FOCUS ON UPSTREAM

Strategist’s Tools p. 19

Analytical articles from CSI experts p. 34

Rating of oil and gas producing companies in Kazakhstan p. 47

October 2019
CONTENTS

Key events in the oil and gas market in the world 5

Key events in the energy sector of the Republic of Kazakhstan 13
Strategist’s Tools 19
Review of oil price changes 20
Pricing factors in the global oil market 22
Forecasts of oil prices, breakeven point in oil-exporting countries 23
Review of upstream capital and operating costs indices 27
Overview of key taxes and budget payments, changes in tax law and tax
burden in the upstream sector of Kazakhstan 29
Infographics: oil demand and production in the world and Kazakhstan 31

Analytical articles from CSI experts 34

Will IPO of NC KMG be a success? 35
Does Kazakhstan need a new Environmental Code? 37
Why Kazakhstani goods are not purchased by foreign companies? 40
First things first – Quality of data 45

Rating of oil and gas producing companies in Kazakhstan 47

CSI Oil and Gas Practice: team and contacts 56

Dear readers, colleagues!
We are pleased to present you the first
issue of the annual CSI Energy Outlook.
It is significant that the publication of the
outlook coincided with the celebration
of the 120th anniversary of Kazakhstani
oil. On this anniversary I would like to
congratulate everyone who has devoted
their lives to the oil and gas industry
and hope that the oil industry will be
the source of many more victoriesand
achievements of our country!
It has been four years since the
establishment of consulting company
CSI. Project after project, our company
accumulates expertise, which we strive
to share in every possible way.
A few months ago, we launched the
CSI Digest – a weekly newsletter and
the CSI Monthly – a monthly newsletter.
CSI Digest provides an overview of the
most important news of Kazakhstan and
the world, which, in our opinion, have
the greatest impact on socio-economic
development of Kazakhstan. And, in the
CSI Monthly, CSI employees share their
ideas, views and visions on the most
pressing issues in Kazakhstan and the
world.
We hope that CSI Energy Outlook will
become an annual analytical product
in which the experts of our oil and gas
practice will provide readers with an
overview of the oil and gas industry,
key world and Kazakhstani events in the
energy sector. Our experts prepared an
analysis of the world market and current
trends in the oil and gas sector, having
studied the performance indicators
of the business model of the leading
companies in the industry, as well as
compiled a medium-term forecast for
the development of the industry, which
Alikhan Baidussenov
Managing Partner,
Head of Oil and Gas Practice
was reflected in the forecasting tools in country are exploited, because they
this issue, ratings of Kazakhstani oil and belong to the country, and therefore
gas producing companies, and also a to its citizens. At the same time, I would
number of analytical articles on relevant like to note a positive example of a large
topics in the industry. Kazakhstani oil company, which stands
out from other companies in terms of
Taking this opportunity, I would like to
accessibility and detail of information -
note the invaluable contribution of the
JSC Embamunaigas.
reports of the Global Extractive Industries
Transparency Initiative (EITI) to the in- In this regard, CSI plans to actively
depth analysis of the oil and gas sector. participate in an initiative to further
The implementation of the EITI has been increase transparency in accordance
carried out in Kazakhstan since 2005 by with international requirements of
the initiative of the First President of the EITI standards for extractive industry
Republic of Kazakhstan N. Nazarbayev. companies. And CSI Energy Outlook is
Since joining the initiative, a great deal one of the tools to increase transparency,
of work has been done to increase as it will allow readers not only to
transparency in the extractive sector find out the current state of affairs in
of our country. the industry, but also to understand
how accessible the information is to
For the leadership of Kazakhstan,
the general public. Our company can
raising reporting standards has a high
provide the improvement of data
status of international, political and
collection and analysis, the quality
anti-corruption nature and is aimed
production of accessible versions with
at transparency of the income of
graphical depiction and analytical
companies and the government in the
calculations, conducting EITI forums,
extractive sector. The full implementation
development of processes for provision
of EITI standards in Kazakhstan should
and publication of sensitive information
lead to a reduction in political risks
that may relate to beneficial ownership
and help prevent social tensions
and disclosure of data on social and
in the regions of their activity.
environmental payments of companies.
However, a number of issues still remain
We hope that CSI Energy Outlook will be
open regarding the support by extractive
another source of useful and interesting
industry companies of the achieved
information for all readers! Thank you
level of transparency and its further
for your attention, looking forward to
advancement. In preparing CSI Energy
meeting you in the next issue of CSI
Outlook, we encountered a number
Energy Outlook.
of difficulties in collecting information
(for details see page 48). We are sure
that potential investors face similar
difficulties, which hinder the attraction
of investments to Kazakhstan. And
Kazakhstan citizens are very interested
in how efficiently the subsoils of the
Key events in the oil and
gas market in the world

CSI Energy Outlook 5

 “Druzhba” pollution -
is the largest emergency in the history of the Russian oil industry, which also
affected Kazakhstan
The shutdown of Russia’s most important oil pipeline
due to chlorides entering it is an unprecedented
event in the history of Russian energy exports
to Europe.
The USSR built “Druzhba” in the 1960s to provide
fuel for the socialist countries. Today, Poland and
Germany are supplied along the northern branch,
Hungary, Slovakia and the Czech Republic along
the southern branch.
The key transit country for “Druzhba” is Belarus:
near the city of Mazyr, oil from Russia is distributed
to the northern and southern branches. On April
19, 2019, the Belarusian state concern Belneftekhim
announced that in recent days, the quality of the
Russian Urals export mix has deteriorated sharply.
The content of organochlorine in it is ten times
higher than the norm: 150-300 ppm instead
of the maximum allowable 10 ppm.
Poland and then Belarus stop “Druzhba” on April 24,
a day later, Ukraine stops transit along the southern
branch. Goods from Russia are contaminated with
dichloroethane. This substance is used to increase
the return of depleted deposits, but then they must
certainly be separated from the extracted oil. Experts
admit that about a monthly pumping volume has
been spoiled - up to 5 million tons or 37 million
barrels.
Key events in the oil and gas market in the world
President of Belarus Alexander Lukashenko begins
to demand compensation from Russia. The country
is losing transit potential due to a shortage of
high-quality raw materials, its two refineries are
working half-heartedly and stop exporting petroleum
products, in addition, the Mozyr oil refinery claims
to have broken some of the equipment.
6 CSI Energy Outlook
In Russia, dirty raw materials are not only in the
“Druzhba” pipeline. From it, it enters the Baltic
Pipeline System-2 and through it reaches the export
oil terminal of the port of Ust-Luga. There, oil with
organochlorine is poured into tankers and sent to the
EU countries, but European buyers refuse to take it.
There are reports that China ready to accept oil.
Traditionally, Druzhba’s largest customers are two
refineries in East Germany. The Total concern has
been hiding for a long time that dirty oil has got into
its plant in Loyne, and only on May 17 admits that it
suspended the work of a number of installations “for
technical inspection”. And on May 29, it turns out
that the company, due to interrupted supply
of Druzhba, is forced to work half its capacity.
The second East German client of “Druzhba” is the
PCK refinery in Schwedt. Its co-owners, the Russian
state-owned company “Rosneft” and the British-
Dutch concern Shell, are silent about the losses of the
plant, which turned out to be within 7 weeks without
deliveries via “Druzhba”. But the head of “Rosneft”,
Igor Sechin, wrote a letter to the Russian government
at the end of May, demanding that both the exporter
and the consignee put pressure on “Transneft” for
compensation.
On June 9, net oil via the northern branch of
“Druzhba” arrives from Belarus to Poland, then
reaches Germany. Prior to this, transit through
Ukraine to Slovakia (May 23), the Czech Republic
(May 27) and Hungary (May 29) is being restored.
At the end of June, it became known that the Russian
operator “Transneft” would pay compensation to
Kazakhstani pipeline operator “KazTransOil” for oil
contaminated in the Baltic port of Ust-Luga. At the
Dichloroethane is a toxic and corrosive substance. Turning into hydrochloric
acid, corrodes the walls of pipelines, tanks, railway tanks, especially if there is
a lot of water in oil. But it poses the main threat at high temperatures
for alloy steel used in refinery equipment. If chlorides enter gasoline,
it will destroy the engines.
Sources:
dw.com, tengrinews.kz, vedomosti.ru, transneft.ru
same time, the amount of compensation may be
about $76 million (according to Bloomberg sources).
According to traders, the volume of contaminated
Kazakhstani export oil is 700 thousand tons of about
5 million tons of substandard raw materials that fell
into the “Transneft” pipeline system.
“KazTransOil” is the first pollution-affected party
with which “Transneft” agreed on compensation.
In transit through the pipes of “Transneft”, oil of
Azerbaijan and Turkmenistan is also exported. As
of the end of June, agreements with them were not
known, and the amount of compensation to Belarus
and other European countries where dirty oil had
been delivered or to which supplies of raw materials
had ceased due to suspension of pumping was not
determined.
On July 24, a meeting of the Board of Directors of
“Transneft” was held, at which the issue of resolving
the consequences of the incident with “Druzhba”
was considered. The Board of Directors has set a
limit on payments to shippers under contracts for
the provision of oil transportation services at $15 per
barrel of substandard oil. At the same time, shippers
must document their property losses.

