards foreign investors keen to develop those resources will make it a viable alternative to the Middle East and the OPEC. This attitude has been slowly changing as it became obvious that the friendly relations with Kazakh authorities of the 1990’s did not carry over into the 21st century and doubts started creeping in that Kazakhstan’s oil and gas reserves may not be as enormous as previously thought.
In the early 1990’s, the explorable reserves in the Caspian Sea were estimated at as high as 200 billion barrels (currently assess at 17-49 billion barells). Most of them were thought to be located in Kazakhstan and Azerbaijan, but there was hope that the Caspian waters of Russia, Turkmenistan and Iran would prove prospective as well. At this point, Kazakhstan is the only country with significant undeveloped reserves and the potential to grow it production in the coming years. But its oil is mainly concentrated in two (very) large fields – Kashagan and Tengiz. There is other oil and gas production, most notably at the Karachaganak field in western Kazakhstan, but nothing quite at the level of the two above mentioned fields. Tengiz could be considered a Kazakh success story, had it not be for the constant dispute between Chevron, the operator of the project, and the Kazakh authorities over the environmental consequences of the sulfur that is a by-product of Tengiz’s oil. The Kashagan project is the subject of a major standoff between the Kazakh government and Eni, the operator, over delays and cost overruns of the project. The third field, Kurmangazy, that was said to rival Kashagan in size when it was discovered, could have helped push Kazakhstan into the big league. Recent development, however, has raised more questions than answers, and its potential is less than clear. However, its fate could almost serve as a synopsis of the entire Kazakhstan oil boom of the last 15 years.
Kurmangazy, a large oil field not far from the famous Kashagan potentially holds 7-10 billion barrels of oil. If the potential is realized, it will be the third largest field after Tengiz and Kashagan. The important word in the previous statements is “if”. While Kazakh government officials still expect the field to begin commercial production in 2010, there is a lot of skepticism within the oil industry, even among people directly involved in the project.
Kazakhstan signed a PSC with a joint venture of the Kazakh national oil company, KazMunaiGas, and what is now the Russian national oil company, Rosneft, on June 6, 2005. KazMunaiGas holds 50 percent of the project and Rosneft holds 25 percent with the option on the remaining 25 percent once commercial extraction commences. The signing followed a long conflict about the division of the northern (and potentially oil-rich) part of the Caspian Sea between Russia and Kazakhstan. Upon resolution of this dispute, Kazakhstan received Kurmangazy and Russia obtained two lesser fields, Khvalynskoe and Tsentralnoe. Additionally, both countries agreed to develop the fields in the formerly disputed border areas of the Caspian together.
The PSC was signed with great fanfare and much interest of Western companies that wanted to get a piece of the pie and put their hands on Rosneft’s option. This enthusiasm cooled off significantly, however, when the joint venture announced that it failed to strike oil at their first exploration well. This in itself may not be significant, and in all likelihood, the initial failed well at Kurmangazy will soon be forgotten when a second well proves successful. Yet, the dry hole in and of itself was important in punching a hole in the belief - both among the international oil companies and the Kazakh government - of Kazakhstan’s seemingly boundless oil development potential.
The Kurmangazy field is still an important part of Kazakhstan’s strategy to enter the top ten oil exporters and be able to export 3.5 million bpd by 2015. This hurry, however, according to some familiar with this project, may have been partially responsible for the failure of the first exploration well. According to a source linked to Rosneft, the Kazakh side has insisted on conducting the exploration well despite a lack of reliable data. This rush led to the decision – on which insiders blame the lack of success with the first exploration well – to drill the well based on results of a 2D seismic study conducted back in the days of the Soviet Union.
According to official information from Rosneft, the project is currently in the process collection of new information. As the speaker of the company told the Kazakh weekly “Business and Power”, a 3D seismic study of the field has been completed and currently the companies are interpreting the results and analyzing data. According to a Rosneft source, it is definitely not a given that a new exploration well will be drilled soon, though. The amount of information about the field may not be sufficient, and until the data supports the drilling of the well, it will simply not be drilled.
Geologically, the Kurmangazy field seems to resemble the Buzachi peninsula in western Kazakhstan. In contrary to neighboring Kashagan, however, Kurmangazy is an over-salt field which would, according to experts, significantly simplify the development of the field. It would not be necessary to drill through a layer of thick and variable salts as is the case with Kashagan which makes it such a difficult field to develop. As far as projected reserves of hydrocarbons go, Kashagan and Kurmangazy could be very similar but there is just much less clarity about Kurmangazy. It is not even known what can be found there: oil, gas, oil and associated gas?
The potential of Kurmangazy is tremendous – there is no doubt about that. However, by now it is clear that the risks are just as high. While there was considerable interest among Western oil majors to participate in the project, among others by Norwegian Statoil and French Total, this has decreased substantially following the failure to drill for oil during the first exploratory drilling phase. And whilst Kazakhstan has been regarded as the new source of oil for a number of years, the realities are increasing apparent at this point of time: difficult geological conditions, low quality of crude with a high content of sulfur, unfavorable geographical location, increasingly worsening investment climate. These factors come into play much more often than fifteen or ten years ago when international investors consider investment in Kazakhstan. The silence around Kurmangazy may be one sign that international investors are becoming less willing to invest in large-scale and potentially lucrative, but very risky projects.
