Head of the Union of Oilfield Service Companies Rashid ZHAKSYLYKOV:
WE LOOK FORWARD TO THE FORTHCOMING DEVELOPMENT OF THE KALAMKAS-SEA OIL FIELD, THE PROJECT IS ESTIMATED AT $ 7 BILLION
In Kazakhstan, the development of the offshore Kalamkas-Sea field in the Caspian Sea may begin soon. The project, the cost of which is estimated at $ 7 billion, is comparable to the giant Kashagan one in terms of complexity and investment level. At the same time, it is possible to accelerate its implementation thanks to the already accumulated experience on the shelf. Rashid ZHAKSYLYKOV, Chairman of the Presidium of Kazakhstan’s Union of Oilfield Services Companies, talked about the prospects for the most long-awaited projects in the country’s oil and gas sector and in the development of the domestic oilfield service companies in an interview with Interfax-Kazakhstan.
- Recently it became known that a project to maintain the oil plateu rate will be implemented at the Karachaganak field. What are the chances for the domestic oilfield service companies to participate in this project? Will they also be able to participate in the construction of the fourth oil refinery and the Saryarka gas pipeline?
- All the projects you mentioned are interesting, but so far they exist in the form of a concept. To date, Tengizchevroil consortium’s (TCO) the [Tengiz expansion project] has got a real start – it’s a third generation plant. All tenders have been held and general contractors selected. Therefore, the Union is actively working in this direction. And the amount is impressive, all the projects enumerated by you will not dwarf even one third of the cost of the Tengiz expansion. There is $38 billion, in addition, it's new qualified personnel, a new kind of business activity, new technologies. Therefore, today the domestic business is more involved in real mode, in the TCO real project.
As for the Kashagan expansion, it is under way. They want to increase production to 450,000 [barrels] a day. This level is feasible, and there will no much money to be poured in there because the reserve was already calculated when the facility was commissioned. Maybe there will be small details, but nothing grandiose is expected. The only thing that we look forward to NCOC the [Kashagan operator] is the development of the Kalamkas field. This will be a field identical to Kashagan, and there the investment package will be very large. We expect probably around $ 7 billion if Kalamkas is put into service.
- $ 7 billion - is this an investment in the development of the Kalamkas-Sea field?
- Yes, the investment in the project implementation. As if the concept has already been approved by investors, the head of state is interested and the support of the Kazakh side has been officially announced. Now the work is ongoing at the level of lawyers and financiers.
As for the Astana gas supply distribution, I do not think that Kazakh business will be able to earn from this and develop. Yes, it’s possible to support, but many companies will not be involved there. In general, we have so few companies that can withstand competition in the gas pipeline construction, there must be unique welding, this is very dangerous business, so there will be a strict selection. Companies [service ones], which are in the market are most unlikely to pass through. Unequivocally we will resort to the services of foreign companies, but in this project, of course, we will "run in" our domestic companies as well.
- Can one expect that NCOC will start developing the Kalamkas-Sea field in the next few years?
- Yes. In terms of complexity and scope of work, the project is comparable to Kashagan. The head of state asked that it not be delayed. Our country is tasked with raising production to 125 million tonnes of oil per year by 2024. With what reserves can we do this? We are hoping for the Tengiz expansion, we are hoping for Kalamkas too. I do not see other options yet. You know perfectly well that there is a decline in production in the other regions like Kyzylorda, Aktobe, Mangystau. Investors do not want to invest money in the development because all strata are worn out but geologists are lagging behind. Over these years in pursuit of the extensions of existing oil fields we forgot about geology.
We have probably overcome the level of complexity because we built Kashagan and have huge experience. How unique was Kashagan? Say, before the Kazakh companies were always involved in onshore projects. From the Caspian Sea to Karabatan we went through three stages: water, marshland and shore. Wherever onshore we had experience, but there was no expereince with offshore and swamps. You know the history of Kashagan, which began 10 years later than it was stated. If Kalamkas is started, then there the speed of the facility commissioning will be rapid. First, we know the companies which can do this, and Kashagan's investors already have diplomatic and friendly relations and can coordinate quickly. That is currently the NCOC team has been formed up.
