State Oil Company Profiles Kazakh State Oil Enterprises Move Toward Privatization (234359 bytes)

A.D. Koen
Senior Editor -- News

The evolution of Kazakhstan's oil and gas industry gained momentum in late July when President Nursultan Nazarbaev issued a decree outlining rules for foreign companies wishing to invest in the country's energy resources.

The July 21 decree carries the authority of law. It is the latest development affecting the oil and gas industry in a nationwide privatization process set in motion after the dissolution of the Soviet Union.

Details of Nazarbaev's pronouncement still are being weighed. It is uncertain whether the decree would have an appreciable effect on the ambitious $6.6 billion investment program being spearheaded by Oil & Gas Minister Nurlan U. Balgimbaev, despite the government's lack of funds to invest.

Before Nazarbaev issued his energy decree, an oil industry committee including the following three entities held authority over oil and gas activity in the country:

• The Ministry of Oil & Gas, in Almaty, was responsible for regulating oil and gas production and refining in Kazakhstan (see chart).

• The Ministry of Geology & Preservation of Underground Resources was responsible for regulating development of Kazakhstan's mineral resources.

• State company Kazakhstanneftegaz, through various state owned operating units, engaged in oil and gas exploration, development, production, transportation, and refining throughout the country.

Whether those relationships and responsibilities would remain with the agencies was unknown. Nazarbaev has said only that the government will work out a development strategy for the country's oil and gas reserves that will ensure an adequate domestic supply and transparent price determination.

Because Kazakhstan is a landlocked country, export pipelines will play a big role in the success of further oil development. However, talks are stalled on the most likely to be built of several competing, proposed export oil pipeline projects.

If Kazakhstan can settle export and domestic pipeline issues and begin implementing key infrastructure projects on Balgimbaev's agenda under Nazarbaev's energy decree, Balgimbaev predicts Kazakhstan's yearly oil and gas industry profits will reach $2.5 billion in 2000, up from an estimated $217 million this year.

Kazakhstan's transition

Kazakhstan is governed by a stable government committed to political and economic reform. However, some observers have described Kazakhstan as a developing economy clothed as a modern society.

Although suffering from a lack of public funding, Kazakhstan's transportation, internal communications, industrial, agricultural, educational, housing, and health care systems are relatively sophisticated, according to information developed by international accounting firm Price Waterhouse. Paradoxically, like many other FSU republics, the country only now is beginning to develop systems of business law, taxation, and banking and investment needed to support a free market economy and forge permanent links with the international business community.

A Washington, D.C., based nonprofit entity, the U.S.-Kazakhstan Council (USKC), facilitates and supports business activities in Kazakhstan and disseminates information about the country in the U.S.

Kazakhstan in March 1994 created an interagency working group comprised of representatives of the ministries of oil & gas, economics, geology and preservation of underground resources, finance, ecology and bioresources, and justice. Representatives of all relevant oblasts also were part of the working group, which conducted direct negotiations with foreign companies for specific tracts.

With the help of legal and financial consultants, the group created the Kazakhstan transaction model to serve as a basis of negotiations with foreign oil and gas companies. That model is the basis of the oil and gas development program essentially left in place by Nazarbaev's energy decree.

The Kazakhstan Model has two key elements:

• A joint venture (JV) between one or more designated Kazakh parties and a foreign oil company.

• An exploration and production contract between the JV and the government of Kazakhstan.

The two step procedure promises profitability adequate to attract foreign oil company investments, while maintaining the country's control over resource development.

Nazarbaev's energy decree

According to the USKC, Nazarbaev's energy decree replaces oil and gas regulations that were pending in March when he dissolved Kazakhstan's parliament.

It reserves for the central government the ownership of Kazakhstan's onshore and offshore oil and gas, but allows owners of hydrocarbons as determined by contract the right to dispose of production as they see fit. The president must approve plans for offshore drilling.