News Roundup - October 31, 2007
Reuters: KazMunaiGas Launches $3.1 Billion Loan
KazMunaiGas, Kazakhstan’s national oil and gas company, has launched syndication of a $3.1 billion loan to a fund a refinery purchase, banking sources told Reuters Loan Pricing Corp (RLPC)…
Reuters: Kazchrome to Launch Chrome Pellet Plant in 2009
Kazchrome, the world’s third-largest ferro-chrome producer, is spending $111 million to build a new plant to produce 700,000 tonnes a year of chrome ore pellets, its parent company said on Tuesday…
Forbes: Kazakhstan’s DBK Leasing Rated ‘Ba3/Not-Prime’ with Stable Outlook
Moody’s Investors Service said it has assigned a ‘Ba3/Not-Prime’ long- and short-term foreign currency and local currency issuer ratings to DBK Leasing (DBKL) with a stable outlook…
Forbes: ShalkiyaZinc Swings to Pretax Profit in H1; Cautions on FY Sales
ShalkiyaZinc NV swung to a first half pretax profit driven by revenues that nearly doubled but warned that full year sales may be 20-30 pct short of projections due to to commissioning problems experienced in upgrading facilities at the Kentau plant…
CNW Group: Alhambra Resources Ltd.: Uzboy Project Operational Updates (Press Release)
Alhambra Resources Ltd. is pleased to provide a number of updates on its 100% owned Uzboy Project located in north central Kazakhstan…
Associated Press of Pakistan: Kasuri Stresses Need to Improve Relations with Kazakhstan
Foreign Minister Khurshid M. Kasuri Tuesday emphasized the importance of relationship with Central Asia especially with Kazakhstan and added that these ties drew strength from the abiding kinship of faith, culture and historical experience…
Itar-Tass: Russia Values Partnership with Kazakhstan - Lavrov
Russia highly values the partner relations with Kazakhstan, Russian Foreign Minister Sergei Lavrov said. “At present, it can be said without an exaggeration that they are a model”…
oilvoice: Victoria Oil & Gas Drilling Update For Kemerkol Oil Project, Kazakhstan (Press Release)
Victoria Oil & Gas Plc, the oil and gas company focused on the Former Soviet Union, has completed drilling of exploration Well 70 and has recommenced production from Well 20 at its wholly-owned Kemerkol oil project in the Atyrau Oblast of Kazakhstan…
Interfax: Bank Caspian to Spend up to $1.5 Billion on Financial Company
Shareholders of Kazakhstan’s Caspian Bank are looking at spending up to $1.5 billion to acquire a financial company…
News Roundup - October 30, 2007
Eurasia Daily Monitor: Kazakh Court Decision Against Chevron Carries Political Implications
The unprecedented tough line taken by the Kazakh government in its row with the Italian Agip consortium may set an ominous precedent for prolonged confrontations with other Western companies. In a second challenge to Western investment, the district court in Atyrau region recently upheld the charges against Tengiz-Chevron submitted by the regional office of Kazakhstan’s Environmental Protection Agency…
Reuters: S&P Release on Kazakhstan GRE Ratings
Standard & Poor’s Ratings Services today announced that it had affirmed the ratings on several Kazakhstan-based government-related entities (GREs). All ratings were also removed from CreditWatch with negative implications, where they had been placed on Oct. 3, 2007…
CNN Money: Various Kazakh Government-Related Entities Affirmed and Taken Off Watch - S&P
Standard & Poor’s Ratings Services said it affirmed the ratings on several Kazakhstan-based government-related entities following a review of their links with Kazakhstan…
Forbes: Bank Austria Creditanstalt to Become Sole Shareholder in Kazakhstan’s ATF Bank
Bank Austria Creditanstalt (BA-CA), a unit of the UniCredit SpA banking conglomerate, will become the sole owner of Kazakhstan’s ATF Bank before the end of 2007, Interfax reported citing ATF Bank chief executive Timur Isatayev…
RIA Novosti: Russia Says Energy Ties with Kazakhstan not Politically Driven
Bilateral energy cooperation between Russia and Kazakhstan is not politically driven, but guided by economic factors, Russia’s foreign minister said on Monday…
The Associated Press: Russia Test Launches Older Missile
Russia test-launched an older intercontinental ballistic missile from the Baikonur station in Kazakhstan on Monday, the strategic rocket forces said…
EurasiaNet Insight: EU Energy Commissioner Expresses Concern over Recent Kazakh Law
European Union Energy Commissioner Andris Piebalgs on October 28 expressed concern over a recent Kazakh law on energy and resources, saying that the European Commission is “studying” the possible impact of the law on the liberalization of the country’s energy sector, according to Interfax-Kazakhstan…
The International Monetary Fund (IMF) today released the October 2007 Regional Economic Outlook: Middle East and Central Asia (REO)…
Aidarkhan Kusainov: Prognoses for Kazakhstan’s Banking and Real Estate Sectors
From ThinkTank.kz
Kazakhstan’s external debt is very high — about 95 percent of the country’s GDP. Was this the cause of the financial crisis in Kazakhstan or is the global liquidity crisis to blame?
Kazakhstan’s external debt is certainly high, and it does to some extent reflect the instability of the financial system in Kazakhstan — but only to a certain extent.
The main problem is the pace of the growth [of Kazakhstan’s economy] and the efficiency of the utilization [of this growth] — or in the quality of the loan portfolio. The increasing growth of bank debt has been linked mainly to rapid growth in retail lending — mortgage and consumer lending — as well as in residential construction lending (which has been virtually equivalent to mortgage lending, especially recently). At the same time, the lending practices have become increasingly risky — low standards for issuance of mortgages, absence of developed credit bureaus and credit histories, etc. This way, instability has been embedded into the system and it only grew together with the expansion of credit.
Therefore, the problems in Kazakhstan’s financial sector are home-brewed. The mortgage crisis in the United States was not the cause for the strained state of our financial system; it simply acted as an accelerator and became a kind of a stimulus which revealed the problem… And at the same time, it presented an excellent opportunity to blame existing problems on outside forces.
Mortgage - a pyramid scheme for financial speculators…
A mortgage is simply a tool for long-term borrowing — and a quite effective tool in that. But the tool calls for correct, reasonable and cautious use. It is a good tool for those who want to buy a property, have enough money to meet the payments, and are reasonably sure of their long-term source of income.
But when our banks issue a mortgage to a young couple without any confirmation of income to purchase a third, fourth or fifth apartment, it is pure speculation where the mortgage is being used as leverage — this is always a risky proposition.
In the case of real estate, mortgage lending itself was not the critical factor — but its misuse and misregulation were. I am opposed to shifting the blame the mortgage lending programs and make this instrument a scapegoat for the crisis.
You mentioned mortgage lending as one of the causes of the crisis. Could you talk a bit more about the role and impact of mortgage lending and real estate in general on the financial sector? You yourself wrote that real estate is an important factor in the financial well-being for the people in Kazakhstan.
First, I would like to deviate slightly and talk about the the nature of such rapid increase in real estate prices.