Energy security in the OSCE area

The OSCE Parliamentary Assembly adopted a resolution against
“Nord Stream 2” and “Turkish Stream” (July 7, 2019)
An amendment expressing particular concern has received permission to lay the pipeline from all
regarding the implementation of the projects was countries whose territorial waters are affected by the
introduced by a group of parliamentarians from the route except Denmark. The operator company has
United States, Lithuania and Canada. already submitted three route options for approval
by Copenhagen: the second and third routes do not
The resolution, in which the “Nord Stream-2” and
pass through the territorial waters of Denmark, but
“Turkish Stream” gas pipelines are called potential
affect only the exclusive economic zone of Denmark
means of political and economic pressure on supply-
in the Baltic Sea near the island of Bornholm.
dependent countries, was adopted by the Political
and Security Committee of the OSCE Parliamentary
Assembly. The author of the resolution entitled
“Energy Security in the OSCE Area” is Ruta Miliute,
a parliamentarian from Lithuania. An amendment
expressing particular concern regarding the
implementation of the “Nord Stream 2” and “Turkish
Stream” projects was introduced by a group of
parliamentarians from the United States, Lithuania
and Canada.
The resolution, “Vedomosti” notes, calls on the
governments of the OSCE participating states to
abandon the use of energy as an instrument of
subordination and influence on countries that Route of the “Nord Stream-2” gas pipeline
depend on imports, supply or transit of energy.
“Nord Stream 2” is the trans-Baltic gas pipeline of
Gazprom, which should connect Russia and Germany.
It will carry out direct deliveries of Russian gas to
Europe, bypassing Ukraine. The commissioning of
the gas pipeline is planned at the end of this year.
The design capacity of the pipe is 55 billion cubic
meters per year. The project cost is almost 10 billion
euros. The pipeline may not be launched on time
due to the position of Denmark, which is delaying
the issuance of permission to lay wires in its territorial
waters. The “Nord Stream 2” gas pipeline operator

CSI Energy Outlook 7

 The “Turkish Stream” is a gas pipeline from Russia
to Turkey through the Black Sea. The first line is
intended for gas supplies to Turkish consumers, the
second - for gas supply to the countries of Southern
and Southeast Europe. The capacity of the first and
second threads is 15.75 billion cubic meters each.
Commissioning is scheduled for the end of the year.

Sources: ria.ru, novayagazeta.ru, gazprom.com

Route of the “Turkish Stream” gas pipeline

The first oil supply from USA to Ukraine

The first ever batch of oil from the United States arrived at the port of Odessa
In July 2019, a tanker delivered 75 thousand tons of a day and a half.
American Bakken oil to the Odessa port. They are
The Odessa port reports that this is the first in the
going to process it at the Kremenchug refinery.
history of Ukraine oil supply directly from the United
The Wisdom Venture tanker, whose length is 237 States.
meters, delivered Hong Kong flag on Saturday, July 6,
In April, Russia imposed a ban on the export of oil
to the port of Odessa, 75 thousand tons of American
and petroleum products to Ukraine. According
Bakken oil. This was reported by the press service
to Russian Prime Minister Dmitry Medvedev, such
of the administration of the Odessa seaport.
a decision was made in response to the “unfriendly
The port is fully ready to receive oil, said the head actions of Ukraine.
of his administration, Igor Tkachuk.
“Bakken oil is produced from the Bakken wells
“At one time, large volumes of oil were transited located in the states of North Dakota and Montana
through the port from Russia and Kazakhstan, in the United States, and also partially in the
Key events in the oil and gas market in the world

Venezuelan for the Mozyr refinery in Belarus. A new
transshipment from the US will also be provided with
high-quality transshipment service,” he said.
According to the publication of the Business
Information Network, a batch of oil was acquired
by the public joint-stock company “Ukrtatnafta” for
refining at the facilities of the Kremenchug refinery.
Reception of oil in onshore tanks will take about
Canadian provinces of Saskatchewan and Manitoba.
In the 2000s, the field began active oil production
from oil shale (shale oil) by the methods of oblique
horizontal drilling and hydraulic fracturing.
Sources: rbc.ru, dw.com

Petrochemical industry of Saudi Arabia

Ineos invests $2 billion in the construction of factories in Saudi Arabia
British energy company Ineos plans to invest $2 Jubail 2 industrial zone in Saudi Arabia.
billion (1.6 billion pounds) in the construction of its
These facilities will produce chemicals for industries
first plants in Saudi Arabia.
such as automotive, aerospace and electronics.
Ineos Group signed a memorandum of Ineos in particular plans to build an acrylonitrile plant
understanding with Total and Saudi Aramco on the with a capacity of 425 thousand tons per year by
construction of three petrochemical plants in the

8 CSI Energy Outlook

2025. This will be the first plant of its kind
in the Middle East. In addition, Ineos will build
a plant for the production of linear alpha olefins
(LinearAlphaOlefin) with a capacity of 400 thousand
tons and launch the production of polyalphaolefins
(PolyAlphaOlefin). Launch of production is also
scheduled for 2025.
Security in the Gulf region
USA creates a military coalition to protect oil tankers in the Gulf region
The United States - amid tensions with Iran - intends
to create a military coalition to protect oil tankers in
the Gulf region. “We are negotiating with a number
of countries to find out if we can create a coalition to
ensure freedom of navigation in the Strait of Hormuz
and the Bab el Mandeb Strait,” General Joseph
Dunford, chairman of the Joint Chiefs of Staff of the
United States Armed Forces, said in Washington
on July 9, 2019.
According to him, in the near future it will become
clear which countries have the political will to
participate in such a mission, and then the question
will be asked whether they are ready to make a
military contribution to its implementation. The
American general noted that the United States
is ready to share its know-how and means of
monitoring shipping. Civilian vessels, Dunford noted,
can be escorted by the ships of the country whose
flag they fly.
A third of the world’s oil transported by sea passes
through the Strait of Hormuz, connecting the Persian
Chevron’s activities in Venezuela
US authorities extended Chevron›s license to operate in Venezuela
until January 22, 2020
In the beginning of July 2019, news appeared that
the United States was allowing the possibility of
extending the license of the American oil and gas
company Chevron to work in Venezuela, despite
the US sanctions imposed on this country. This was
reported by the head of the White House National
Economic Council, Larry Cadlow. The license of the
American company was due to expire on July 27.
As a result, the U.S. Treasury Department renewed
Chevron’s license to operate in Venezuela for two
three-month periods: at first until October 25, 2019,
Ineos chairman Jim Ratcliffe called the signing of the
memorandum “an important milestone that marks
our first investment in the Middle East,” BBC reports.
Sources : pfj.ru, nangs.org
and Oman gulfs, notes DW. The Bab el Mandeb Strait
at the entrance to the Red Sea is also one of the
most important shipping routes in the world. On May
12 and June 12, attacks on oil tankers occurred in the
Gulf of Oman. The United States blamed Iran for
the incident, but Tehran has denied any involvement
in these incidents.
According to news at the end of August this year,
the United Kingdom, Poland, Bahrain, and Australia
joined the coalition. The authorities of Japan and
South Korea are still pondering over a request from
Washington. Official Berlin rejected the US proposal,
indicating that it was considering the feasibility of
creating a separate European coalition to protect
merchant shipping in the Strait of Hormuz (linking
the Persian Gulf to the Arabian Sea).
Sources: oilcapital.ru, eadaily.com
then until January 22, 2020. The license involves
doing business with the Venezuelan state-owned
company PDVSA. In addition, the oilfield services
corporations Halliburton, Schlumberger, Baker
Hughes, Weatherford were also allowed to continue
their work in Venezuela.
Note: on January 23, 2019, the Venezuelan
opposition leader Juan Guaido proclaimed himself
interim president. He was supported by several
European countries, as well as the United States.
On January 28, Washington imposed sanctions on
CSI Energy Outlook 9
 Venezuelan state oil company PDVSA, blocking the
company’s assets and interests in its jurisdiction for
$7 billion, and also banned transactions with them. At
the same time, the U.S. Treasury Department issued
special temporary licenses to Chevron and four
oilfield service companies for operations in Venezuela
(for six months).
Sources: bloomberg.com, news.ru, reuters.com

