The main problems and opportunities of KazMunayGas

in realization оf its oil and gas projects

Introduction
The national company KazMunayGas was formed in accordance with the President’s Decree
of February 20, 2002 through the merger of the companies Kazakhoil and Transport of Oil and Gas.
Practically, since that time the task was set to form a vertically - integrated company which should
take the leading positions in the Kazakhstan’s oil and gas sector and become a large transnational
company in a long term prospect.
It should be stressed that activity of KazMunayGas in realization of projects is directly
connected with the state strategy for the development of the Kazakhstan’s oil and gas sector. For
example, the government of Kazakhstan has adopted several special programs and projects in which
a leading role is allocated to KazMunayGas as a national company. In particular, the talk is about the
«Program for the development of the petrochemical industry in the Republic Kazakhstan for 2008-
2013» and about the «Complex plan for the development of oil refineries in the Republic of
Kazakhstan for 2009-2015». In addition, in February 2010 a state program for the country’s forced
industrial and innovative development through 2014 has been approved.
At the same time, a strategic plan has been elaborated for the development of KazMunayGas
for the period till 2015 in the following directions:
- Exploration and production of oil and gas resources;
- Expanding the volume of proved hydrocarbon reserves by the rates outstripping their
exhaustion, and increasing the fields’ recovery;
- Transportation, processing and marketing of oil and refined products;
- Development of gas sector;
- Development of service sector and infrastructure;
- Introduction of environmentally sound and efficient technologies;
Thus, practically all projects, which are run currently by KazMunayGas, are directly
connected with the approved state programs. However, as practice shows, on many directions
KazMunayGas is not capable of implementing the projects without attraction of financing, investors
and advisers from outside.

The priority projects of the national company KazMunayGas

1. Geological exploration of new fields

The prospects of increasing the number of new oil and gas fields are connected with the
unexplored structures in the Pre-Caspian depression, on the Caspian Sea shelf (the fields
Кurmangazy, Zhemchuzhina, Тyub-Karagan, block N, etc.), on the Aral Sea shelf and also on the
fields revealed by the regional seismic survey in North, Central and South Kazakhstan where under
the results of research conducted earlier a number of prospective areas have been prepared for deep
drilling.

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 It should be mentioned that a search for new oil bearing fields is connected as a rule with the
deposits having abnormal high reservoir pressure (700 - 900 аtm) where it is needed to drill wells to
a depth of about seven thousand meters. However, KazMunayGas has no neither experience, nor
technologies, or means (in the estimates of experts, drilling of one deep well costs $50 million a
minimum), therefore it is needed to attract foreign investors for drilling operations. Also, a weak
point of KazMunayGas is a lack of technical base to conduct 3D seismic survey.

2. Application of new technologies of production at the old fields

The most prospective and productive hydrocarbon fields today in their majority belong to
the foreign companies with KazMunayGas having only a certain share in them. Therefore, the rates
of production growth at the foreign companies operating in Kazakhstan are much higher than at
KazMunayGas which develops mainly the old fields. Meantime, more than half of the fields are
worked out by over 30 %. The matter is that the old oil and gas fields in Kazakhstan (many of them
are low profitable, have high watering and hardly recoverable reserves) start to demand the
introduction of more comprehensive and expensive technologies so that to increase their oil
recovery. Indeed, even in the wells being developed for a long time remains a considerable volume
of oil which is impossible or difficult to produce using traditional methods. This gives an additional
stimulus to the introduction of advanced technologies in oil production. However, KazMunayGas
does not possess such technologies now.

3. Development of offshore fields on the Caspian Sea

In a long-term prospect the expanding of production of hydrocarbons in Kazakhstan is
connected primarily with the Caspian Sea shelf. It means that it is needed to form a sector of
offshore oil and gas operations, new for the country. However, a vital problem for KazMunayGas is
a lack of equipment for offshore oil and gas operations, as well as little experience in the work at
the offshore fields. For example, the drilling barge Sunkar, which is operating within the North-
Caspian project, is managed basically by foreign specialists. At the same time, Kazakhstan does not
have its own oil sea platforms which have Russia, Azerbaijan and Turkmenistan.