Within all markets, there are always assets that are undervalued for some reason — they may not be “fashionable”, may be in distress, etc. And when it becomes clear that the asset is underestimated, some investors begin to actively buy it and its price begins to grow much faster than of all other assets. Then everyone notices the rapid growth, people try to jump on the bandwagon, and the price grows even faster until it reaches its “intrinsic value”. However, the inertia causes the movement to continue irrationally, pointlessly, until it reaches a top [well beyond this intrinsic value] and then falls down.
This is a normal cycle, this is how the stock market works, and indeed all markets for freely traded goods. This is how it was and this is how it always will be. The question is only about what asset we are talking. If it’s equities and there are many professional players who participate in the market, they know and understand these mechanisms. If it is residential real estate, however, it involves large segments of population, from students to retirees, who do not fully understand these mechanisms.
This is what has happened to Almaty real estate, in my opinion. By my estimates, property was undervalued by 50 percent in 2000-2002. That is, according to different estimates of income, macroeconomic parameters and comparative international indices, the cost of one square meter was twice as low as people could feasibly spend when buying property.
This undervaluation was the result of completely understandable factors. The collapse of the Soviet Union, the financial crisis in Southeast Asia, Russia’s default in 1998, the correction of tenge against the dollar in 1999, low oil prices and so on resulted in that few people thought about buying new or renovating old properties. An apartment was a purchase for 10-15 years - that was the way of thinking and something for which people had to mentally prepare.
When somewhere around 2002-2003 the incomes started to rise, people began to buy apartments, move around and be more mobile — at the same time, the prices of real estate began to climb as well. And they started to climb quickly because people inherently understood that they could spread themselves out and the dream of purchasing an apartment became something tangible.
And we entered into an exciting time when the prices began to rise by 60-100% a year. And buying and selling real estate became a real business — buy today, tomorrow the price will go up.
Here we reached the point when real estate began to significantly influence financial activity — due to a strong multiplier effect. And that happened sometime in 2004.
And what effect did this multiplier effect have, other than well-known positive effects like employment growth, improvement of housing conditions, wider availability of residential property?
First — the spread of mortgage lending. As I said before, in itself it is an excellent tool, but it can be a dangerous tool if used as financial leverage, as an instrument for speculative transactions. This product flourished because suddenly it became possible and advantageous to buy real estate without any capital (or for just 15 percent of the initial deposit) and sell the next day — the gain would be more than enough to cover any interest payments. Unlike in Russia, here [in Kazakhstan] you can borrow to buy even an unfinished apartment.
This way, you could sell one apartment for $100,000, then take a mortgage loan to buy a new apartment and a couple others in an early stage of construction (in order to sell them and repay the whole loan within a year), and the balance of the money can be used as down- payment to purchase consumer goods like a refrigerator, a TV, a car. And there are no credit bureaus, no standardized system that would monitor the levels of debt of individual borrowers.
Second — the rapid explosion in consumer credit. One case I already outlined above. The rest is simply borrowing against residential property and spending money. Have fun!
Third — new construction. With those real estate prices and new “purchasing power” backed by the banks, everyone was more than happy to lend to new construction projects. And massive construction began. And the real estate companies and speculators began to purchase land for unreasonable prices, fueling the demand for land and old homes.
Fourth — massive lending to small- and medium-sized businesses and lowering of risk management standards. Roughly speaking, if you just put in your property as collateral [to raise money to start a new business], your actual field experience, skills, management prowess and business plan are no longer so important. The consequence of this has been the declining quality of the loan portfolio.
All these factors led to a sharp rise in the need for various types of loans. It is unambiguous that incomes and the economy in general rose, but I want to stress this again: the fast or rather explosive growth in the willingness to borrow was triggered by rising real estate market, to which we reacted too late and too mildly.
Well, the demand for credit has grown, but how is it possible that the external debt became so high?
Here we come to another important aspect.
From 2000 to 2005, Kazakhstan’s economy has been in an extremely advantageous position in terms of growth. Virtually all of this time, the prices for almost all major export commodities rose significantly: oil, metals; at the same time the production grew in volume as well. And when the volume and price simultaneously increase by 10-20 percent a year, then an export growth of 20-40 percent is guaranteed. Thus, the economic situation in Kazakhstan — the growth of its gold reserves and the National Fund, increased income of the population, the improvement of Kazakhstan’s sovereign rating — makes it a very attractive market for investment, and naturally, the banks have been very successful in attracting many foreign investors. Additionally, the service and other associated sectors have been developing as well, i.e. the economy and the income grew — to lend to such an economy was clearly favorable and desirable.
At the same time, our banks remain the sole source of capital for businesses and individuals in Kazakhstan. Let me explain, the often talked about “business-to-business” loans — which are also part of external debt — are just credits of parent companies to their subsidiaries, and are mainly concentrated in the mining and oil sectors. Few Kazakh companies have been able to attract money from abroad independently, and those few that could are already companies of international standing.
Thus, the banks got an opportunity to borrow and borrow significantly, and they were helped greatly by the economic performance of the country as a whole.
This is how it came to [the high level of] external debt.
Returning to the first question, do you believe that the crisis is of our own making?
Yes, I think so and, in fact, I would suggest that we are having two crises.
First — the financial liquidity crisis, and second — it’s what I would call an overall currency crisis. And I think that our banks are the source of both.
The first one is generally well understood and obvious to all. The bubble in the real estate market burst — huge amounts of money stayed trapped in houses which cannot be sold - at least for the prices at which they are listed, unfinished houses, barely laid foundations, and purchased land. The consumer lending sector has come to a virtual halt - employees are being dismissed, sent on unpaid leave, etc.; this development could lead to default on mortgage payments for apartments bought for investment [or rather speculation]. This is certainly no secret, this matter has been discussed at the government and parliament level - the state is currently buying up commercial housing for government needs. In fact, public money of the money of national companies is being thrown together with private money.
The second one is the currency crisis. Currently, the real exchange rate of the tenge to the dollar stands at around 160, and for about a year now, it has found itself in the region of 140-160 (data can be easily found on the website of National Bank of RK) — this means that the dollar should cost around 190-200 tenge. Last time when the disbalance between the real and actual exchange rate was so high was just before the sharp devaluation of the tenge in February 1999 when it appreciated from 75 to 140 tenge to the dollar.