The arrest of the Iranian tanker Grace 1

Oil tanker detained in Gibraltar at US request
On this issue, the Iranian Foreign Ministry called sanctions is unacceptable, ”a government spokesman
“on the carpet” the British ambassador to Tehran. told reporters on Thursday.
On July 4, 2019, a supertanker with oil, supposedly
On the evening of the same day, the Iranian Foreign
intended for Syria, was detained in Gibraltar, media
Ministry announced that the British ambassador
reported. Tanker Grace 1 under the flag of Panama
to Tehran, Robert Makar, was called to the ministry
was detained by the authorities of the territory on
to express “his strong objection to the illegal and
suspicion of violating the oil embargo against Syria.
unacceptable capture” of Grace 1.
According to the Acting Minister of Foreign Affairs
of Spain, Josep Borrel, the detention occurred at the Gibraltar released the Iranian tanker 45 days after
request of the United States. its detention in the waters of the state. The state
made this decision, despite the US request for
Gibraltar authorities say they have “reasonable
the detention of the ship. Washington, in turn, is
grounds” to believe that the tanker was transporting
interested in this, because it wants to achieve the
oil to the Baniyas refinery in the Syrian province of
confiscation of oil on board the vessel, which violated
Tartus. This plant is owned by a company that is
US sanctions. Iran called the decision of Gibraltar
under EU sanctions. Gibraltar Chief Minister Fabian
a victory of diplomacy and the failure of the White
Picardo has already sent a letter to the heads
House policy.
of the European Commission and the European
Council explaining the actions taken by the Gibraltar EU sanctions against Syria prohibit European
authorities in accordance with EU rules. business contacts with Syria, especially in the oil and
petroleum products trade. Sanctions introduced
“We are studying the circumstances in which it
in 2011.
happened. This was a request that the United States
Key events in the oil and gas market in the world

sent to the United Kingdom. We are looking at how Gibraltar is the overseas territory of Great Britain,
this affects our sovereignty, in the sense that disputed by Spain, in the south of the Iberian
it happened in the waters, which, as we understand Peninsula, including the Rock of Gibraltar and the
Spain, ”explained Josep Borrell. sandy isthmus connecting the rock with the Iberian
Peninsula. Enters the EU through UK membership.
The spokesman for the British government’s office,
The territory is the NATO naval base.
in turn, said: “We welcome these decisive actions to
ensure the implementation of EU sanctions against
the Syrian regime. We welcome the decisions of the
Sources: gazeta.ru, aljazeera.com
Gibraltar authorities who conducted this operation.
All this should give a clear signal that violation of

Syria’s position on Grace 1

According to Damascus, the captured tanker was not heading to Syria,
there is no evidence to the contrary
According to news from July 11, 2019, Syria denied The Iranian tanker detained in Gibraltar was not
that Iranian oil on a tanker captured in Gibraltar waiting for a single Syrian port, the link with the
was destined for one of the country’s refineries. Syrian refinery of the Baniyas port, which the British

10 CSI Energy Outlook

intelligence services insist on, is fundamentally
incorrect, the Syrian Parliament’s Foreign Affairs
Committee told Izvestia. They recognized that the
country really continues to purchase Iranian oil, but
they go through other channels. In Damascus, they
called on London to release the oil tanker, since the
British have no legal grounds for detaining the ship.
“There is not a single official confirmation that the
tanker was heading to Syria. I know for certain that
OPEC forecasts
World oil demand in 2020 will exceed 100 million barrels per day
The cartel changed its forecasts in its July report of
the current year. According to OPEC forecasts, world
oil consumption in 2020 will increase by 1.14 million
barrels per day, as a result of which global demand
will cross the sign barrier of 100 million barrels per
day. Consumption in OECD countries, the cartel said
in a July report, will increase by 90 thousand barrels
per day. On the whole, positive dynamics is expected
only in the countries of the Americas, and in Europe
and the Asia-Pacific region demand will decrease,
the document says. Thus, the annual oil consumption
in the world will be 101.01 million barrels per day.
“Factors that may affect the growth rate of oil
demand in 2020 include macroeconomic changes
in major consumer countries, the displacement of
heavy distillates with natural gas and other fuels,
subsidy programs and plans for their termination,
the consequences of commissioning / delays / the
closure of mega-projects in the field of processing
and programs to reduce fuel consumption, especially
in the transport sector, ”the OPEC report said.
The cartel changed its forecasts in its July report of
the current year.According to OPEC forecasts, world
oil consumption in 2020 will increase by 1.14 million
barrels per day, as a result of which global demand
will cross the sign barrier of 100 million barrels per
day. Consumption in OECD countries, the cartel said
in a July report, will increase by 90 thousand barrels
per day. On the whole, positive dynamics is expected
only in the countries of the Americas, and in Europe
and the Asia-Pacific region demand will decrease,
the document says. Thus, the annual oil consumption
in the world will be 101.01 million barrels per day.
“Factors that may affect the growth rate of oil
demand in 2020 include macroeconomic changes
in major consumer countries, the displacement of
heavy distillates with natural gas and other fuels,
our ports did not expect a ship with a similar name
and registration number, ”said Deputy Chairman of
the Committee on Foreign Affairs Ammar al-Assad.
“Nevertheless, our country has the right to purchase
oil from any state, for this we do not need permission
from London or Washington.”
Source: iz.ru
subsidy programs and plans for their termination,
the consequences of commissioning / delays / the
closure of mega-projects in the field of processing
and programs to reduce fuel consumption, especially
in the transport sector, ”the OPEC report said.
At the same time, in 2020, the organization expects
an increase in oil supply from OPEC non-resident
countries by 2.44 million barrels per day to
66.87 million barrels. It is noted that the United
States, Brazil, Norway, Canada, Russia, Australia
and Kazakhstan will become the main drivers of
growth in oil supply, while Mexico, Colombia, Great
Britain, Indonesia and Thailand, on the contrary,
will decrease. “The forecast for a 2020 proposal
by non-OPEC countries, despite the expected
commissioning of new pipelines for transporting
oil from the Permian basin in the amount of more
than 2.5 million barrels per day, is subject to many
uncertainties, including oil prices, investment
management, hedging, inflation costs, unplanned
downtime associated with technical problems,
a delay in the commissioning of new projects and
the duration of maintenance, ”the document says. In
June, OPEC reduced oil production in monthly terms
by 68 thousand barrels per day to 29.83 million,
while in the framework of the OPEC+ transaction, the
organization continued to overfulfill its obligations
- in the reporting month by 22%. “Oil production
declined mainly in Iran, Libya and Angola, while it
grew in Nigeria and Saudi Arabia,” the report said.
OPEC countries that pledged to reduce their oil
production in the framework of the deal, reduced it
in total compared to October 2018 by 987 thousand
barrels per day against the promised 812 thousand.
In particular, Saudi Arabia traditionally showed the
largest reduction, having reduced production by
820 thousand barrels per day, having exceeded the
agreement more than twice.
CSI Energy Outlook 11
 On July 1, the largest oil exporters included in for oil prices, but trade wars will remain a key risk
OPEC+, following a two-day meeting in Vienna, for the market, analysts say.
signed an agreement to extend the deal to regulate
oil production for the next 9 months until March
2020. The decision to extend the deal will be positive Source: wsj.com

US-China trade war

USA plans sanctions against China over imports of Iranian oil
The US administration decided that China’s import sanctions policy against Iran is working. Increasing
of more than 1 million barrels of oil from Iran in June pressure on China in this matter is required from
was a violation of US oil sanctions against Tehran. US President Donald Trump and US Republican
However, it has not yet been finally decided what lawmakers. At the same time, the introduction of
kind of response Washington can give. Meanwhile, such restrictions may complicate the already difficult
the US administration is actively calling for sanctions trade negotiations between the two countries.
against Chinese companies acquiring Iranian oil,
TASS reported.
Sources: tass.ru, oilcapital.ru, July 12, 2019
The US government fears that China’s actions
could undermine Washington’s position that the US

Drone attack in Saudi Arabia

As a result, the country’s oil production fell in September by 1.3 million barrels
per day
The daily average production of the world’s largest WTI crude oil futures for November delivery rose
oil exporter, Saudi Arabia, fell by 1.3 million barrels in by 16% to $ 63.64 per barrel, and Brent crude oil
September due to drone attacks on the country’s oil rose by 19.3% to $ 71.95. Prices have not grown
facilities, the OPEC report said. Now the production so aggressively since 1988. A week later, after
Key events in the oil and gas market in the world

is restored. Saudi Aramco opened data on the progress of

reconstruction, oil prices began to fall again.
On the night of September 14, 2019, 10 UAVs
(unmanned aerial vehicles) attacked Khurais oil field There was an unsuccessful attempt to compensate
and the primary oil refinery at Abqaiq field. After the the fall in production in Saudi Arabia in September
bombing, a fire broke out, which was quickly put out. by Libya (increased production by 104,000 barrels per
Nevertheless, the state-owned oil company Saudi day) and Angola (24,000 barrels per day). The total
Aramco announced a halving of oil production – to production of OPEC countries fell by 5% compared
5.7 million barrels per day. In Abqaiq there is a center to August and amounted to 28.5 million barrels per
for primary oil refining and bringing it to marketable day.
quality, 50% of all the company’s oil goes through it,
said Saudi Aramco. Hussite Yemeni rebels claimed
responsibility for the attack, but the United States Sources: vedomosti.ru, interfax.ru
doubted that and blamed Iran for the attacks. Tehran
rejected these allegations.
Saudi Aramco produced oil less than usual for two
weeks. At the end of September, it managed to
restore production, but the average daily rate for
September still was low – 8.6 million barrels per day.
As soon as events in Saudi Arabia became known,

