Karachaganak
BG delays Kazakhstan investment
(Financial Times) - BG Group has deferred indefinitely a planned investment in Karachaganak, one of the biggest gas and oil fields in Kazakhstan, in the most significant energy project delay as a result of the global financial crisis.
BG denies talks to sell Karachaganak stake to KMG
(Reuters) - British gas producer BG Group Plc said it was not in talks to sell part of its stake in the giant Karachaganak gas field to Kazakhstan’s state oil and gas company, KazMunaiGas.
KPO disputing new oil export duty
(SRI) - Karachaganak Petroleum Operating (KPO), a Western oil group developing the Karachaganak oil and gas condensate field in Kazakhstan, is disputing the new oil export duty in its application to KPO’s operations.
Karachaganak group to pay Kazakh oil export duty
A consortium developing the huge Karachaganak gas field in Kazakhstan has become the first Western entity in the Central Asian nation to fall under a new oil export duty, a senior government official said on Monday.
Oil lubricates high-level links
When Kazakhstan’s giant Kashagan oil field was found in 2000, it was the biggest in decades. Few thought then that the Caspian field could be the last such discovery.
Tengizchevroil, Karachaganak Petroleum see tax looming
Following record-breaking world oil prices, the Kazakh authorities are trying to balance the economic interests of the state by cancelling the existing privileges for energy majors pumping oil in the Central Asian republic.
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?
Oil and Investment Games of Central Asia
Another interesting piece of analysis by Dosym Sotpaev, the head of Almaty-based Risk Assessment Group. The article can be also found here and the Russian version here.
What had to happen sooner or later, has happened. The government of Kazakhstan has started operations in the conflict against Agip KCO consortium on all fronts. Not the fact of the conflict with one of the largest foreign investors is interesting here, rather the tendency.
The period from 1991 till 2002 was most favourable for attracting foreign investors and their activities. During this period Kazakhstan lost control practically over all of its oil and gas deposits, after selling them to foreign companies. Since 2002 – till present time we observe the policy of establishing investment parity and strengthening the control over investors. There are objective as well as subjective reasons for this.
Firstly, due to favourable pricing condition on the market, Kazakhstan could create strong enough economic platform to decrease dependence from foreign investors. It was also connected to increased role of the state in the economy, including oil and gas sphere, where positions of state owned KazMunayGas are improving.
Secondly, new oil and gas elite appeared in Kazakhstan; this elite wanted an access to the resource pie, which for a long time belonged to foreign investors.
Thirdly, Kazakhstan started forming a new legislation base for resource sector. The main difference from the previous one is in strengthening new priorities in forming investment climate. While during the previous decade Kazakhstan’s priority was attracting foreign investors, in the recent years the priority is supporting national companies, which are closely connected with political elite. For example, several years ago a new law on investments was adopted in Kazakhstan, it cancelled 6th article of the old law “On foreign investments”. According to the abolished article, the government undertook responsibility to restrain from actions that would harm the investors.
The government also adopted the law “On changes and amendments to some legislative acts of Republic of Kazakhstan on the issues of mineral resources and conducting operations with oil in Republic of Kazakhstan”. Now the government officially has a priority in purchasing shares of investors’ projects that decide to trade them. Besides, Kazakhstan has already adopted the amendment to oil legislation, which prohibits transfer of rights for the resources within two years of singing the contract. The term “concentration of rights” was also included into legislation on natural resources, it means that the government has the right to interfere into a deal if it threatens considerable increase of foreign ownership that influences national security. According to the government, the reasons behind the changes are the interests of national security, and that the previous legislation didn’t provide the government with enough control over national resources.
Fourthly, the government of Kazakhstan has already started decreasing the dependence on western capital by broadening the areas of investment activities and inviting Russian, Chinese, Indian and South Korean companies. Activities of Chinese companies in oil and gas sector of Kazakhstan will only increase. It can be seen from their serious intent to participate in new tenders for development of Caspian deposits.
The first sign of changes in government’s policy regarding foreign investors were frictions between the government and “Tengizchevroil” about ecology. It was very uncommon in mid 1990s, the frictions ended up with a big penalty levied to the company.
Later the tax committee of the Ministry of Finance of Kazakhstan stated that it wanted to reconsider tax regulations of large oil companies; the contracts signed during 1993 – 1997 were to be reconsidered. The government wants the companies that came to our country more than ten years ago to stop emphasising investment risks in Kazakhstan. It means that they have to agree to increasing tax payments to the budget. That is to pay according to standard tax procedure of Kazakhstan. Particularly Astana is trying to increase TCO’s input into national economy by 20% without taking into account the growth of extraction of hydrocarbons.
Unexpectedly for everyone, in April 2006 KNB (Kazakh National Bank) of Kazakhstan accused some foreign companies that their activities threaten national security. Nurgali Bilisbekov, head of economic security department of KNB, said that KPO (Karachaganak Petroleum Operating) and Agip KCO consortiums take actions to maximize their profits to the prejudice of Kazakhstan. This was one of the first precedents when KNB publicly accused foreign investors in threatening national economic security. Previously the main accusations towards the investors were about breaching ecological norms, labour legislation or, in extreme cases, non-payment of taxes.
Early this year Karim Masimov, Prime Minister, stated that in general implementation of contractual conditions by producers of natural resources is unsatisfactory. Then it was about extending the exploration periods, postponing beginning of industrial production from the deposits and increasing the costs. It has an obvious hint at the activities of large foreign oil and gas companies working on Karachaganak, Kashagan and Tengis deposits. Thus, the situation has been coming to this ending since long ago.
The government considers the price of political risks, which our country pays to oil investors that came during that period, to be overvalued. In early 1990s the government provided them with very beneficial taxation conditions and guaranteed invariability of terms of the contracts. That’s why in 2007 the government of Kazakhstan stated that it intends to strengthen control over export-import activities of largest producers of natural resources in the country.
On the instructions of the Prime Minister the Ministry of Energy and Mineral Resources together with the Ministry of Economy and Budget Planning have to arrange efficient monitoring of fulfilling the contractual liabilities. Strengthening the monitoring meant collecting the information required for pressing the investors. Then it seemed that the government would try to convince the producers that reconsidering the contract terms once was better than the government’s increased and adversary attention towards their activities.
In addition notice that the government of Kazakhstan often makes concessions to Kazakhstani investors. Extracting and processing with the country’s own companies is emphasized. For accomplishing this goal “KazMunayGas” wants to receive $70 billion in investments and credits from local businesses. Kazakhstani investors also received additional mechanism of cooperating with the President. On 21st of April 2007 the President announced creation of National Investors Council. Currently the investments into the country’s economy by local investors are $80 billion, which is $20 billion more than by foreign investors. However the main task for the President was to redirect internal investments of local companies into non-resource sphere, where foreign investors are not very active.
In perspective the government of Kazakhstan will continue to pursuit the policy of strengthening the control over all large foreign oil and gas investors. Possibly the international consortium that develops Karachaganak gas deposit will be the next target for the government, this consortium has also announced increase of exploration costs.
Besides, the policy of attracting foreign investments will provide more favourable conditions in non-resource sectors. New socio-economic programme of the government for 2007 – 2009, presented by Karim Masimov on 9th of February 2007, confirms it.
Hence, figuratively foreign investors are offered the role of a sheep rather than of a horse rider in kokpar game (Central Asian game of horse riders). It is surprising how our government discovered all of these ecologic and customs violations after a decade of closing their eyes on them. A big mistake by the investors was to accept the rules of the game and make those violations, after becoming accustomed to “blindness” of our officials. Now these officials successfully use the mistake as a powerful pressure tool.