The exchange rate has been supported (and the strengthening of tenge was really difficult to contain), because prior to 2005, our exports grew rapidly both in absolute terms and in terms of generated revenues; in 2006, the growth in volume (at least with regard to oil) has slowed significantly, but here the record prices helped. Moreover, major share offerings took place (large to the extent that the magazine “Economist” listed Russia and Kazakhstan as the potential risk factors of world economy), major bank borrowing took place as well.
So, this is what we have for foreign exchange payables in 2007:
o A significant increase in dividend payments and other compensation due to foreign investors thanks to record prices of hydrocarbons and metals last year, an increased number of shares in a foreign ownership (from new share offerings in 2006), and the doubling of external debt.
o A significant increase in imports (to be around 60 percent judging by the first two quarters)
o A significantly negative balance sheet as a consequence of foreign lending and refinancing of short-term debt.
As for the receivables situation:
o Growth in exports, but not so much as the growth in imports (to be around 20 percent judging by the first two quarters).
o Large placements of shares are not anticipated
o It is unlikely that significant external financing will be attracted.
Therefore, I anticipate that, in order to preserve this course, it will be necessary to use foreign exchange reserves. As a matter of fact, they are already being used - only in August and early September, they declined, if I am not mistaken, by about 10 percent. It just happened sooner than anticipated because of the global liquidity crisis. The prospects for 2008 are also not encouraging.
Even if we successfully resolve the issue of domestic liquidity, minimize the casualties in the banking system and manage to avoid a substantial correction or crisis on the real estate market, our foreign trade statistics and balance of payments are not likely to change.
Imports will rise because of a strong tenge. The growth in exports will not significantly exceed the growth in imports (unless the price of oil pass the 100 dollar mark) since the current state of industry will not allow any increase in local production. Planned domestic industrial will not be operational before 2010, and again, in order to build the factories a lot of imported equipment, services, and specialists will be needed. Dividends will remain high (though prices are lower than last year but still comparatively high), as will the interest and refinancing payments.
So, going from one crisis we will fall into another one, unfortunately. Unless we adjust the exchange rate, which, again, complicates the credit situation… Most of the credit was issued in tenge but the financing was brought into the country in foreign currencies (and the proportion [of foreign financing] was very, very significant).
Somehow, everything looks quite hopeless.
That’s how it turned out. I think that such scenario has been considered because I saw and read the “Report on Financial Stability” which was prepared by the National Bank and the Financial Supervision Agency last year. Many figures in my analysis are from this report. Last year, the AFC [Financial Supervision Authority] has attempted to tighten the requirements for issuing loans and introduce stricter reserve requirements, and it even fulfilled the first part of the plan. The introduction of the second phase as planned would certainly have cooled the growth, and could, perhaps, lead to lower economic growth indicators. But it would help make the whole system more stable, and would bring much needed stability to further development. But you remember the fierce resistance of the bankers and the business lobby who almost accused the AFC of sabotage, and, unfortunately, the second phase has been postponed, as far as I know, until September this year, and now until October. Overall, I think that a year ago, the long-term sustainability has been sacrificed for short-term profit.
However, as a result of this crisis, I think that stable banks with long-term view that did not jump on the bandwagon of short-term gains will ultimately benefit.
What are your predictions regarding all the above? What will happen to the real estate market? What will be the price of one square meter? What can we expect next?
I considered several scenarios. Let’s talk about two of those.
The crisis in the real estate market, in case it’s not obvious to someone, has arrived and the process took place as follows:
In mid-2006, the cost of one square meter (index “Roof”) went through the top range of what could have been considered a fair price and went into a phase of irrational escalation. At that time, I predicted the following:
o About 6-9 months (from mid-2006) would be needed to understand that the prices were already too high, so by the summer of 2007 a “summer slowdown” would materialize. I would like to note that for the previous three years the prices were rising in the winter and in the summer.
o In September a small rush to the market will start - as a result of the fact that all “investors” will finally completely satisfy themselves that the prices are no longer rising, and will offer their “investment” properties up for sale, of course at inflated prices.
o During the next 2-4 months a smooth decline will set in, and it will finally become obvious to everyone that real estate does not sell. This will start a wave of selling, defaults on mortgage payments etc.
o Accordingly in the winter of 2007-2008, a liquidity crisis will set in with a series of bankruptcies, calls on loans, and a withdrawal of capital. This will lead to a correction of the exchange rate.
The second scenario looks as follows: tightening of state regulation, introduction of the new reserve requirements, tightening of issuance of mortgage and consumer loans, gradual correction of the exchange rate, drop in the real estate market, etc. This entire scenario that I suggested in the early summer of 2007 has not materialized.
I anticipate that in any scenario, the price for one square meter will be in the region of 1000-2000 dollars (at the current exchange rate - with a downward correction of the exchange rate it may be even lower).
As you can see, the principle difference lies in who begins the process. It will either be the market and we will have to live with the possible consequences; or it will be the government that will be able to choose the time and mechanism to minimize the possible negative consequences. I still think that it would be correct for the government to spearhead the process in order to give it a clear frame and manageability.
The American mortgage crisis came right into this situation. As you can see, in our analysis, this crisis jumpstarted certain processes, but it is not the principle element. With its arrival, though, an opportunity arose to either conduct some necessary corrective actions; or to use it to shift the blame for the current situation on this “external factor.”
You mentioned the possible bankruptcy of Kazakh banks — how massive will this process be?
Well, some banks are going to go bankrupt, in that I am almost sure, but which ones and how many I cannot say. I can only assume that those banks will survive that have an extensive depository base - the size of this base should be large relative to assets, good risk management and a relatively low level of external borrowing. It seems to me that in these matters it will not be the absolute size that will be essential for survival; small banks with a loyal customer base, both creditors and depositors may be able to weather the crisis well or even gain some benefits from the whole process. That means that the banks that remained banks in their activities will continue to exist. Important are reliability, risk management and customers - the size is not as important.
What can we expect next?
This fall and winter will be very difficult for many, but by the end of the year, I think, everything will more or less stabilize. At the same time, I think that this crisis or correction will prove to be quite useful for the overall economic health.