12 CSI Energy Outlook

Key events in the energy
sector of the Republic
of Kazakhstan

CSI Energy Outlook 13

 KPO announced successful completion
of scheduled shutdown
October 14, 2019 at the Karachaganak field in Kazakhstan successfully completed
planned shutdown
For scheduled preventive shutdown, all production During the shutdown, the following types of work
facilities of the field were completely stopped, were successfully completed:
including the Karachaganak Processing Complex,
--Mandatory maintenance and inspection works;
Complex Gas Treatment Units UKPG-2 and UKPG-3
as well as the product collection system. --Modification of production facilities;
--Pre-installation for the “Removing Production
Up to 12 thousand people were involved daily during
Restrictions on Gas Project”;
the shutdown (including day and night shifts).
In total, the involved personnel worked out about --Pre-installation for the “Construction of the Fourth
3 million man-hours. Gas Re-Injection Compressor Project”;
--Pre-installation for the “Fifth Infield Pipeline Project”;
In preparation for the shutdown, KPO organized
large-scale training for employees of 212 contracting --Pre-installation for the “Karachaganak Expansion
companies. Altogether, 2 216 training courses were Project”.
organized, the results of which were issued 33 000 All scheduled works were completed in full, safely
relevant certificates. and earlier than planned.

Shell has decided not to continue the joint

development of the “Kalamkas Sea – Khazar” project
Key events in the energy sector of the Republic of Kazakhstan

The project was recognized as not sufficiently competitive with other projects
in Shell’s global investment portfolio
North Caspian Operating Company N.V. (NCOC) and Khazar is an oil and gas field, also located on the
Caspian Meruert Operating Company B.V. (CMOC) shelf of the Caspian, is part of the Zhemchuzhina
announced the cancellation of public hearings contract area. The right to develop has a number of
on preliminary environmental impact assessment oil companies led by Royal Dutch Shell, which owns
(Pre-EIA) materials to the feasibility study for the a 55% stake in the project. The operating company
development of the Kalamkas Sea and Khazar for oil operations under the Production Sharing
deposits. The event was to be held on October 1, Agreement is CMOC. According to some reports,
2019 in Aktau. Khazar’s reserves are estimated at 40 million tons
of oil and 10 billion cubic meters of gas. And the
Kalamkas Sea is an oil and gas field located in the
reserves of the entire Pearl block, which also includes
Kazakhstan sector of the Caspian Sea and developed
the Auezov, Naryn and Tulpar fields, are estimated
by a consortium of international companies as part
at 100 million tons of oil.
of the North Caspian Project, operated by NCOC.
According to data from open sources, the geological
reserves of the field are about 150 million tons of oil
and 15 billion cubic meters of gas.

14 CSI Energy Outlook

The new ministry was created -
Ministry of Ecology, Geology and Natural Resources of Kazakhstan
On June 17, 2019, the President of the Republic of - The Ministry of Industry and Infrastructure
Kazakhstan, Kassym-Zhomart Tokayev, signed a Development in the field of state geological study,
decree on the creation of the Ministry of Ecology, reproduction of the mineral resource base.
Geology and Natural Resources of the Republic
of Kazakhstan with the transfer of the following The new ministry was headed by Magzum
functions and powers to him: Mirzagaliev
- The Ministry of Energy in the field of formation and
who previously held the posts of vice minister of
implementation of the state policy of environmental
energy, vice minister of oil and gas, as well as deputy
protection, solid waste management, protection,
chairman of the board of JSC “NC “KazMunayGas”.
control and supervision of the rational use of natural
resources;
- The Ministry of Agriculture in the field of use and
protection of the water fund, water supply, sanitation,
forestry;

Daily oil production at Kashagan reached

370 thousand barrels
Kashagan field completed early repairs and resumed oil production
On May 19, 2019, after the first preventive
maintenance of production facilities, oil production The volume of oil production after the
at the Kashagan field was resumed. Repair work at reopening of the first production well gradually
the oil field began on April 14, lasted 35 days and increased and currently has reached the level of
completed ahead of schedule, which allowed the 370 thousand barrels of oil per day.
resumption of oil production ahead of schedule.
The plan of work included opening, inspection, repair Since the start of production in 2016, to this day,
and maintenance of vessels, safety valves, conversion NCOC has produced more than 20 million tons of
of production wells into injection wells, installation export oil, as well as more than 6 billion cubic meters
of additional reboilers, and other production of gas delivered to the market and more than 850
operations. Mining resumed after the completion thousand tons of sulfur export.
of commissioning of the equipment of the marine
and ground complexes, testing of instrumentation
and automatic process control systems.

Social tension at the fields

There was a conflict in Tengiz between local and foreign workers
of the TCO contractor
On June 29, 2019, in the Tengiz shift camp, working conditions. The reason for the disorder in
local workers of the Consolidated Contracting the Tengiz shift camp was a photograph of an SSER
Engineering and Procurement S.A.L Offshore (CCER, employee from Lebanon, which he published in the
Tengizchevroil contractor) gathered at the work site WhatsApp messenger. The next day, Tengizchevroil
and expressed their dissatisfaction with unequal LLP (TCO) announced a temporary freeze on the

CSI Energy Outlook 15

 construction of a third-generation plant at the Tengiz conflicts at the Tengiz field. Among the more than
field. 10 major conflicts, the biggest is the events at the
Tengiz field on October 20, 2006. Riots at Senimdi
The riots in Tengiz affected 45 people. After the
Kurylys (a contractor for PFD, which, in turn, is a TCO
mass brawl that took place at the construction
contractor), which affected 339 Turkish citizens, 136
site of the third-generation TCO plant, 45 people
of them were seriously injured, several vehicles were
sought medical help. Over 100 foreign citizens
burned, and household premises were destroyed.
left Kazakhstan after the incident in Tengiz. At the
The reasons for the riots: wage discrimination in TCO,
moment, the conflict between the workers is settled.
SK and other contracting organizations, mass layoffs,
Work on the site of the TCO Third Generation Plant
as well as facts of disrespectful attitude of expats
is underway as usual.
to local workers.
Social tensions caused by the unfair attitude of
employers periodically spilled over into major

Nuclear power plant construction

There is no decision on construction yet, but the place has already been
determined in the Almaty region
On April 4, 2019, Deputy Minister of Energy Magzum
Mirzagaliev announced that in the Almaty region
a place was allocated for a nuclear power plant in
case Kazakhstan decides to build it. The site for
the construction of nuclear power plants has been
previously determined in the Almaty region, however,
consideration is still being given to the most suitable
Key events in the energy sector of the Republic of Kazakhstan
document - a memorandum of understanding and
expansion of strategic cooperation in the field of the
nuclear fuel cycle between the Ministry of Energy of
Kazakhstan, “Kazatomprom” and “Rosatom”.
In 2014, Kurchatov in the East Kazakhstan region
was chosen as the location of the station. Later,

technologies for the construction of nuclear power a site was determined in the Almaty region.
plants.
The closest settlement to the proposed construction
The issue of building a nuclear power plant in
site in Kazakhstan is the tiny village of Ulken, 370
Kazakhstan has been under discussion for several
kilometers from the southern capital, near Lake
years. In May 2014, the heads of the atomic state
Balkhash. The village can be reached on the highway
companies of Kazakhstan and Russia, “Kazatomprom”
Almaty - Karaganda - Nur-Sultan. The population of
and “Rosatom”, Vladimir Shkolnik and Sergey
Ulken is 1807 people. Six out of twenty-six high-rise
Kiriyenko signed a memorandum of understanding
buildings are empty.
on cooperation in the construction of nuclear power
plants. Later, in 2016, it was supported by another

Saryarka gas pipeline

Construction works are on schedule and 75% of the pipeline
has already been built
On June 20, 2019, Minister of Energy Kanat of the Saryarka gas pipeline was built
Bozumbayev, at a reporting meeting with the
public, said that welding is currently underway near The Saryarka gas trunkline is being built for
Zhezkazgan. The average pace of welding gasification of the capital of Kazakhstan, as well
is 7-8 kilometers per day. At the same time, work is as settlements of the Karaganda and Akmola
underway on enlightenment, insulation of welding regions.
joints, laying and backfilling of pipes in the trench.
Involved more than 2,200 people and about 700
units of special equipment. As of August 16, 75%