4. Establishment of a required service oil and gas infrastructure

Efficient implementation of large-scale oil and gas projects in the Kazakhstan sector of the
Caspian Sea should be accompanied by the outstripping formation and development of modern
industrial and social infrastructure. To accomplish this, a complex plan for the development of the
coastline of the Kazakhstan part of the Caspian Sea has been worked out and approved. The
document defines the provisions recommended for coastal support, processing enterprises, exit
zones of sea pipelines to land, safe storage of waste products, as well as other facilities necessary
for subsoil users. However, for full implementation of the adopted program by 2015 it will be
needed to attract foreign investors, conduct technical examination, and apply new technologies
which KazMunayGas does not possess. To such infrastructure facilities it is possible to refer the
following:
- The system of bases for coastal support of KazMunayGas’s activity;
- Construction of land communications (railways, motorways, telecommunication,
electrification, water supply and etc.);

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 - Development of the ports of Aktau, Bautino and Кuryk for transshipment of large-capacity
cargoes;
- Development of the river port in Аtyrau for transshipment of low-capacity cargoes;
- Deepening of the mouth of the river Ural;
- Productions on repair and manufacture of special floating vessels at the domestic machine-
building plants;
- Construction of the exit zones of sea pipelines to land;
- Construction of facilities on safe storage of wastes.
To date, KazMunayGas has reconstructed the runway in Аtyrau, and completed the
construction of a special mooring, base for servicing offshore operations, a landfill for utilization of
wastes and burial of drilling slime, and a sea vessels filling station. As for other projects, additional
financing and new technologies are required.

5. Development of own oil and gas processing

In the next five-ten years, given the increase in the volumes of oil and gas production,
KazMunayGas has a plan for the development of oil processing and petrochemistry. About 70
companies are engaged in oil production in the republic, while only two are involved in processing –
KazMunayGas and Chinese CNPC. Three oil refineries are functioning in the republic: Аtyrau
(АNPZ), Pavlodar Petrochemical Plant (PPP) and PetroKazakhstan Оil Products in Shymkent. All of
them have out-of-date technologies with a high rate of deterioration.
The main projects of KazMunayGas:
- Full modernization of the Kazakhstan oil refineries (Аtyrau, Pavlodar and Shymkent) till
2015 with the aim of increasing their capacity up to 17 million tons annually, so that by 2014 to
fully satisfy the domestic demand for high quality refined products, especially for gasoline and
aviation kerosene.
- Construction of the first in the republic Gas Chemical Complex in the Аtyrau region;
- Production of road bitumen in the Маngistau region;
- Production of aromatic hydrocarbons at the Аtyrau Oil Refinery (commissioning in 2011);
- Building of the gas processing plant at the Karachaganak field with a capacity of 5 billion
m3.

6. Development of transport logistics aimed to increase efficiency of products’ delivery

to the consumers.
JSC Trade House KazMunayGas, subsidiary of KazMunayGas, plans to establish three joint
ventures on transportation of refined products inside Kazakhstan and for export. The company plans
to develop motor transportation through its subsidiary, KazMunayGasОnimderi, as well as to form a
separate railway company and to continue cooperation with Kazmortransflot (subsidiary of
KazMunayGas) under sea transportation. That is, the talk is about tanker transportation on the
Caspian and Black Seas, and internationally. Kazakhstan should have five tankers with a carrying
capacity of 12000 tons, but at present, it has only three tankers which are designed for navigation on
the Caspian Sea rather than in the world ocean.

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 7. Expansion of a network of gas stations throughout the republic (AZS)
KazMunayGas plans to develop a network of gas stations in the republic and to increase its
share in the domestic market of refined products from the current 20 % to 60 % by 2015. In the
company’s plans are also the development of a foreign network of gas stations. At present, through
its subsidiary Rompetrol in Romania, KazMunayGas supervises a network of 930 gas stations in
some European countries.

The main problems of the national company KazMunayGas in realization of projects

1. Lack of financial resources to run many projects

At present, KazMunayGas experiences significant deficiency of financial resources which
does not allow it to finance a number of projects and deals on the purchase of assets without
attraction of credits. The talk is about $5 - $7 billion. In this regard, the company is constantly
conducting work on attracting foreign investors. Particularly, big problems are with the financing of
the project for the Kazakhstan Caspian System of Transportation (КCST) of hydrocarbons from the
port of Aktau to the Azerbaijan Baku. For example, it is needed to invest, under preliminary
estimates, about $1.4 billion on the construction of the oil pipeline from Iskene (Atyrau region) to
Кuryk (Маngistau region) with an annual capacity of 20 million tons and about 750 km in length,
and on the construction of a transshipment terminal in Кuryk. This is not considering the
investments on onshore infrastructure in Iskene.