What will disappear will be the school of thought that you can do anything and you will always make money. Normal business will begin to develop, with risk assessment, normal business principles, good governance; businesses will be restructured, small business will begin to develop - something it can no longer do in current conditions because of the cost of real estate and related rents.
This way, many opportunities and prospects will open for our business on the global stage. Indeed, the competition in the world is competition of technologies and talent. And with the current attitude (of the type that no matter what you do, you are still going to get paid), who will invest in them? Why build management system, develop technology, strategies and plans if the economy is based on the idea to buy cheap property and resell it at higher price, or borrow cheap money in the West and a resell it here. Commodity exporters do not care about the exchange rate but producers do. And for the period from January 2006 the appreciation of the exchange rate was about 6 percent. If your operating margin is 20 percent, then you will lose 30 percent of profits, and this without taking into account the growth in wages because your good specialists are being poached by trading companies since the same 6 percent go to them.
Had all this happened earlier, it would be a correction - today we can discuss whether it is “a crisis or substantial correction” - in six months, it will definitely be a crisis.
News Roundup - October 29, 2007
Reuters: EU Urges Fair Treatment for Kazakhstan Investors
The European Commission said on Thursday that energy-rich Kazakhstan should treat foreign firms fairly, a day after the Asian country’s president signed a controversial law that could affect investments by energy firms…
Global Voices Online: Kazakhstan Blocks Opposition Websites
On October 18, 2007, Kazakhstan has blocked access to a number of independent websites switching off main opposition outlets including kub.kz, geo.kz, zonakz.net and inkar.info…
International Herald Tribune: Kazakhstan Shuts Opposition Websites amid Family Feud
Opposition Web sites in Kazakhstan were temporarily shut down this week, organizers said, for publishing documents relating to the public battle between the country’s authoritarian leader and his estranged former son-in-law…
Neweurasia.net: Four Billion Dollars
This sum is the most popular one in Kazakhstan lately. The Kazakh banks have to return 4 billion dollars to their international creditors by the end of this year. The Almaty mayor said that 4 billion dollars will be necessary to pay compensations to the owners of illegal real estate in the national parks near the city. The president ordered to allocate 4 billion dollars for liquidation of the consequences of economic crisis…
The continuous trouble over the delay in the Kashagan development has seen a few new developments over the last week. The 22 October deadline after which talks between the consortium and the Kazakh government about the stalemate should have originally been resolved got extended…
TREND: Kazakhstan Will Strengthen Its Influence on Kashagan Project: Expert of Argus Media
Increasing the participation share of Kazakhstan State Company GazMunayGaz in the development project of Kashagan field will provide an opportunity to increase the influence of the State and may bring forward tougher State control of the financial part of the project, said an analyst of the assessment agency Argus Media, Rauf Huseynov…
The Economist: Breadline Blues
Bread is more than a staple food in Kazakhstan. It is part of every meal. For many of the poor, it may even be the main meal. It is also a symbol of hospitality. When President Nursultan Nazarbayev tours the country, he is always greeted by young women in traditional dress offering him bread and salt…
Radio Free Europe / Radio Liberty: Kazakh President Accused Of Ordering Opposition Leader’s Murder
Rakhat Aliev, the controversial former son-in-law of Kazakh President Nursultan Nazarbaev, has accused the president of ordering the murder last year of a key leader of the country’s political opposition…
Harper’s Magazine: Mea Culpa: Haste Makes Mistake
I recently posted an item about the lobby firm APCO’s representation of the government of Kazakhstan and congressional hearings about Kazakhstan’s desire to chair the Organization for Security and Cooperation in Europe (OSCE)…
Hemscott: Max Petroleum Posts FY Loss; Abandons East Alibek Well
Max Petroleum PLC reported a pretax loss of 24.75 mln usd for the year to end-March 2007, and said its shares are expected to resume trading on Oct 29. The company, whose shares have been suspended pending the publication of its annual report for the year to end-March, had posted a pretax loss of 23.66 mln usd in the period from April 8 2005 to end-March 2006…
Kanatbek Safinov: National Security Above All
From Oil Review:
Development and strengthening of public presence in the energy sector, in Kazakhstan, should lead to the adoption of a law on nationalization defining the clear legal frames for nationalization of some kinds of property, which, on the one hand, will enable to advocate the national interests of the state more effectively and, on the other hand, will set more apparent rules for. We ask Kanatbek Safinov, a leading lawyer in the field of subsoil use, Managing Director and member of the Board of the Kazakhstan Holding Company for Samruk State Assets Management, to share his opinion on this matter.
How the Law On Subsoil and Subsoil Use, which gives the state the preferential right to buy out a share, can progress in the process of continuing development of the oil and gas industry of Kazakhstan?
The practice of strengthened presence of the state in the energy sector of the national economy is more a worldwide trend in conditions of significant consumption of energy resources rather the Kazakhstani invention. This trend is closely linked with the necessity of ensuring the economic and national security of the state.
In a well-known discussion between Kazakhstani specialists in civil law and academician S. Zimanov on the adoption of amendments to Article 71 of Law on Subsoil and Subsoil Users concerning the preferential right of the state, the latter one gave clear understanding of the role of the state in subsoil use contracts in the present-day conditions. He gave reasonable evidence to the deficiencies and narrowness of the approach aimed to limit the role of the state in subsoil use contracts to only the provisions contained therein and to considering the role of the state only in the limits of such contracts.
At that time S. Zimanov explicitly formulated an axiom: an adequate understanding of the role of the state and its authorized bodies in subsoil use contracts lies not only in the regulative framework of these contracts, but also in the body of the laws and regulations governing these contractual relations and defining the legal status of the parties to them. For the state to act as a party to subsoil use contract it becomes necessary to be guided by the body of regulations and legislative acts and primarily by the Law on National Security.
Article 71 of the Law on Subsoil and Subsoil Use should be regarded as the first step by the state associated with the policy of resumption of control over national strategic resources, safeguarding and reinforcing the resource and energy basis of the Kazakhstani economy.