- How successfully are local oilfield service companies working at Kashagan and what are their prospects for Kalamkas? Can they get complex large-scale work?
- In the past year the government has been taking great care of and has been protecting domestic business. Now, if you want to participate in large tenders - over $30 million then you must mandatorily have a joint venture with a Kazakh company.
This is the PSA requirement [PSA LLP, acts as an authorized body in the production sharing agreements for the North Caspian and Karachaganak projects], a supervisory body established by the Energy Ministry. This applies specifically to NCOC and KPO (Karachaganak Petroleum Operating). That is, tenders from these companies worth more than $ 30 million cannot be awarded without consent from PSA. It has the right to veto and not to approve of a tender. And practice proves we feel it currently.
- Does this not contradict the norms of the Product Sharing Agreement (PSA)?
- It seems to me that the interest of Kazakhstan rather than the investor will be more and more taken into account every year. Global practice proves this. Say, the Saudis. Initially, [they] gave 95% to investors with the remaining 5% with the Saudis. Now, on the contrary, 95% remains with them and only 5% with investors. Norway has gone through this as well. There is nothing terrible in this, and we must overcome. You can imagine, the TCO project is under preparation - after the plant construction it is necessary to landscape its territory, plant trees, build access roads, fences. They do not want to give even this type of work to Kazakh business; we are fighting even for this segment. Designs are carried out abroad. But we can plant trees, build roads and fences.
- Kashagan, you mentioned, plans to expand production to 450,000 barrels a day. Now they are slightly behind schedule or adjusting it. For the time being they have not reached a planned 370,000 barrels a day and planning to do so already in 2019...
- Absolutely not, not lagging, even ahead of schedule. They are on schedule, you know, why investors currently, it seems to me, are a little bit lagging behind with the extension. So you want to ask a question, why do not they start this project? Investors are awaiting the outcome. They have invested more than $50 billion, we all know quite well, that with bank remuneration this went up as much as $ 80 billion. Now they are awaiting the return on investment. Once they feel a convincing return, they will begin to release money for the expansion. Without consent from the investors, they the [consortium NCOC] cannot. This does not depend on the NCOC team but on the investors who invested in the project. In addition, I do not think that the investors have only one project - Kashagan. Probably, they have a lot of projects, but Kalamkas is of great interest to them. Therefore, probably this is a tactic or strategy, as soon as they get ready to invest that very day the project will start. We have just wait and see.
- Will there be new discoveries in small and medium-sized areas so that junior companies could earn money?
- You remember, in early 2017 the head of state started his foreign visits with the UK. He was there and signed, unless I am mistaken, contracts of intent with more than 15 European exploration companies so that they come over to Kazakhstan and start working together with Kazakh companies. We are trying to do this - to open new oil fields.
We perfectly understand that any oil filed is to run down. The Ansagan field near Tengiz gives huge hope. There Kazakhstani companies have been developing for many years already, and there is such a long-long list. But now it is necessary to untie the hands of geologists, they must be equipped with technical equipment; actually we lost qualified geologists and did not replenish them. What an educational establishment can boast that they graduate Kanysh Satpayev’s followers? This is creative work, it seems to me that we went ‘too deep’ and attached more importance to technical work. We trained welders but we forgot the subsoil use creative side.
- You mentioned President Nazarbayev's visit to the UK and signed documents, any results?
- There are advancements but the many people were looking forward to the start of the International Financial Center Astana because they wanted to insure themselves and register these companies with IFCA. We are on friendly terms with the British Chamber of Commerce, and I heard that about 4-5 exploration companies have already registered there.
- Now they say that there is nothing to look for at the depth of 3-4 km, let's go to the shelf and subsalt layers, everyone wants to start the Eurasia project. These are all complex projects and big investments, and what will happen to small and medium-sized companies in the market which supply the domestic market with crude oil?
- A very serious, problematic issue. Among the oilmen such companies are called "bucket holders". These are companies which produce 3,000-5,000 tonnes of oil a month, and there are lots of them. First, these deposits were originally acquired by foreigners, then because of small debit and unprofitability they left them and went. At the last auction the Kazakh entities began already to buy them. People, who could earn something in 25 years, began to invest in these fields. And very successfully to be honest. I know one person, who bought really recently two more fields. Yes, this does not produce much, 3,000-5,000 tonnes a month, but fairly enough. There are about 20-30 people involved with each field. This oil output entirely goes to the domestic market.
