energy
Kashagan: A Strange Victory
Interesting analysis by Dosym Satpaev, director of the Almaty-based Risk Assessment Group. The original article in Russian can be found here.
Last week, a long dispute between the Kazakh government and the Agip KCO consortium of Western oil companies came to an end. Our officials made the foreign investors an offer they could not to refuse.
As a result, KazMunaiGaz, the national oil company, increased its share in the Kashagan project from 8.33 percent to 16.81 percent. In addition, the participants discussed a $5 billion payment as a compensation for lost profits due to cost overruns and significant delays in commercial production.
All this was hailed as another great success in the government’s pursuit of public interest. But it is a strange “victory” considering that we have heroically solved problems that we brought upon ourselves in the 1990-s when hydrocarbon deposits were distributed like hot pastries at much lower prices than those that we are paying now. It has been announced that KazMunaiGas is going to pay $1.78 billion to increase its share in the consortium. That is no small sum, even if not paid at once but in three tranches once production begins.
All this would look great, if it was not for fact that in autumn 1998, Kazahstankaspishelf, the state oil company (representing the interests of the state), sold for $500 million its stake in the Kashagan project to Japanese Indonesia Petroleum (Inpex) and American Phillips Petroleum Co (7.14 percent each). Even at that time, there was discussion about the appropriateness of the transaction. And that did not only concern the low price (especially compared to $1.78 billion) but also the loss of a strategic asset. Especially since a few years after this sale, Kazakhstan paid BG, a partner who decided to exit the project in 2003, nearly $600 billion for an 8.33 percent stake in the same project. And now they are willing to pay $1.78 billion. Of course, it can be argued that the dollar devalued and the cost of the project increased. But so far, nobody has explained why there was such a hurry to sell Kazakhstan’s stake in the Kashagan project in the first place. Moreover, it’s still unclear where the $500 million went.
Ii is debatable whether all this can be called a “victory” if, in addition to strange math at the expense of national interests, nothing has been accomplished. It also should not be forgotten that the budget of the Kashagan project rose from $57 billion to $ 136 billion. Therefore, joining the new operating company, KazMunaiGaz will be required to invest heavily into the project along with the other larger investors.
Moreover, the Kashagan conflict revealed another more serious problem. Despite our ambitions to join the world’s top five exporters of oil and gas, Kazakhstan controls only 12 to 15% of its recoverable reserves of minerals. The rest, unfortunately, belongs to foreign investors. So, now we may have won one battle, but lost the entire war.
Resolution in Kashagan Standoff a Win-Win Situation (At Least Now)
A long running dispute between a consortium of Western oil companies and the Kazakh government over Kashagan, a huge offshore oil development project in Kazakhstan, seems to have ended in an amicable resolution on Sunday night. The consortium has agreed to pay a fine of $2.5 billion to $4.5 billion, and let KazMunaiGas, the Kazakh national oil company, to increase its stake in the project to be equal to that of the four largest partners in the consortium. This is a welcome development for both the consortium and the Kazakh authorities. However, it could also turn out to be the start of a push to renegotiate all big oil contracts signed in the 1990’s.
Background:
On Sunday night, the consortium of foreign companies consisting of Eni (the operator of the field), ExxonMobil, Shell, Total, ConocoPhillips and Inpex, has reached an agreement with the Kazakh authorities and the Kazakh national oil company KazMunaiGas in a long-running dispute over the future of the Kashagan field.
Under the deal, the consortium has agreed to pay additional royalties to the Kazakh government of $2.5 billion to $4.5 billion over the life of the Production Sharing Agreement (PSA). These royalties are tied to the projected prices of oil with $65 per barrel on the low end and $85 on the high end and will start flowing in once commercial production begins.
Additionally, the partners have agreed to allow KazMunaiGas, the Kazakh national oil company to increase its stake to 16.8 percent. This will put it at par with the four largest shareholders (Eni, ExxonMobil, Shell, Total). The price tag for this acquisition was reportedly $1.78 billion. While this sum is, according to analysts, about half the fair market value of the stake, international observers largely see this deal as better than expected for the international oil companies.