The logical continuation of the regulative idea set forth in Article 71 of the Law on Subsoil and Subsoil Use are new provisions of the Law on Subsoil and Subsoil Use that are being currently discussed in the Parliament Mazhilis, which will enable the state to restore the economic balance of the parties’ interests upset by the subsoil user’s actions, affecting the national economy and posing a threat to the national security.
In the case of subsoil user’s actions causing a significant change in the economic interests of the republic and threatening the national security, the draft law provides for the right of the state to demand amendments to contractual provisions with the purpose to restore the national economic interests.
The draft law provides that determination of subsoil use areas that are of strategic importance for the state shall be referred to the scope of the government’s competence.
The law also provides for extended list of grounds under which a subsoil use contract may be terminated in a case of failure by parties to reach consensus on amending the contractual provisions within the maximum allowed time of up to one year.
Besides, it is proposed to amend the Law in force with an article entitling the competent body on the government’s initiative to unilaterally waive the fulfillment of the contract in the event of threat to the national security as a result of a subsoil user’s activities.
A not insignificant aspect is the retroactive effect regarding earlier concluded contracts, that entirely matches the provisions of the earlier and current investment legislation (in particular, the Law on Foreign Investments of 27 December 1994 and the Law on Investments of 8 January 2003).
I think that development and strengthening of public presence in the energy sector, in Kazakhstan, should lead to the adoption of a law on nationalization defining the clear legal frames for nationalization of some kinds of property, which, on the one hand, will enable to advocate the national interests of the state more effectively and, on the other hand, will set more apparent rules for investors.
Development of the national legislation towards the above mentioned direction may have an effect on the investment climate. At the same time one should understand that the state for many years has been arranging favorable conditions for the attraction of investments in Kazakhstan with the purpose of a mutually beneficial cooperation with investors.
In these years inward investments in the Republic including those in the energy sector pursued, in the long run, earning some profit by investors. The legislation stability regarding invariance of contracts and earning profits by an investor as well as free outward investments remain strong priorities of the state policy.
Along with that some investors trying to find weaknesses in earlier concluded contracts think that possessing strategically important, for the republic, resources and objects they independently and without consideration of the economical and political interests of Kazakhstan will determine their fate, including alienation of facilities, determination of the term of commercial production commencement, routes of produced raw material supply etc.
Some investors trespass the limits of their commercial interests and pursue political interests, which may contradict the national interests of the republic.
In practice, there are instances when investors by referring to the law provisions concerning stability of contractual provisions do not recognize the effect of one legislative acts, but in practice comply with other legislative acts improving their position, without amending the contractual provisions by the parties.
Therefore, I think that an investor who develops strategic deposits of the Republic of Kazakhstan, available for a period specified in the contract, should pursue the purely economic interests, i.e. the estimated rate of return for the entire contract period, and also bear corporate responsibility for efficient development of the deposits so as not to prejudice the economy, environment and social life of the region and nationwide. These requirements are based on the international practice of corporate business responsibility for compliance with the international and national standards in ecology, transparency, investor’s attitude to the economy and social sphere of the host country.
The host country’s role is to ensure the investor’s profit earning and to maintain the economic interests balance.
This distribution of interests from the standpoint of investors and the state, i.e. the guarantee of the economic profit of the investor along with the protection of national interests forms a balance, which should be considered while developing the legislation in future.
In the legal regulation of other industries a similar development is envisioned. In this connection it is worth mentioning the recent ‘Law on amendment of some legislative acts of the Republic of Kazakhstan on matters ensuring the state’s interests in the field of economy, which, in particular, introduced a conception of strategic facilities and the criteria of referring one or another kind of property to them.
This law has supplemented the Civil Code with principal provisions stating that encumbrance of strategic facilities with a third person’s rights, or their alienation is possible only under the government’s authorization. The law also vested the preferential right to the government for the purchase of a strategic facility at the market price if the private owner of the strategic facility intends to sell it.
Some investors, which earlier obtained strategic facilities as a concession, lease or own these objects on the other grounds, are attempting to withdraw these objects from the state control and then alienate them directly or indirectly without consent of the state as an owner. With that they should clearly realize the consequences of their decisions in the context of the above mentioned laws.
Referring again to the Law on Subsoil and Subsoil Use I should stress that since hydrocarbon reserves refer to the category of depleted and nonrenewable ones, the reality of possessing them is more attractive than money.
In all countries one can notice a recent tendency towards more practicable and effective use of hydrocarbon reserves, the strengthening of state control over private business, which is specialized in energy resource production. It is typical that many countries possessing hydrocarbon raw materials long ago developed a policy on establishing of national state companies both for the purposes of development of state entrepreneurship and of additional control of the processes taking place in the oil and gas industry.
This policy along with controlling functions of state bodies allows successfully applying elements of partnership control to subsoil users when developing oil and gas fields collectively.
No doubt, the state as a sole partner or shareholder of a national company should and do give a certain support thereto in development.
Article 71 of the Law on Subsoil and Subsoil Use in the current edition enables a national oil company to remain a driving force for the domestic economy.
Independent development of deposits by a domestic company entails the necessity of applying and developing new Kazakhstani technologies, use of domestic machinery thereby creating new jobs for Kazakhstani people. As a result, we have an opportunity to encourage the further advancement of domestic innovation technologies, the industrial sector and the social sphere.
How the amended Law on Subsoil and Subsoil Use can influence the future plans of KazMunayGas?
Under Article 71 of the Law on Subsoil and Subsoil Use, the preferential right to purchase an asset to be sold in the field of subsoil use belongs to the state. At the same time the state after acquisition often transfers relevant assets to the national company.
Regulations on the state’s preferential right to acquire assets to be sold in the oil and gas industry set forth in the Kazakhstani legislation enables a national company to multiply its capabilities thorough entering into contracts earlier concluded without the state participation as a contractor, or through acquiring participating interest (shareholdings) in the authorized capital of companies, being subsoil users in the Republic of Kazakhstan. Emergence of new lossless assets to KazMunayGas as a result of such acquisitions will contribute to the increase in dividends to be distributed, based on the performance results. I call this assets ‘lossless’ because they are no longer encumbered with a risk of unsuccessful exploration, in contrast, they have a real price and proven hydrocarbon reserves.