16 CSI Energy Outlook

Construction began in November 2018 and is
ongoing in four phases. At the first stage, the
construction of the Kyzylorda-Zhezkazgan-
Karaganda-Nur-Sultan route is implied. At the
second stage, it is planned to extend the gas
pipeline from Nur-Sultan to Kokshetau, at the
third - to Petropavlovsk. The final stage involves
the construction of Zhezkazgan and Temirtau
compressor stations. The length of the gas pipeline
is 1061.3 km.
KMG EP Buyback
JSC KazMunayGas Exploration Production completed the program of massive
buyback of its preferred shares
In February 2019, JSC KazMunayGas Exploration
Production completed the massive buyback program
for its preferred shares. The final specialized trades
at KASE for the repurchase of preferred shares took
place from January 14 to January 30, 2019, and the
final settlement date was January 31, 2019.
The program for the repurchase of preferred shares
of JSC KazMunayGas Exploration Production was
launched on August 13, 2018 at a price of KZT12,800
per preferred share, which at that time amounted to
a premium of 24.4% to the 30-day average market
price of preferred shares on KASE. Initially, the
program end date was set on November 16, 2018
and then extended until January 31, 2019 due to the
KMG new strategy
JSC NC KMG approved the development strategy until 2028
In September 2018, a new development strategy for
JSC NC KMG until 2028 was adopted. At this stage
of the Company’s development, the implementation
of large investment projects has been completed
and the active investment phase has been
completed. The company formed the strategic vision,
mission and goals of KMG for the next 10-year period
on the basis of the analysis of factors restraining the
growth of its value, developed ways to overcome
them.
The new development strategy of KMG is a strategy
for the gradual organic growth of the company for
2018-2028, which defines the target state of the
Company in the medium term (5 years), as a stable
company with an acceptable level of debt and a tight
debt control system.
It is estimated that 171 settlements in the Karaganda
and Akmola regions will be supplied with gas from
the gas pipeline. The gas pipeline’s productivity will
amount to 2.2 billion m3 of gas per year. In general,
due to gasification, the volume of coal consumption
will decrease by 650 thousand tons / year, which will
significantly improve the environmental status in the
regions through which the gas pipeline will pass.
large number of applications from holders of small
blocks of preferred shares of the Company.
On April 16, 2019, the official press release of
JSC KMG EP was available informing about the
decision on voluntary delisting of preferred
shares with KASE.
Immediately after the completion of the preferred
share buyback program, the restructuring of the
KazMunayGas group of companies was launched,
including the liquidation of the sub-holding structure
of JSC KMG EP.
In the short and medium term, the Company will
focus on strengthening financial stability and focus
on solving operational issues. Realization of medium-
term goals will allow KMG in the long term (10 years)
to carry out investment activities to ensure the
growth of the value of the Company, by investing
in an increase in the oil and gas resource base to
increase the supply of hydrocarbons and oil products,
both to the export and domestic markets. Although
in the medium term KMG plans to reduce debt and
not to attract new borrowings, in the long term,
borrowing for investment purposes is possible taking
into account the financial situation of the Company,
to prevent the deterioration of KMG’s financial ratios
and credit ratings.
CSI Energy Outlook 17
 Privatization program continues
JSC NC KMG is preparing for IPO
According to the April news of the current year, the by a government decree in September 2011 with a
“Samruk-Kazyna” state fund is considering the option maturity of 2011 to 2015. The aim of the program was
of placing from 15% to 25% of the shares of NC KMG to provide opportunities for citizens of Kazakhstan
JSC as part of an IPO. The Chairman of the Board to acquire shares of leading domestic companies
of the Astana International Financial Center (AIX) and to promote the development of the Kazakhstani
Exchange Tim Bennett earlier in March 2019 reported securities market.
that the placement of “KazMunayGas” shares on the
According to the press service of JSC NC KMG (April
AIX site was tentatively planned for the II quarter of
25, 2019), they continue to explore opportunities
2020, but he did not rule out the possibility of listing
to support the growth and development of KMG,
may be delayed.
including a potential IPO.
According to the comprehensive privatization plan
“However, the final decision to conduct such a
for 2016-2020, it is planned to carry out an SPO
transaction, including on the possible structure,
of “Kazakhtelecom”, an IPO of the national railway
timing and involvement of consultants, has not yet
company “Kazakhstan Temir Zholy”, the national
been made. KMG will inform the market about its
oil and gas company “KazMunayGas”, “Air Astana”
decisions in the proper manner in accordance with
and others. The program for introducing equity
regulatory requirements,” the company added.
stakes in subsidiaries and affiliates of the fund on
the Narodnoe IPO securities market was approved

Dunga field
The contract is extended for 15 years, while Kazakhstan will increase its share
Key events in the energy sector of the Republic of Kazakhstan

in the profit oil

On July 4, 2019, an agreement was signed to extend
the production sharing agreement on the Dunga
oil and gas field development project for 15 years.
The document was signed by Minister of Energy of
the Republic of Kazakhstan Kanat Bozumbayev and
Vice President of the Caspian and Southern Europe
Total Exploration and Production Bernard Clement,
Director of Joint Ventures Oman Oil Exploration and
Production Abdul Wahab al Bulushi, Member of the
Board of Partex Oil and Gas Fernando Alves.
The contract is extended from 2024 to 2039, this
will additionally produce about 9 million tons
of oil.
The Dunga oil and gas field is located in the
Tupkaragan district of the Mangistau region.
Geological reserves amount to 106 million tons of oil
and more than 6 billion cubic meters of gas. The field
was discovered in 1966. It was put into trial operation
in 2000.
Currently, the project participants are Total E & P
Dunga GmbH (60%), Oman Oil Company Limited
(20%) and Partex Kazakhstan Corporation (20%),
collectively referred to as the Contractor. The project
operator is Total E & P Dunga GmbH. In 2018,
production at the field amounted to 708,000 tons
of oil and 56.8 million cubic meters of gas.

One of the important terms of the agreement was an

increase in the share of Kazakhstan in the profitable
products division from 40% to 60% by January 1,
2025.

18 CSI Energy Outlook

Strategist’s Tools

CSI Energy Outlook 19

 Review of changes in oil prices in 2011-2017
Whilst the sharp fluctuations in oil prices, CSI experts Chart 2. 2.Share
График of oil producers
Доля производителей in на
нефти theмировом
world market
рынке
analyzed the main driving forces that affect the oil
market. With relatively stable demand, supply factors
come to the fore of the attention.

Chart 1. Change in oil prices, US dollars per barrel

130
Shale boom
Demand reduction
110

90 Libyan Civil
War

70
Beginning of
Arab spring
50

30
2011 2012 2013 2014 2015 2016 2017 2018

At the end of 2014, members of the Organization of

After rising from the summer of 2017 and peaking
at $86 per barrel at the beginning of October 2018,
the price of Brent crude oil underwent a noticeable
correction, falling by about 40% by the end of 2018
(see Chart 1). A similar correction occurred five years
ago. Oil prices plummeted in 2014 after a period
during which Brent crude traded at around $110 per
barrel. And in January 2016, prices fell to less than
$30 per barrel.
Changes in oil supply sources have become an
important factor in rising oil prices since the advent
of shale oil in the United States. Since 2011, the
US shale oil production capacity has expanded
significantly, allowing the United States to compete
with the two largest global oil producers, Russia
and Saudi Arabia, in terms of daily production.
The development of production technologies
and investments in pipeline systems and railway
capacities have allowed US producers to expand
production, which has made the US an important
driver in the global oil supply. Between 2011 and
the summer of 2014, the US share in the aggregate
supply increased significantly (see Chart 2).
Strategist’s Tools
Petroleum Exporting Countries (OPEC) changed their
strategy by abandoning oil quotas in an attempt
to regain their market share and, according to some
market analysts, crowding out US oil supply, lowering
oil prices below the level at which US shale oil
producers can be profitable. OPEC’s actions led only
to a short-term reduction in shale oil production.
At the end of 2016, OPEC had to reconsider its
approach, since a decrease in global demand led
to a further decrease in oil prices. The OPEC strategy
put pressure on the public finances of its members,
and indicators of fiscal sustainability in the period
2014-2016. sharply worsened for most OPEC
countries. As oil prices began to rise again in 2017,
US producers quickly regained their market share.

20 CSI Energy Outlook

Overview of changes in oil prices in 2018-2019
Chart 3. Oil price in 2018-2019, US dollars per barrel extent to which members would comply with the
conditions for reduced production. Consequently, the
Production
100
reduction
decline in oil prices did not stop until the beginning
90 agreement of 2019 after the initial figures for December
indicated a significant decrease in production
80 at OPEC.
70 Further support for the oil price should be provided
60 U.S. Iranian oil sanctions by the extension until March 2020 of the OPEC+
announcement since
agreement on reducing the total oil production
50 November 2018
by 1.2 million barrels per day relative to the level
40 of November 2018, starting from July 1, 2019.
30
2018 2019 Chart 4. Demand for oil
Annual percentage
График 4. changes, quarterly data
Спрос на нефть