In order to make these small fields interesting, it seems to me that like in Russia we need to equalize the sale of oil both for export and for the domestic market. We have one price for export, another one for the domestic market. Everybody wants to trade for export, because the price is high. If we today announce that we will now export gasoline to Russia, then it means that these three plants [three refineries in Kazakhstan] are operating at full capacity. The factories are coping fairly well; another issue is that there are not enough raw materials.
Why are we now going to ban imports of lubricants from Russia? Kazakhstani business started to buy up small fields and they supply their products to the domestic market. An unaccounted amount of crude oil has appeared in order to supply these three plants with raw materials.
- Was the increase in supplies to the domestic market significant after the activation of small oil fields?
- No one can give a clear answer on this.
- When did Kazakhstani businessmen start actively buying up small fields?
- Interest appeared as soon as oil prices stabilized. Do you understand what is interested in the oil market? As soon as the price turbulence begins, not to mention small companies, even large investors "catch silence". As soon as the price stabilizes, they begin to invest. Recall 2014-2015, when the oil industry investment portfolio fell completely. Now this re-started but nearer to $ 80 a barrel I have the shivers, I start fearing. Moreover, Trump's latest statement about some kind of agreement with the Saudis also causes concern. The most comfortable price, it seems to me, is $60-$65. And an investor knows what his profit will be, and the oil service would not suffer. The price if it collapses to $30, again all operators will switch in "economy mode" and the oilfield services industry will stand idle.
- Despite the activation of small deposits, does the problem with deliveries to the domestic market remain? Was it somehow possible to satisfy the domestic market with oil due to the resumption of production at mothballed small fields or because did KMG increase supplies?
- The ministry tried to raise up to 40% the domestic market [target] for private companies and the KMG [KazMunayGas] system [to oblige the companies to supply 40% of oil production to the domestic market]. Immediately many investors shut down the oil fields, turned around and left. How do they cope with this today? Most likely, a lot is provided from the KMG reserves. We are not told, of course, but we do not care where they take it. We just want no fuel and lubricant rush anymore. Because it hits the entire industry, this completely undermines the social stability of the population. Our social stability is probably worth more than foreign benefits. “Well done” to the Energy Ministry, which found a way out to provide the full volume [supplies to the domestic refineries] and gave up Russian gasoline, this is a job well done.
Last year, when there was a gasoline price rush I was asked [this] question, then I said that all oil that the KMG system produces was to be left on the domestic market, because it is a national company. For KMG the well-being of the nation must be above all else.
Let me say so - probably the share of KMG exports is reduced and the share of the domestic market increased. Because such work could not be conducted anymore further, that is they hit bottom and began to take action.
- How long will it be possible to live on KMG oil? We asked the ministry whether they are starting negotiations with the three large subsoil users about oil supplies to the domestic market. They insecurely confirmed, but there was a statement already that TCO would supply raw materials to the 4 refineries.
- First, no expert in Kazakhstan has yet seen the PSA at all. If I saw the PSA signed between Chevron and the Kazakh government, I could say that they noted in the PSA that in 40 years they will supply the domestic market with so and so much oil. On the rest too. Who are investors? Let's look into them; these are Agip, Eni, Shell. All those companies that have refineries and produce finished petroleum products. They invest money, supply their plants with raw materials, and, probably, when they signed something, they thought more about raw material supplies for their plant rather than about Kazakhstan’s domestic market.
Probably, this is stipulated somewhere in the PSA. It seems to me that no one should not make any secret of this. The minister should admit that he saw the PSA, and, for example, in 30 years a Kazakhstani citizen will head up these companies and in 35 years the major operators will supply so-and-so much percentage to the domestic market. The more secrets, the more people get angry.
- Let's return to the oilfield service, for many years there was a problem with access to tenders from the companies with Chinese participation. Overstated requirements, violations of the rules for holding tenders were noted. The current minister, Kanat Bozumbayev, without disguising his irritation several times, publicly expressed his opinion on this matter. How pressing is the problem now?