It is of note that Article 71 of the Law on Subsoil and Subsoil Use enables KazMunayGas to create a mechanism of monitoring of prospective subsoil use sites (and blocks in sea). Then in future when transferring subsoil use rights to such sites or participating interests (shareholdings) in subsoil use companies, with awareness about one or another subsoil use sites (blocks), to make proposals to the government on the assets that are of interest for KazMunayGas.
Besides, due to the opportunity for the state to use a preferential right, the national company can achieve the increase in reserves not only in the domestic market. It has also an opportunity to create the base for expansion to foreign energy markets, which finally will lead to increased deductions to the state budget and forming a niche for the Republic of Kazakhstan in the international market.
It is known that after adoption of legislative amendments giving the state a preferential right to buy out the interests of investors, a concern arose that these amendments may complicate transactions of selling interests. What points do remain unclear?
Concerns that these amendments will complicate interest sale transactions both for contracts and for authorized capital of a subsoil user are unlikely to be reliable.
Such procedures already take some time for execution of the transaction. This connected with the necessity to evaluate an asset to be alienated and also with possible pretenders to purchase. Any seller is interested in getting a maximal price which, in its turn, is formed on the basis of unbiased data of production costs incurred and depends on recoverable reserves volume, market oil price, infrastructure closeness etc. Permit of the competent body for the transaction or reasoned decline for the transaction should be issued within 45 days from the date of filing by the subsoil user of the relevant application in accordance with provisions of Article 14 of the Law on Subsoil and Subsoil Use. The application should contain a clear indication of the person to whom the assets is to be sold. Failure to observe the permit obtaining procedure by subsoil user means, by virtue of Article 14 of the above mentioned law, that the transaction is invalid as from the time of its execution.
The state’s right to preferential acquisition already has been used many times in practice. And as the practice showed the state acquiring an asset on preferred basis is to pay to the seller the final price agreed between them, in other words, the state doesn’t dictate the price it wants to buy the asset at. This means a market approach to the matter by the state.
Along with this, some companies based on their own considerations and strategies are willing to pay more for assets to be alienated. It is natural to ask: what is to be done if an asset to be sold is really of strategic importance for the republic however it is overpriced considerably? Has the state a right to introduce a mechanism of price regulation in general or to provide it only for cases of acquiring assets by the state? Any asset acquired under sale contract will be recorded in the books at the transaction price. The issues of its subsequent reevaluation in the course of business operations in view of obvious inconsistencies of the real price of an asset with the price actually paid for it are not the subject of consideration or regulation by whatever legislative act, i.e. all such issues are subject to corporate regulation only.
There’s a need ahead to toughen measures of administrative responsibility of a subsoil user for violation of the environmental laws, inefficient use of subsoil reserves and aggressive exploitation of subsoil. These measures should be accompanied not only by penalties but also include other response measures such as suspension of operations for long periods in order to eliminate faults, and upon revealing of facts of systematic ignorance to meet the national legislation requirements on the part of a subsoil user, to let the competent authority to terminate contracts for the given violations without any indemnification by the state to the subsoil user in fault. But that is a subject of another talk concerning the subsoil use.
News Roundup - October 25, 2007
Reuters: Kazakhstan Shuts Ddown Opposition Web Sites
Kazakhstan has blocked access to a number of opposition Web sites in a move Internet users condemned on Wednesday as a crackdown on freedom of speech…
The Register: Kazakhstan Blocks Opposition Websites
Kazakhstan yesterday blocked access to several websites critical of the government, including the “main opposition outlets”, kub.kz and geo.kz, Reuters reports…
EurasiaNet: Kazakhstan Blocks Critical Websites As Opposition Cries “Cenzorship”
Kazakhstan has blocked four opposition news websites in a move that media freedom advocates called “political censorship” in a country increasingly seeking to portray itself as an emerging democracy…
Forbes: Development Bank of Kazakhstan’s Medium Term Note Issue Ratings Affirmed
Fitch Ratings said it has affirmed the medium-term note programme of Development Bank of Kazakhstan at ‘BBB’ long-term and ‘F3′ short-term, after the size of the programme was doubled to 2 bln usd…
Reuters: Kazakh KazMunaiGas Seeks $3 Billion Loan
KazMunaiGas, Kazakhstan’s national oil and gas company, will borrow $3 billion on the international markets to a fund a refinery purchase, Interfax news agency reported on Wednesday citing banking sources…
International Herald Tribune: Kazakhmys Shares Drop as Copper Cathode Production Fell
Shares in Kazakhmys PLC fell more than 7 percent Wednesday after the mining company with operations in the former Soviet republics said copper cathode production fell 6 percent in the first nine months of the year…
Reuters: Kazakhmys Q3 Copper Output Down, Shares Slide
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Mining Journal: Kazakhmys Production Falls after Flooding
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CACI Analyst: Bread Crisis in Kazakhstan Hightens Social Tension
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neweurasia.net: India Looks to the Caspian
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DefenseNews.com: Kazakhstan To Build Up Navy To Protect Oil
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RIA Novosti: Kazakhstan Lifts Ban on Russian Rocket Launches from Baikonur
Kazakhstan has lifted its ban on launches of Russian Proton-type rockets from its space center in Baikonur, a government spokesperson said Wednesday…
Reuters: Kazakhstan Lifts Ban on Russian Rocket Launches
Kazakhstan, home to Russia’s Baikonur cosmodrome, has lifted a ban on launches of Russian Proton rockets that was imposed after one of them crashed, the government said on Wednesday…
Guardian Unlimited: Kazakhstan Target Astana Success at Tour de France
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Global Voices Online: Kazakhstan: Prices Unleashed
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Interfax: Kazakhstan Drops Plans for Power Plant Construction with China
The government of Kazakhstan has frozen talks on a joint project with China to build a large power plant in the Ekibastuz coal region of Pavlodar region, a government source told Interfax…