The latest fluctuations in oil prices by the end of 2018

were caused by significant changes in the market
assessment of the prospects for oil supplies. Despite
U.S. production growth, oil prices rose during the first
three quarters of 2018, as market participants focused
on lowering production in Venezuela and the
prospects for Iranian exports to decline after the U.S.
withdraws from the 2015 Iranian nuclear agreement.
In May 2018, the United States announced that,
starting in November 2018, they would again impose
sanctions on the export of Iranian oil. By October
2018, Iranian oil exports had already declined by
about 0.35 million barrels per day.
At the same time, the market was worried about The growth in aggregate oil demand in recent years
whether OPEC would respond by increasing has been more stable, but is expected to decline
production to compensate for the loss of Iranian by the end of 2019. Over the past decade, energy
products in world markets. However, since the consumption in countries that are not members of
beginning of October there has been a noticeable the Organization for Economic Co-operation and
correction in prices. Saudi Arabia and Russia have Development (hereinafter referred to as the OECD),
given assurances that they will indeed increase especially in China, has been the main driver of
production, if necessary, after the imposition of global oil demand (see Chart 4). However, demand
sanctions. Further downward pressure was exerted growth in emerging and developing economies
by the decision of the US government to provide has been balanced by slowing demand in OECD
six-month exemptions for oil imports to key Iranian countries. Recently, when economic growth in
consumers. At the beginning of December 2018, emerging and developing economies has slowed
OPEC, together with the largest manufacturers somewhat, there has been some similarity in oil
that are not members of OPEC, agreed to reduce demand growth in OECD and non-OECD countries.
production. However, there were doubts as to the

CSI Energy Outlook 21

 Pricing factors in the global oil market
The role of OPEC and other major producers
cooperating with OPEC remains an important
factor in the dynamics of oil prices. Extra-large
oil producers, such as Saudi Arabia, still play an
important role. Nevertheless, the OPEC strategy
to lower oil prices in 2014 and 2015 was not able
to suppress shale oil production in the United
States, which indicates a decrease in OPEC’s ability
to stabilize prices at the desired level over longer
periods of time. While traditional production
methods are usually cheaper than shale oil, most
oil-exporting countries need higher oil prices to
balance their public sector budgets. However, the
shale revolution helped limit the increasing pressure
on oil prices, as US production tends to rise when
prices exceed the break-even level. According to
an energy study conducted by the Federal Reserve
Bank of Dallas, the operation of existing wells can be
profitable in the price range of 25-35 US dollars per
barrel.
In general, the shale revolution has changed the
structure of the oil market. OPEC strategies should
now take into account the reaction of shale oil
producers. Competition from shale oil producers
may reduce the ability of traditional oil producers to
raise prices above a given level over long horizons.
At the same time, the process of adapting OPEC
strategies to a new source of competition has led to
some volatility in oil prices in recent years. Given that
oil price volatility will continue in 2019, the CSI team
examined a number of factors and identified the
most likely triggers that, in our opinion, will affect
the price of oil in 2019-2021.
The main factors that will affect the price
of oil in 2019-2021
1. Demand
Market demand is the main driver of oil prices and
in case of signs of weakening demand, the price
of oil will decline. Forecasts regarding demand are
mostly negative. Thus, OPEC lowered its forecast
for oil demand growth by 100,000 barrels per day.
Goldman Sachs also lowered its forecast for oil prices
Strategist’s Tools
due to concerns about oversupply and relatively low
demand. These forecasts indicate a possible decrease
in demand, which will negatively affect prices over
the entire period.
22 CSI Energy Outlook
2. The economic situation in China
China is the largest exporter and the second largest
country in terms of imports in the world (after the
United States), this fact has a strong influence on the
global economy. Today, a big uncertainty is formed
by the trade war between the USA and China. The
negative impact of external circumstances slows
down industrial production in China, and forecasts
of GDP growth look disappointing. The Chinese
stock market received the title of the worst stock
market in 2018, thanks in large part to the trade war.
Inflation among manufacturers is also troubling in
China, rising by only 0.9% compared with growth
expectations of 1.6%. If in 2019 the most important
consumers in the world see a slowdown in economic
growth, both the global economy and oil markets will
suffer.
3. Global crisis and financial instability
We are currently in the longest bull market in
history, and this fact can be considered a cause
for concern. In 2018, sales on the US stock market
repeatedly occurred due to fear of the financial crisis,
slow growth and a trade war. In 2019-2021, close
monitoring of the state of the world economy should
continue. The US yield curve, a time-tested measure
of forecasting recession, has flipped over again.
The inverted yield curve is a bad omen for both
the global economy and the oil market.
4. Geopolitical Factors in the Middle East
Due to the compact location of the largest oil fields,
the Middle East is considered a rather important
region, and any tension in the region can seriously
affect oil prices.
It is also noteworthy that the events around
important logistics hubs, which play a key role in the
transportation of Middle Eastern oil, also influence
futures quotes. So, events in countries that control,
for example, the Strait of Hormuz, significantly affect
prices. According to Lloyds, the strait accounts
for up to 40% of world exports.
5. Maritime regulations 2020
The International Maritime Organization (IMO)
announced in 2016 a new set of rules, which should
be enforced by 2020 and provides for reducing
the sulfur content in “all types of marine fuel” from
3.5% to 0.5%. There are different opinions regarding
the readiness and potential of the refinery for such
reforms. According to one estimate, to fulfill these
rules, it is necessary to build almost 75% of additional
capacities. Moreover, the costs of this may not
be offset by sales. In any case, it will be extremely
important to monitor changes in the IMO 2020 rules,
which could lead to a significant change
in the demand for crude oil.
6. Reduction in oil production
Perhaps the most predictable and understandable
factor, which, however, is losing its importance year
by year. The reason is clear: American and Canadian
oil workers are producing more and more oil, and the
influence of OPEC is less and less.
Countries included in the oil cartel meet twice a year
and decide on the volume of production or, to be
precise, on oil quotas. Quotas are formed for each
country, but a total figure (volume) is announced.
In December 2018, OPEC+ countries decided to
reduce daily production by 1.2 million barrels. On
July 1, the largest oil exporters included in OPEC
+, following a two-day meeting in Vienna, signed
an agreement to extend the deal to regulate oil
production for the next 9 months until March 2020.
In general, this fact may provide further support for
the oil price.
As of September 2019, OPEC includes 14 countries:
Algeria, Angola, Venezuela, Gabon, Iran, Iraq, Congo,
Kuwait, Libya, United Arab Emirates, Nigeria, Saudi
Arabia, Equatorial Guinea and Ecuador. Qatar has left
the organization since January 2019.
7. Sanctions on Iran
Existing sanctions against Iran and the potential
withdrawal of US sanctions will remain one of the
Oil Price Forecasts
Oil price dynamics in 2019: what to expect
from the global oil market?
According to the World Bank forecast for 2019, oil
prices this year will average $66 per barrel and $65
per barrel in 2020. A slight downward revision of
the oil price forecast is associated with lower than
expected global economic growth forecasts and
higher than expected oil production in the United
States.
The ongoing trade dispute between the two main
key factors in the oil markets in 2019-2020. The
resumption of exceptions that have already been
made for major purchasers of Iranian crude oil is far
from unambiguous. Any decision to renew or cancel
them will have serious consequences for oil prices.
8. Climatic factors
One of the most consistent factors affecting the price
of oil is the weather. Each year in August-October,
the focus of the oil market is shifting towards
weather conditions in the Gulf of Mexico. The Atlantic
hurricane season often makes serious adjustments
to expert forecasts. The period from September to
October is the peak of the hurricane season, and this
is important for the industry and market players in
that most of the US mining and processing capacities
are located in a region that is subject to the influence
of these same disasters.
In other words, an impending hurricane may stop
or limit production and processing for some time.
Often, companies evacuate workers in advance and
reduce production. For example, in 2017, hurricanes
Harvey, Irma, and Nate paralyzed the operations of
the Gulf of Mexico enterprises, which led to a 12%
drop in US production and a decrease in refinery
load at the beginning of September from 96.6% to
the minimum since 2008, 77.7%.
Hurricane Dorian, which occurred in August 2019,
did not support oil quotes, as it passed by the main
producing territories of the United States.
Although this list of factors is far from exhaustive, it
contains the most significant catalysts for rising oil
prices, which can be observed in our next section,
where we predict the dynamics of prices. Thus, the
interaction between the above factors is likely to
play a large role in shaping developments in the oil
market in 2019-2021.
consumers of crude oil - the United States and China
- continues to suppress rising oil prices. Although the
price of oil may still rise in 2019, as OPEC makes sure
that oil reserves are “under control”.
According to the OECD, “tensions in trade are
damaging not only short-term, but also medium-
term prospects, which requires the government to
take urgent measures to revive growth.” The current
alliance of OPEC and other countries can keep oil
prices afloat, by not rushing to increase production.
Thus, oil prices may continue to rise as the OPEC
CSI Energy Outlook 23
 alliance continues. Recently, OPEC and its partners
once again reduced production in an effort
to stabilize the oil market.
According to EIA’s Short-term Energy Outlook, crude
oil production in OPEC countries will average 30.3
million barrels per day, which is 1.7 million barrels
lower than in 2018. The EIA predicts a further decline
in oil production by 0.4 million barrels per day to
29.8 million barrels per day in 2020. Also, according
to EIA forecasts, a decrease in world oil reserves of
0.2 million barrels per day in 2019 and 0.1 million
barrels per day in 2020 is expected. According to the
forecasts, global oil demand will grow by 1.4 million
barrels in 2019 and by 1.5 million barrels in 2020.
In April 2019, crude oil prices rose for the previous
4 consecutive months, gradually approaching
a 6-month high. Despite the EIA forecast for a
decrease in Iranian oil production and exports, oil
supplies from OPEC and other countries seem to be
able to compensate for the shortage of Iranian oil.
Increased oil production is expected in the United
Arab Emirates, Kuwait, Saudi Arabia and Russia.
In June-July, Brent quotes moved in the range
of $60–67 per barrel. Economic indicators point
Strategist’s Tools
24 CSI Energy Outlook
to a potential slowdown in global economic growth.
In turn, it can lead to a decrease in oil demand.
A noticeable response among investors was not even
provoked by the decision to extend the contract to
reduce production at OPEC+ (July 1). In August -
the first trimester of September, Brent quotes were
already in the range of $55–64 per barrel.
According to RBC news for July, JPMorgan analysts
believe that in the third quarter, oil prices may reach
an average of $67.33 per barrel. BNP Paribas analysts
are even more optimistic. The French bank predicted
the growth of Brent quotes to $ 76 per barrel
by September of this year.
According to the EIA forecast, the price of Brent
crude oil in 2019 will be $73 per barrel, which is $5
more than previously predicted and will drop to $67
per barrel in 2020.
Given the pricing factors listed in the previous
section, CSI analysts forecast that oil prices can vary
in the range of $52-92 per barrel in 2019-2021 with
an average of $65, $69, $72 per barrel by the end
of 2019, 2020, 2021 , respectively (see Chart 5).
What will happen in 2019-2020 in oil
exporting countries?
What will happen in 2019-2020 in oil
exporting countries?
Oil exporting countries are heavily dependent
on energy revenues to finance their economy as
a whole, including the allocation of subsidies to
address priority issues in these countries. Thus, the
break-even points of the budget of oil countries are
more important for world energy prices than the
sale of a barrel of oil by large oil companies, which
must finance capital expenditures and pay dividends
Chart 5. Dynamics of oil prices in 2018-2021, US dollars per barrel
to shareholders. The breakeven point differs in each
country depending on the budget deficit of various
oil producers.
According to our expectations of oil prices, as well
as statistics from the International Monetary Fund,
we have identified a number of countries that may
have potential budget deficit problems with the
aforementioned forecast oil prices
(see Charts 6 and 7).
CSI Energy Outlook 25
 Chart 6. Break-even point in oil-exporting countries in 2019