- The oil filed service is facing three classic types of business and three classic types of investors. First, the American one, in the person of Chevron. They have their own approach, program, standards and policies. There is the European one, in particular, NCOC and KPO, where the European companies are more involved. And the Chinese investor.
As far the first and the second ones are concerned we have learned to listen to each other at least. In case no one agrees, at least to listen to. With the third one we have not learned to talk even. Earlier this year I met with the CNPC general director; we talked friendly for three hours. They said: "Super, Kazakhstani business is super! We will help, but we will invest nothing as long as the extension contract has not been signed." To date there is absolute zero, the work is not conducted at all. You have figures; see how much CNPC has invested in the oilfield service. How much for drilling, for construction. This is absurd.
- That is, now does CNPC not invest in its fields in Kazakhstan, pump oil out only?
- They do not invest at all; they only pump out, because the work on the contract extension has not been completed.
- Do they get subsoil use contracts renewed?
- I have got information that lawyers are already working, they will be renewed. But it seems to me that in the new contract it is necessary to regulate all the matters that hurt Kazakhstani business. We remember the times when CNPC arrived in Kazakhstan, and those Kazakh companies that helped CNPC develop. However, seven or eight years later, these Kazakh companies became unqualified for them, and were not needed. Over this time they dragged in their subsidiaries. We ran so much from pillar to post, we fought so much, but so far we do not know how to work with the Chinese oil companies. Sometimes it seems to me that even the government officials do not know how to do this. How many meetings we have held! They have their own vision, understanding – they stand fast and act on their own.
In Aktobe, there is an opinion that CNPC is a company that came to Kazakhstan as an investor, and then turned Kazakhstan into its investor. Sometimes it is painful for us to realize that we are still completely losing out, no matter how hard we are trying. The only one who probably constantly contacts and points out shortcomings to them is our Union. In one year I try to meet two or three times. Sometimes I lack enough additional power, (…) Atameken, KMG, even the Energy Ministry (…) could prop up our work.
- Was this issue brought up at the presidential level?
- We wrote a letter, and I wrote to the president as well. We published about the problem in the media and that's it, the issue was closed. I do not know the secret of such impenetrability of the Chinese companies.
- It was said that joint ventures would be set up with the largest foreign oilfield service companies in Kazakhstan. How many of them have already emerged?
- Where did the idea of creating a joint venture come from? First, in all major projects [Tengiz, Kashagan, Karachaganak] the Kazakh companies could not become general contractors. All the time we were playing second fiddle - at the sub contractual level. The Kazakh companies were evolving, and our ambitions were also growing up. We wanted to reach the general contractor’s level, but there were financial difficulties - it was necessary to insure 30% of the contract value. We, the Kazakh companies, could in no way do this. The idea of creating joint ventures and consortiums came up where a foreign company acts as a financial group, and a Kazakh company as a technical group. Having united our efforts, we begin to enter into large-scale general contracts.
The first victory is already there. As part of the TCO project, the consortium Asar won one lot with participation of the Turkish company Gate as a parent company, and there are 12 Kazakh companies with it. We won the lot and became the general contractor. Now we are preparing the second consortium for commissioning works, it will be called Mura (Heritage). Wood Group will act as a parent company - the strongest in the world for commissioning, and under its umbrella we will gather the Kazakh companies. To date, more than 7 of Kazakhstani companies are willing to participate in this.
Once the system had been implemented on KPO and NCOC projects, when a tender with a value of more than $ 30 million could be awarded only to a company with 50% Kazakh participation, foreign companies themselves began to look for a Kazakh partner. Participation of foreign companies not only provides for financial stability, but also the company stable growth, qualified personnel, new technologies. Our domestic companies are undergoing transformation.
- By the way, is the Alash supplier base, about which there has been so much talk, working now?
- Such a big name, but so far it has not produced any results yet. It seems to me that it's better to register not companies on the Alash database. Operators do not open this database at all. Even if you have passed prequalification through Alash you still have to pass it with the operators. And does this make any sense? I think it would be more productive to register our workforce there.
- Thank you for the interview!
August, 2018
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