News Roundup - October 24, 2007
The Wall Street Journal: Kazakhs Seek Bigger Slice
Foreign investors developing one of the world’s biggest oil fields could see their stakes in the venture whittled down as Kazakhstan pushes to expand the state oil company’s role in the project…
The Oil and the Glory: The Cheshire Grin in Kazakhstan
Talks under way between Kazakhstan and Big Oil are about much more than the nation’s unhappiness with the work on the world’s largest oilfield discovery of the last three decades…
The Oil and the Glory: The Wheels of Justice in New York
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Business Insurance: Best Affirms Eurasia’s Rating
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Gazeta.KZ: Gold and Currency Reserves of Kazakhstan Decreased by 1.4% in October
International reserves of Kazakhstan in the whole (in current prices) including National Fund assets (according to preliminary data, USD 18 754,2 million) decreased by 1,4% and amounted USD 36 595,2 million, as reported by KZ-today agency referring to RK National Bank information…
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Interfax: HIV Toll among Children in Southern Kazakhstan Reaches 138 - Regional AIDSCenter
The number of HIV-positive children in the Southern Kazakhstan region has increased by one person to 138, Natalya Babina of the regional AIDS Center told Interfax-on Tuesday…
Interfax: Railcar Shortage Disrupts Coal Shipments in Kazakhstan
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News Roundup - October 23, 2007
The Financial Times: Kashagan oil Dispute a Step Closer to Resolution
An oil group led by Italy’s Eni is believed to have taken a first step towards resolution of a dispute with Kazakhstan over the development of Kashagan, the giant oilfield in the Caspian Sea area, according to media reports…
Oil and Gas Eurasia: Kashagan Compensation Agreed
At the weekend, the consortium agreed in principle to hand KazMunaigas a bigger stake in the project to compensate for production delays and cost overruns, Russia’s Interfax news agency reported. The size of the additional stake is not yet determined. KazMunaigas currently holds 8.33 per cent of Kashagan…
CNN Money: Eni-Led Consortium Signs Memorandum On Kashagan
The Eni SpA (E)-led consortium developing the giant Kashagan oil field Monday signed a memorandum of understanding with the Kazakh authorities committing to continuing talks beyond today’s deadline…
Forbes: Kazakhstan Electricity Grid Operating Co Assigned ‘BBB’ Long-term IDR
Fitch Ratings said it has assigned a first-time long-term foreign currency issuer default rating of ‘BBB’ with a stable outlook on Kazakhstan Electricity Grid Operating Co (KEGOC) reflecting the 100 pct state ownership, support and low business risk profile…
TREND: Kazakhstan to Join Nabucco Project
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Kommersant: Rusal Sees Progress in Kazakhstan
The danger of Kazakh authorities taking the major Bogatyr Access Komir coal asset away from Rusal shareholders has passed after the Russian company reached an agreement with the state-owned Kazakh Samruk Corp. on its joint ownership…
Radio Free Europe / Radio Liberty: Labor Migrants Face Abuse, Xenophobia
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Kazinform: Kazakhstan Bans Sunflower Export till March 1, 2008
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Kazinform: Kazakhstan Likely to Revive Beet Production Amid Sugar Shortage
Prime Minister of Kazakhstan Karim Massimov has charged Agriculture Ministry, National Holding KazAgro JSC and Almaty region to put forward their proposals on beet production resumption within a month…
Transmeridian Exploration Incorporated today announced that it has received Kazakhstan Government approval for its Gas Utilization Program with increased gas flaring volumes for 2007 and all of 2008…
CNN Money: Globalstar Announces Successful Launch of Four Satellites
Globalstar, Inc., a leading provider of mobile satellite voice and data services to businesses, government, and individuals today announced that four Globalstar satellites were successfully launched from the Baikonur Cosmodrome in Kazakhstan, using the Soyuz launch vehicle…
CNN Money: SES Global’s Sirius 4 Set for Nov 18 Launch as Baikonur Operations Resume
SES Global said the launch date for its Sirius 4 satellite has been set for Nov 18 following delivery of the spacecraft to the Baikonour Cosmodrome in Kazakhstan…
News Roundup - October 22, 2007
The Financial Times: Kashagan Oil Dispute a Step Closer to Resolution
An oil group led by Italy’s Eni is believed to have taken a first step towards resolution of a dispute with Kazakhstan over the development of Kashagan, the giant oilfield in the Caspian Sea area, according to media reports…
Reuters: Exxon Blocks Deal on Bigger Kazakh Kashagan Stake
Talks between Kazakhstan and oil companies developing the giant Kashagan field have stalled as U.S Exxon Mobil is blocking the expansion of the state’s share in the project, Interfax news agency said on Saturday…
Council on Foreign Relations: Non-OPEC Oil Production
Oil producers operating outside the Organization of Petroleum Exporting Countries (OPEC) are responsible for producing 60 percent of the world’s oil and face increasing production hurdles…
Bloomberg: Germany Backs Kazakh OSCE, WTO Bids as Investors Are Reassured
Germany backed a bid by Kazakhstan to head the Organization for Security and Cooperation in Europe, rejecting international criticism that the former Soviet state’s electoral record should bar it from assuming the watchdog’s helm…
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The Washington Post: Russia’s Space City Frozen in Time
In this remote and rusting town on the barren steppes of Central Asia, the space race and the Sputnik era seem much more than a memory. Rockets still pierce the heavens in a halo of smoke during launches, and engineers and military men still crack open bottles of vodka to celebrate a successful launch…
neweurasia.net: New Bank. Why?
Against the background of the Kazakh banking system’s liquidity and the overall atmosphere of uncertainty in this sphere, a new bank – MasterBank – is entering the market after the financial authorities have issued a license for its activity…
The Associated Press: Soyuz Craft Lands Short of Destination
A technical glitch sent a Soyuz spacecraft on a wild ride home Sunday, forcing Malaysia’s first space traveler and two Russian cosmonauts to endure eight times the force of gravity before their capsule landed safely…
RIA Novosti: Soyuz-FG Carrier Rocket Puts Globalstar Satellites into Orbit
A Soyuz-FG carrier rocket launched from the Baikonur space center in Kazakhstan has put four U.S. Globalstar communications satellites into orbit, the Russian Federal Space Agency said on Sunday…
Forbes: Nokian Tyres to Build Car Tyre Plant in Kazakhstan with Local Company
Nokian Tyres said it will take an initial 10 pct stake in a newly formed venture that plans to produce up to 4 mln car tyres a year at a plant in Kazakhstan, with the option to gain a majority holding later…