Chart 7. Break-even point in oil-exporting countries in 2020

Strategist’s Tools

26 CSI Energy Outlook

Review of Upstream Capital Costs Index

Chart 8. Dynamics of changes in the UCCI index and world oil prices

Brent USD (2000=100) Brent KZT (2000=100) UCCI

800 250

700 225

UCCI Index (2000 year = 100)

Oil prices (2000 year = 100)

600 200

500 175

400 150

300 125

200 100

100 75

0 50
2000 2004 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: IHS CERA, National Bank of the Republic of Kazakhstan

Upstream Capital Costs Index (UCCI) tracks
the costs of building production infrastructure and
equipment. The index is based on a geographically
diversified portfolio of 28 mining projects - onshore,
offshore, pipeline and LNG (liquefied natural gas)
projects.
The UCCI is similar to the consumer price index and
serves to track the level of costs around the world.
Chart 8 shows a direct relationship between changes
in capital costs and changes in oil prices. So, for
example, in 2009, the Brent index rose to 400
units compared to the base 100 units in 2000, i.e.
4 times. In turn, the UCCI rose to 230 units, i.e. 2.3
times. Thus, the coefficient of elasticity was 0.43, i.e.
for every percentage increase in oil prices, capital
expenditures increased by 0.43%.

CSI Energy Outlook 27

 Review of Upstream Operating Costs Index

Chart 9. Dynamics of changes in the UOCI index and world oil prices

Brent USD (2000=100) Brent KZT (2000=100) UOCI

800 250

700 225
Oil prices (2000 year = 100)

UOCI (2000 year = 100)

600 200

500 175

400 150

300 125

200 100

100 75

0 50
2000 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014 2015 2017 2018 2019
Sources: IHS CERA, National Bank of the Republic of Kazakhstan
Note: The level of detail for UOCI is greater than UCCI. Those. the graph, including curves for the level of oil
prices, is built on a larger number of points. As a result, oil price curves in Charts 8 and 9 may vary slightly.

Upstream Operating Costs Index (UOCI) worth noting that Kazakhstan joined the Extractive
measures the change in the value of operating Industries Transparency Initiative, according to which
expenses in oil and gas fields. It is similar to the information on the use of the country›s natural
consumer price index (CPI) and serves to compare resources should be open to the public. Thus, if
costs around the world. procurement information is disclosed as part of this
The graph shows a direct relationship between program, it will be possible to calculate and track
changes in operating costs and changes in oil prices. the UCCI and UOCI indices for Kazakhstan.
So, for example, in 2009, the Brent index rose to 400 As a result of tracking indices in Kazakhstan, oil
units compared to the base 100 units in 2000, i.e. and gas companies will be able to use this data in
4 times. In turn, the UOCI index rose to 173 units, strategic planning and forecasts of their activities.
i.e. 1.7 times. Thus, the coefficient of elasticity was
0.24, i.e. for every percentage increase in oil prices,
operating costs increased by 0.24%.
In the future, it is advisable to conduct a similar
analysis on the situation in Kazakhstan on a
regular basis. This will be possible when disclosing
Strategist’s Tools

details on the types of goods, works and services

purchased by oil producers in their reports. It is

28 CSI Energy Outlook

Overview of key taxes and payments to the budget
from oil and gas companies
Mineral Extraction Tax (MET)
--Subject of taxation: the physical volume of hydrocarbons produced by a subsoil
user for the tax period
--Tax base: the value of the volume of hydrocarbons produced during the tax period
--Tax period: calendar quarter
--Tax rate: varies from 0.5% to 18% depending on the volume of annual production,
type of hydrocarbons produced, domestic sales or export

Rent tax on export

--Subject of taxation: the volume of crude oil and crude oil, coal products sold for
export (except for the volumes transferred by the subsoil user to fulfill the tax
obligation in kind and sold by the recipient on behalf of the state or authorized
person)
--Tax base: the value of exported crude oil and crude oil products, calculated
on the basis of the volume actually sold for export and the world price calculated
in the manner determined by the Tax Code of the Republic of Kazakhstan
--Tax period: calendar quarter
--Tax rate: varies from 0% to 32% depending on the world price of oil

Export Customs Duty (ECD)

--The ECD rate for crude oil and products derived from oil is determined based on
the average market price of crude oil prevailing in the world markets for crude oil
for the previous period. The preceding period - starts from the 20th day for two
months, until the 20th day of the month preceding the month of application of
export customs duties.
--Crude oil export customs duty rate: varies from 0 to 236 USD per ton

Corporate Income Tax (CIT)

--Subject of taxation:
- taxable income;
- income taxed at the source of payment;
- net income of a non-resident legal entity operating in the Republic of Kazakhstan
through a permanent establishment
--Tax period: calendar year from January 1 to December 31
--Tax rate: 20%

CSI Energy Outlook 29

 Excess profit tax
--Subject of taxation: a part of the net income of a
subsoil user exceeding an amount equal to 25% of
the amount of deductions of a subsoil user for the
purposes of calculating excess profit tax
--Tax period: calendar year from January 1
to December 31
--Tax rate: from 0% to 60% depending on the
percentage of net income in excess of 25% of the
ratio of net income to deductions for calculating
excess profit tax
Source: Tax Code of the Republic of Kazakhstan;
Order of the Minister of National Economy of the
Republic of Kazakhstan dated February 17, 2016 No.
81 “On approval of the List of goods with respect to
which export customs duties are applied, the size of
rates and their validity, and the Rules for calculating
the rate of export customs duties for crude oil
and goods derived from oil”.