2. Weak personnel potential of KazMunayGas

The company’s leadership does not have enough experience in managing such large oil and
gas projects as Kashagan, Теngiz and Karachaganak. Weak is also the preparation of the technical
personnel of the middle and local levels. For this reason, KazMunayGas needs technical expert
examination and consultations of foreign experts. The results of state inspection held in late 2009
showed that of 52 employees of the managing staff of KazMunayGas, 25 % do not correspond to the
requirements of approved duty regulations. In the management of departments, more than 40 % do
not correspond to the qualifying requirements. The facts of occupying the posts of the heads of
departments, chief engineers, engineers and analysts without appropriate profile educational
background and work experience are practically in the company’s each structural division. Also, it
was defined that the existing structure of management is inefficient. For example, the auxiliary
departments and services exceed the production divisions by their number.

3. Lack of advanced equipment

Since 1999, the oil and gas mechanical engineering in Kazakhstan has been fully functioning
due to the orders of KazMunayGas which on an annual basis develops and coordinates «The 3-year
plan for production of equipment» with the machine-building plants.
About two tens of industrial enterprises are operating in oil and gas mechanical engineering,
and they are standing firm basically because of orders of KazMunayGas. The majority of these
enterprises, except for Petropavlovsk Machine Building Plant, are small companies. In total, they
produce about 300 names of technical equipment, from mobile drilling rigs to pipes and reservoirs.
However, it is little if to take into account that annually the extractive companies import thousand
items of oil and gas equipment on $2-3 billion to Kazakhstan, while from local manufacturers they

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buy on $150-200 million a maximum. Foreigners, with rare exception, do not buy local equipment.
It is interesting that KazMunayGas covers only part of its demand on the account of domestic
equipment which often does not correspond to international requirements.
The matter is that many oil producing companies place orders with their partners – special
engineering companies. The largest and well-known among the latter are PFD, Schlumberger and
Halliburton. As a rule, coming in the country to develop fields these companies in turn are bringing
up their subsidiaries or affiliated machine-building companies. As a result, the orders of the
companies for the oil and gas equipment fully remain abroad.
It is for this reason that it would be favorable for the Kazakhstan government and
KazMunayGas to establish joint ventures with the engineering companies which are working in
Kazakhstan or ready to come in the republic to produce the oil and gas equipment. In particular, a
certain interest presents the technologies on sour gas injection under high reservoir pressure and a
big percentage of hydrogen sulfide.

Assessment of opportunities of KazMunayGas in realization of projects

Projects Own potential of Demand for foreign Prospects of

KazMunayGas investments and development
technical expertise
1. Geological Low High Average
exploration of
new fields - Lack of technical base for the - A major financial - Prospect depends
conduct of 3D seismic survey. burden lays on the on the availability of
foreign extractive sufficient financial
- Lack of financial assets companies assets
2. Application of Low High Low
new technologies
of production at - Lack of technologies and work - A main accent is made - A main attention is
the old fields experience in increasing on attracting new given not to the
productivity of old fields investors for the old modernization of old
fields fields, but to the
- Lack of financial assets increase in the share
of KMG in the large
oil and gas projects
with participation of
foreign companies
(Kashagan, Теngiz,
Karachaganak).
3. Independent Low High Low
development of
the offshore fields - Little experience of work on - A major financial - КMG is not going
on the Caspian the offshore fields. burden lays on the to incur all expenses
Sea foreign extractive on independent
- Lack of financial assets companies development of the
offshore fields
because of their
expensiveness.
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4. Creation of Average High High
necessary service
oil and gas - Part of the project has been - Joint financing with the - This project is part
infrastructure already implemented. foreign extractive of the state forced
companies. industrial and
- There is an active support of innovative program
the state. - Work on attraction of for the country’s
new investors. development.
- Under process is the attraction
of the foreign extractive
companies
5. Development Average High High
of own oil and
gas processing - The project is being - Construction of several - This project is under
implemented as part of the state oil and gas refineries is control of the state
forced industrial and innovative made on the account of and has the sources of
program. foreign investments. financing.