The companies and the Kazakh authorities also agreed to alter the operating structure of the project. Eni, the sole operator until now, will relinquish its role as soon as the first development phase of the project is completed and commercial production starts. At that point, the operatorship will be divided among the five companies with the largest stakes in the project. According to Kazakhstan’s Minister of Energy and Mineral resources Sauat Mynbayev, KazMunaiGas will take on a leading role in providing a strategic direction while the foreign companies will split the actual development work.
Additionally, Mynbayev announced that the favorable tax regime which was a part of the original PSA will be revised.
Canadian Junior Tethys Petroleum Aims To Prove It Is Not Just The Mega Projects For The Major Oil Companies That Make Kazakhstan Attractive
From oilbarrel.com on December 17, 2007
By Anthony Robinson
Mention Kazakhstan and what comes to mind are huge, deep on and offshore deposits of sour, high pressure oil and gas - and very expensive “green field” projects which only the oil majors can tackle. David Robson’s Kyzyloi development in western Kazakhstan, north west of the Aral sea and close to the border with Uzbekistan, could not be more different - at this initial stage at least.
Robson, who is the Chairman, President and Chief Executive Officer of Toronto main board listed Tethys Petroleum Limited (symbol TPL) told his audience at two presentations during the KIOGE conference in Almaty recently that gas was about to flow from the first stage of what he called “the development of a new gas province in western Kazakhstan.”
Unlike gas and oil from the big, deep greenfield developments further west, Kyzyloi gas is sweet and dry. It comes from a shallow deposit of only 450 metres, and thanks to its location it does it require the costly infrastructure investment and new pipelines needed to get oil and gas to market from Kashagan, Tengiz or Karachaganak.
Central Asia Petroleum Negotiating Sale of MangistauMunaiGas
The Indonesian company Central Asia Petroleum Ltd., majority owner of AO Mangistaumunaigas (MMG), has decided to sell a majority stake in the Kazakh oil company. According to sources, negotiations with several foreign companies have already begun. It is already known that the Kazakh national oil company KazMunaiGas (KMG) plans to acquire at least 25 percent of the company, probably not later than in the first half of 2008.
According to sources in the company, Central Asia Petroleum Ltd. intends to price the whole company at $4.3 billion. At the end of 2006, when the management of the company attempted to delist its shares from the Kazakhstan Stock Exchange (KASE) to prevent a supposed hostile takeover, analysts estimated the value of the company at $4 billion. Even though at that time, despite circulating rumors, no transaction took place, interest in MMG did not abate. “Chinese, American and Russian companies have shown interest in acquiring a controlling stake in the company”, said a source in the Ministry of Energy and Natural Resources. “Lukoil has been actively interested. Furthermore, the Indian concern Mittal Steel which has recently acquired significant interests in oil and gas and power generation is often mentioned as an interested party”, noted Dmitriy Aleksandrov, an analyst at the Russian brokerage Financial Bridge in an interview with Kazakh business weekly Business & Power. According to the analyst, though, the structure of the company is extremely opaque, and it is very difficult to accurately estimate its value. “Based on the company’s oil production, the price tag could range from $3 to $4.5 billion,” thinks Aleksandrov. “I assume that the 25 percent stake that KMG is expected to acquire will be priced closer to the upper range”. In his opinion, the remaining shares could be acquired by a strategic foreign investor like Lukoil, Mittal Steel or Chinese CNPC. “The participation of American investors appears less likely”, believes the analyst.
“The majority of shares in the company will be sold after KazMunaiGaz acquires the blocking stake in MangistauMunaiGas. That transaction must take place in the beginning of 2008 “, reported a source in the Ministry of Energy and Mineral Resources. The blocking stake in the company is necessary to enable KMG to exercise control over who will be allowed to acquire the remaining shares in the company. “As soon as the 25 percent are ‘returned’ to the state, no decision will be made without the participation of the national oil company. Indeed, besides its oil and gas interests, MMG owns 55 percent of the Pavlodar petrochemical plant. And much will depend on who controls the refinery, among other, possibly, the prices of gasoline. For Kazakhstan, this is a strategic asset”, he emphasized. “Most likely, the Pavlodar refinery will be sold separately from the oil and gas assets that MMG controls. But this is still a question of negotiation.”