Under the law, the government may grant exploration rights by competitive tender or through independent, direct negotiations. Acreage tendered in competitive bidding rounds is to be awarded based on proposed starting date, work program and schedule, level of expected production, and the amount of estimated project investment.

The form of contracts to be allowed includes JV, service, and production sharing arrangements. However, some top governmental officials -- notably Vice President Erik Magzumovich Asanbaev -- have stated publically their preference for JVs. They believe Kazakhstan's business culture will improve most rapidly under conditions created by JVs, and that JVs make foreign partners more reliable and responsible for fulfilling projects.

The hydrocarbon exploration and development contract between the government and foreign partner is a comprehensive document setting forth the rights and obligations of each party. Issues of public interest addressed by the agreement include taxation, export duties, bonuses, royalties and production sharing, resource management, and environmental protection.

Nazarbaev's decree reportedly retained the requirement that foreign companies provide employment and training to Kazakh nationals and give preference to Kazakh subcontractors of equal skill and logistical capabilities to competing foreign subcontracting firms.

Kazakh officials also have developed standard documentation both for JVs and production sharing contracts to ensure consistency and fairness among the many expected agreements with foreign oil and gas companies.

Pace of privatization

Kazakhstan in 1994 divided its territory into tracts ranging from 1,269 to 1,489 sq km to serve as contract areas for oil and gas investment. Exploration operations of two types may be performed on the tracts.

Nonexclusive exploratory activities are allowed in poorly studied areas or unstudied areas with promising sedimentary basins. Drilling and more-detailed seismic surveying is reserved for more promising prospects or projects where investment is a priority. Kazakhstan assigns investments of the two latter types as first, second, or third phase sites.

Kazakhstan's privatization efforts follow diverse strategies and include other sectors of the economy.

Kazakhstan's oil and gas ministry -- working with the country's state property committee -- by the end of May 1995 had privatized 146 state enterprises. Another 38 state enterprises were deemed not qualified to become privately owned and 4 the property of their working staffs.

Of the 31 enterprises owned by state company Munaigaz, 20 were transformed to joint stock companies, 2 are in the process, and another 7 will remain with Munaigaz.

Of 34 enterprises of state holding company Kazakhgaz, 19 have become joint stock companies. Eight Kazakhgaz gas gathering operations will not be privatized because they are property of the workers.

Foreign companies since the breakup of the FSU have stepped up the pace of upstream oil and gas activity, but state owned companies still account for most of the country's oil and gas output. State run Munaigaz reported that Kazakhstan in 1995 through April produced more than 6 million tons of oil, about 5.6% more than during the same period a year earlier. Munaigaz accounted for more than 4.4 million tons of the volume, while units of Kazakhgaz produced 777,000 tons and JVs 870,000 tons.

Kazakhstan's 1995 gas output in the same period was more than 85% ahead of the 4 month total in 1994. But even at that, production amounted to only about 1,535 cu m, including 809 cu m extracted by Kazakhgaz and 762 cu m by Munaigaz.

Oil and gas infrastructure

Despite the determined effort to found a free enterprise economic system, Kazakhstan is severely handicapped by past Soviet policies that required decisions affecting literally every aspect of the country's domestic economy to be made in Moscow.

Since declaring its independence on Dec. 16, 1991, Kazakhstan's economic development especially has been hampered by the physical infrastructure it inherited following the breakup of the FSU. The negative influence likely will persist for many years to come. Kazakhstan's facilities were planned and built mostly to satisfy the FSU's economic needs.

As an example, Khazakstan's refining configuration is not suited to its internal needs. The 104,000 b/d Guryev refinery at Atyrau in the western end of the country lacks the capability to process oil produced in the region.

Another example is Kazakhstan's estimated 2 trillion cu m of gas reserves. Ironically, 96% of its gas reserves are located in the east, but development of gas in Kazakhstan as a part of the FSU was limited. Domestic markets in the south are forced to rely on exports from Uzbekistan.

Balgimbaev's agenda