- Partial financing is made on the

account of state assets.
6. Development High Average High
of transportation
logistics - KazMunayGas already now - It is supposed to form - This project is part
provides 65 % of oil three joint ventures on of the new concept
transportation, 100 % of gas transportation of oil for KMG’s
transportation, and 50 % of products. development till
tanker transportation which are 2015.
carried out in the Republic of - Taking into account that
Kazakhstan. Oil transportation KazMunayGas wishes to
via the pipelines is made by its gain monopoly on
subsidiary КаzTransOil, gas transportation of oil and
transportation – by KazTransGas gas raw materials inside
and tanker transportation – by Kazakhstan, the demand
the national marine shipping for foreign investments to
company KazMorTransflot. implement this project is
not high.
7. Providing High Low High
demands of the
home market for - By the end of 2009, the number - KazMunayGas - KMG is a
refined products of gas stations of KazMunayGas supervises three oil monopolist among
including has reached 260. By 2013, it is refineries in Kazakhstan, the Kazakhstan
through the supposed to increase this figure and also has large companies in the
increase in the up to 400. By 2015, the company petroleum storage depots sphere of oil
network of gas wishes to have 60 % of the which supply the processing.
stations (AZS). market of fuel wholesale and consumers in all regions.
retail sale.

- After the purchase of the

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 Romanian company Rompetrol
several years ago,
KazMunayGas received a
network of 930 gas stations in
some European countries.
8. Building of oil Average Average High
and gas pipelines
- Company supervises or - KazMunayGas prefers - Already under
participates in the majority of the to build oil and gas process is the project
country’s functioning oil and gas pipelines on the parity for the construction
pipelines. and equal conditions with of oil and gas
the foreign investors. pipeline to China.
- KazMunayGas has experience
and equipment for laying
pipelines.

SWOT-ANALYSIS
OF ACTIVITY OF KAZMUNAYGAS (КMG)
Strengths Weaknesses
1. The company supervises 23 % of the total oil production 1. A significant share of KMG’s assets
in Kazakhstan. comprises old and unproductive fields.

2. KMG has its own raw-material base. The company 2. Weak personnel structure at all levels of
develops 41 fields in Western Kazakhstan. The largest of management.
them is Uzen the production from which is conducted since
1965. KMG’s oil proved and probable reserves comprise 3. High level of corruption and affiliatedness
245 million tons. with the group of the president’s son-in-law.

3. КМG has permanent and active support of the 4. The company’s closeness and non-
government. transparency.

4. One of KMG’s heads is the president’s middle son-in- 5. Weak technical base for the development of
law Timur Kulibaev who lobbies the company’s interests. new and complex fields.

5. The strategy for the company’s development in a 6. Lack of enough experience of work at the
medium term prospect is adopted. offshore shelf fields.

7. The political future in Kazakhstan is of

uncertain character, and this can have a negative
effect on the oil and gas industry.

8. Absence at КMG of a direct exit to the

European market of raw materials.
9. Preservation of KMG’s dependence from the
transit of oil and gas through the territory of
Russia.

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 10. High cost price of oil production ($5-7), and
absence of a direct access to the sea.
Opportunities Threats
1. Increase in production and the volumes of oil export. 1. Further reduction in professional level in
КМG.
2. Appearance of alternative routes of oil and gas
transportation. 2. Preservation of technological backlog from
the foreign oil and gas companies.
3. Establishing in Kazakhstan of advanced petrochemistry
and advanced gas refineries. 3. Reduction in the volume of oil production at
the KMG’s old fields without introduction of
4. Entry of KMG as a shareholder in all large oil and gas new technologies.
projects with participation of foreign companies
(Kashagan, Теngiz, Karachaganak). 4. Reduction in KMG’s share in the total
volume of oil and gas production because of
5. Under favorable price conditions in the world oil market, excessive strengthening of the Chinese
it is possible strengthening of KMG’s financial positions companies.
that will allow it to increase project financing.
5. New collisions between the influential elite
6. Attraction of investors for the conduct of geological groups in Kazakhstan for the right to control
exploration and production at the new fields with КМG that is fraught with new scandals and
participation of KMG. impacts on the company’s reputation.