Zhaikmunai — What Is Behind Its Intended IPO?
Zhaikmunai, the Kazakh oil and gas company, stated its intention to offer its shares in an IPO on the London Stcok Exchange, hoping to raise up to $760 million. This is the first private oil and gas company in Kazakhstan which decided to seek transparency by becoming listed in London. Officially, the company explains its motive by the lack of funds for further development of business. However, analysts do not exclude that foreign (or domestic) investors are seeking the listing in an attempt to protect their holding in Kazakh oil and gas sector from possible encroachments by the state.
According to the official press release by the company, Zhaikmunai intends to place global depository receipts (GDR’s) on the exchange in the indicated range of $13-16 per share. It is expected that Zhaikmunai - being privately held - will issue GDR’s in exchange for a portion of shares in the company. The precise timing and the size of portion to be sold in course of the IPO are so far unknown. The timing of the announcement, however, is rather surprising. Given the current high oil prices, it would seem that a company of this type should have no problems finding sources of funds - unlike, for example, domestic banks and construction companies.
Zhaikmunai’s general director Vyacheslav Druzhinin, who is based in Uralsk, not far from where the company operates, refused to comment, saying that the issue was outside of his competence. As Business & Power, the Kazakh weekly, quotes “the local management was not to release any information to the media as it was not familiar with the situation.” Requests for comments that Business & Power sent to Kai-Uwe Kessel, the managing director of Belgium-based Probel Capital Management, also remained without an answer. According to Reuters, however, Zhaikmunai is expected to put up for sale 42.6 percent of the company.
Karachaganak and the Future of Petrochemical Industry in Kazakhstan
The Karachaganak gas condensate field has kept itself out of the headlines lately. That is something that its operators, the Karachaganak Petroleum Operating B.V. (KPO) surely appreciate given the negative exposure that the two other major oil and gas projects in Kazakhstan received in the recent months.
The Karachaganak field lies in northwestern Kazakhstan about 150 kilometers east from the regional capital Uralsk, and is one of the world’s largest oil and gas condensate fields. Covering an area of over 280 square kilometers, it holds more than 1.2 billion tons of oil and condensate and over 1.35 trillion cubic meters of gas.
While Karachaganak and KPO had their own share of controversy in the past, compared to the environmental difficulties of the Tengiz field operated by Chevron and the well-publicized troubles of Eni, the operator of the giant Kashagan field, the Karachaganak project can be regarded as a success story. Last week, KPO, the international consortium developing the field celebrated the 10th Anniversary of the signing of the Karachaganak Final Production Sharing Agreement (FPSA). The project itself - currently the biggest internationally funded project in Kazakhstan - has so far met deadlines and cost estimates stipulated in the FPSA, and it will exceed the planned gas production by 20 percent during the third phase of development of the field.
However, despite these successes (which certainly helped to keep off Kazakhstan’s tax police and environmental authorities), Karachaganak faces many of the same problems that all oil and gas producers, especially foreign once, are exposed to.
The main challenge is the geographic location of the field and the lack of distribution options for the natural gas extracted from the field. Due to the Russia-centric nature of the Soviet gas pipeline network, the only existing export option for Karachaganak gas is to Russia, more specifically the Orenburg Gas Processing Plant just across the border. Currently, KPO sells its gas to KazRosGas, a joint venture between Gazprom and KazMunaiGas, which in turn exports the gas to Orenburg and then to other CIS states through the Russian gas pipeline network. This arrangement leaves KPO in a vulnerable position because of the lack of any alternatives. Thus, KPO itself is unable to market its gas in Western Europe and is forced to sell its gas to KazRosGas at a significant discount to European market prices. This disadvantage has been somewhat alleviated when a new delivery price for Karachaganak gas was negotiated earlier this year at $140-145 per tcm. However, since natural gas prices in Western Europe currently stand at around $250, this arrangement is still much more advantageous for KazRosGas and especially Gazprom than for KPO.
Another challenge is the structure of the field; like the majority of Kazakh gas fields, it is a gas condensate field. Due to the lack of viable export options for gas, the focus at the development of the field has been on liquid hydrocarbons (oil and condensate) which can be exported to Western markets via the CPC pipeline (all Karachaganak partners hold shares in the pipeline). For a long time, gas was seen as a semi-useless byproduct rather than a valuable export commodity like oil. One reason for this is the above described lack of export routes for the gas; another reason is the low quality and high sulfur content of the gas that requires further purification before it can meet contractual specifications as to export quality.
KPO has responded in slowing down the development of the natural gas portion of the field and has tried to find alternate uses for the natural gas it extracts.
First, it reinjects significant quantities of gas into the ground to maintain crude wellhead pressure for liquids extraction - at this point about 6 billion m3 of gas per year. Reinjected gas can then be recovered at a later date.
Second, it uses the extracted gas as power generator for its own facilities at Karachaganak.
Third, just last week, KPO launched the construction of the Karachaganak-Uralsk pipeline that will deliver gas to the Western Kazakhstan Region (WKO). This “will reduce the WKO’s (dependence on Russian gas supply and will bring an important source of locally produced and competitively price natural gas to towns and villages”. While this deal will, without a doubt, strongly favor Kazakhstan, it should help KPO avoid or reduce the kind of attacks that other Western consortia tend to face in Kazakhstan.
Fourth, KPO sells gas to KazRosGas to export it through the Russian gas pipeline network.
The lack of export options and the low quality of the Karachaganak natural gas (and the need for further refinement) has so far made the development of the field with respect to natural gas relatively difficult.
In a new development, however, according to the Kazakh business weekly Business & Power, a meeting between the management of KPO and KazMunaiGas and the Ministry of Energy and Mineral Resources is planned for next week in London that may complicate the delicate relationship between KPO, Kazakhstan (and KazMunaiGas) and Russia (and Gazprom). In it, Kazakhstan is expected to demand from KPO the construction of a gas processing plant in Karachaganak in order to diminish the Russian influence over Kazakh gas that is prevalent today. While no details were made public, it is likely that Kazakhstan will require KPO to participate in the construction of the plant and also guarantee gas deliveries at below market prices.
It was only a few months ago, however, when Kazakhstan announced the creation of a joint venture between KazMunaiGas and the Gazprom-owned Orenburg refinery to process the Karachaganak gas at the Orenburg plant. According to the preliminary plans, KazMunaiGas was expected to invest $350 million in exchange for 50 percent of the plant and each of the partners was to contribute another $250 million to expand the capacity of the plant to process Karachaganak gas and build two pipelines from Karachaganak to Orenburg. The gas processed at the joint venture would be partially exported abroad through the Russian pipeline network and partially transported back to Kazakhstan to supply the northwestern part of the country with natural gas. While the final agreement has not been signed yet, according to sources involved in the negotiations, a conclusion seemed imminent.
Even though the timing is unexpected, the idea of having a gas processing plant at Karachaganak is not new. It has been floated several times in the past and was supported mainly by the KPO as a way to break away from the dependency of the Orenburg plant. However, according to the FPSA, Kazakhstan would face the responsibility to shoulder the greater part of costs to build the plant, and with a price tag of $1.2-1.5 billion, this would be no small venture. On the other hand, Kazakhstan would benefit tremendously from having a gas processing plant at Karachaganak. Its domestic gas infrastructure is undeveloped and neglected, and even though Kazakhstan is a net natural gas exporter, it relies on Russia and Uzbekistan to deliver gas to consumers in the north and the south of the country. In the past year, Kazakh authorities issued several statements in which they outlined the importance of developing domestic petrochemical industry and gas infrastructure to achieve self-sufficiency and to diversify its export routes.
Yet, as of now and for the foreseeable future, all gas export routes go through Russia. Kazakhstan has been playing a very delicate game of trying to promote its interests and reduce its dependence on Russia without completely alienating its powerful Western neighbor. Gazprom is unlikely to give up its influence over Karachaganak gas, though; especially since its own production is decreasing and its contractual obligation in Europe are increasing in the coming years. However, it will be interesting to observe the development of this matter. Is Kazakhstan simply trying to put pressure on Gazprom to improve its future negotiating position? Or is this indeed the beginning of a coordinated push to become more self-sufficient in providing natural gas to Kazakhstan’s population?