Overview of changes in tax law and tax burden

in the upstream sector
Overview of Changes a mining allotment, 5,000 meters or less.
--In 2018 introduction of a “new” alternative tax on --This right shall apply from the date of the
subsurface use in exchange for rent tax on export, conclusion of the mining contract or the beginning
payment on reimbursement of historical costs, of the mining period under the combined
mineral extraction tax and tax on excess profits exploration and production contract until the
of subsoil users; expiration date of the relevant subsoil use contract
--The cancellation of the commercial discovery bonus and is not subject to change
in 2019 in order to stimulate exploration; --Subject of taxation: the difference between the
--Direct binding of the ECD rate for gasoline and total annual income for the purposes of calculating
diesel fuel to the ECD rate for oil, effective since Alternative Subsoil Use Tax and deductions for the
2019. purposes of Alternative Subsoil Use Tax, taking into
account the adjustments provided for by the Tax
Code of the Republic of Kazakhstan
Alternative Subsoil Use Tax
--Tax period: calendar year
Alternative Subsoil Use Tax is entitled to apply, in
exchange for a payment for the reimbursement of --Tax rate: from 0% to 30% depending on the world
historical expenses, mineral extraction tax and excess price of oil
profit tax, legal entities-subsoil users who have
concluded:
Source: Tax Code of the Republic of Kazakhstan.
1. a contract for the production and (or) for
combined exploration and production of
hydrocarbons on the continental shelf
of the Republic of Kazakhstan;
2. a contract for the production and (or)
exploration and production of hydrocarbons
in fields with a depth of the upper point of the
hydrocarbon deposits indicated in the allotment
Strategist’s Tools

or in the contract for production or exploration

and production of hydrocarbons in the absence
of a mining allotment, not higher than 4,500
meters and the lower point of the hydrocarbon
deposits indicated in a mining allotment or in a
contract for the production or exploration and
production of hydrocarbons in the absence of

30 CSI Energy Outlook

Tax burden in Kazakhstan in 2017-2018
Under the current tax regime, oil producing and
exporting companies pay about half of the price
of a barrel to the state budget in the form of the
following taxes and payments: MET, ECD, rental tax
on export and CIT*.
Assumptions: all produced oil was exported; oil
production volume was 120 thousand barrels per day (6
mln tons per year).
* For the calculation, the average value of income
tax per unit of production for oil and gas companies
included in the CSI rating was taken.
Source: Tax Code of the Republic of Kazakhstan.
Infographics: world oil demand and production
Government take in the upstream sector
in the world
The average share that companies in the upstream
sector are obliged to pay to the state in different
countries (government take) for 2009-2014, %
Measured as Net Present Value (NPV) of payments
to the state, divided by the sum of NPV of free cash
flow and NPV of payments to the state
Comment: In general, this share may be higher due
to the social burden in the form of sponsorship for the
development of the region, etc.
Source: https://www.bcg.com/publications/2015/
government-take-in-upstream-oil-and-gas-framing-
a-more-balanced-dialogue.aspx
CSI Energy Outlook 31
Strategist’s Tools

32 CSI Energy Outlook

Oil and gas production in Kazakhstan

DONOR REGIONS AND RECIPIENTS OF THE STATE BUDGET: two out of four regions
replenishing Kazakhstan budget are oil and gas producing regions

Subventions from the republican budget / withdrawals from the local budget** in absolute value
(billion tenge) and in percentage of the local budget in 2018

* Total for Turkestan region and Shymkent

** Withdrawals from the local budget are expressed in negative values
Sources: Statistics committee of MNE RK, MF RK

CSI Energy Outlook 33

 Analytical articles from
CSI experts

Will IPO of NC KMG be a success? p. 35

Does Kazakhstan need a new Environmental Code? p. 37

Why Kazakhstani goods are not purchased by foreign companies? p. 40

First things first – Quality of data p. 45

Analytical articles from CSI experts

34 CSI Energy Outlook

Will IPO of NC KMG be a success?
National Company KazMunayGas (NC KMG) is
expected to launch an IPO in 2020. Will this IPO be
a success? To answer this question, we first need
to agree on how to define success. In doing so it is
important to take time and consider a broader range
of issues beyond the financial metrics of the shares
placement.
A potential listing and offering of NC KMG shares on
the stock market has been under consideration for a
few years. Officially, no formal IPO decision has been
made yet. Nevertheless, the readiness of NC KMG for
the IPO was discussed at a meeting of the president
of Kazakhstan Kasym-Zhomart Tokayev and Alik
Aidarbayev, the CEO of the National Company in
May 2019. This is one indication that the IPO in 2020
can be viewed as a so-called base case scenario.
The potential IPO of NC KMG would be an extremely
important event for Kazakhstan. Firstly, KMG is
the largest asset in the governmental privatization
program. NC KMG group is estimated to generate
about 5% of the country’s GDP. Furthermore, the
group is responsible for a large share of export
revenues and tax receipts while being a large
employer as well as a buyer of goods and services
for many Kazakh companies.
Secondly, NC KMG represents the strategic
resources sector which plays a crucial role in the
Kazakh economy. For this reason, IPOs and any
other developments that improve transparency and
accountability in this sector boost the attractiveness
of the broader economy.
Thirdly, given its size and position in the strategic oil
sector NC KMG shares are destined to become
a “blue chip” of the local stock market, contributing
to its development and thereby attracting investors
to all sectors of the Kazakh economy, in particular via
the recently created AIFC financial hub.
Besides,
as the first large privatization deal after the
2019 presidential elections, NC KMG IPO would
become one of the indicators of confidence of
international financial markets in the Kazakh
political system
its ability to maintain stability, predictability and
market friendliness in the process of so-called transit
of power.
Given such importance of the upcoming public
offering, the NC KMG team will undoubtedly do
its best so that the IPO can be confidently called a
success. The more important is then to consider what
should be viewed as a successful IPO.
Evaluation of IPO results can be done in different
ways leading to starkly different conclusions. Take the
IPO of the Brazilian national oil company, Petrobras,
in September 2010 as an example. The deal
amounted to a record $70 billion which translated
into the entire company valuation of $200 billion, the
fourth biggest in the world at the time. Shares
of various types were placed domestically and on the
New York stock exchange, the most prestigious and
demanding stock market in the world. Furthermore,
investors accepted high valuation per barrel of
reserves of the Brazilian company. Petrobras
confidently took its place among global oil and gas
leaders. Why not an example of a successful IPO,
it would seem?
However, looking at this transaction from the point
of view of its participant, a long-term investor who
bought Petrobras shares in New York in 2010 at the
placement price of $34.5 per share (for example,
instead of investing in ExxonMobil trading on the
same exchange at about $60 per share), the picture
may be completely different. At IPO the investor
made a bet that assuming fairly high oil prices hold
on, the massive subsalt oil reserves of Petrobras
would be efficiently developed through an ambitious
capital investment program, financed by IPO
proceeds among other sources, and this would lead
to share price appreciation.
Fast-forward a few years. In April 2015 Petrobras
issues, with a delay, financial statements for the
year 2014. These statements reflect the assessment
of the damage caused to the company by corrupt
activity of managers and contractors in the process
of implementing that impressive capex program
investors were betting on. Corresponding losses are
valued at about $17 bn. By this time Petrobras has
been in the center of an international investigation
called “Carwash”, the one that uncovered cases of
inflating contract prices for bribes and led to charges
against over 30 executives at Petrobras and its
contractors. Add to that lower oil prices, reduction in
capital investment, suspension of dividend payments,
sales of oil and oil products at reduced prices on the
local market (as demanded by the government), and
you get the outcome for our investor: shares trading
at $5-7, five times lower than at the IPO 4.5 years
before. For comparison, ExxonMobil shares went up
CSI Energy Outlook 35
 from $60 to $80 per share during the same time.
In this example,
we see two sides of the same IPO. On the one
hand, a professionally conducted share placement
for a record amount at a good price on a leading
stock exchange. On the other hand, an investor
with an 80% loss
and a company with a seriously damaged reputation.
Should this IPO be regarded as a success or a failure?
Going back to the planned IPO of NC KMG, one
suggestion is not to rush with evaluating its results.
There is no reason to doubt that such company as
NC KMG is capable of going through a standard
procedure of listing its shares on international
exchanges. Specific financial parameters of the shares
placement would depend on a variety of factors
that would range from the IPO team efforts to
external conditions such as oil price dynamics, stock
market conditions at the moment of placement,
news flow, competitors’ activities. If the placement
does go ahead than surely on terms that NC KMG
management advised by experienced bankers will
regard as attractive.
In sum, if the IPO of NC KMG happens in 2020, there
is every reason to believe it will be called a success.
And this success should not be underestimated, as
it would represent the result of significant efforts in
preparing the company for the listing. IPO in like
launching a new ship, the result of huge work and
a good reason to celebrate. However, what really
matters for a ship is how it will be able to conduct
its missions, under various sea conditions.
For the key company stakeholders including
employees, the state, suppliers and contractors,
the population of the regions where the company
Analytical articles from CSI experts
operates, what matters most is not the IPO
transaction as such, but the public company
that emerges as its result. Will this company be
financially stable? Will it behave predictably? Will
it be transparent? Shall it deliver on the promises
made to the shareholders? Will it provide work for its
suppliers and ensure fair competition? Will it be fair
in distributing profits? Will it behave responsibly
in terms of safety and environment?
In other words,
a successful IPO is not the same thing as a good
public company
36 CSI Energy Outlook
The main assessment of the successfulness of the
NC KMG IPO can be done only over time taking into
account the extent to which expectations of new
shareholders, as well as all other stakeholders, have
been met.
An important condition for such long-term success
is harmonization of interests of different stakeholders
of the company. This is a difficult task because
in addition to balancing their interests between
themselves the existing pre-IPO stakeholders need
to collectively give up part of their claims on the
company’s results to accommodate the interests
of new minority shareholders.
For example, minority shareholders expect that
free cash would be distributed as dividends while
management and employees would prefer to
keep extra funds on the company’s accounts.
Minority investors would normally prefer to avoid
unprofitable investments made at the request of the
government for social purposes while beneficiaries
of such investments and contractors responsible for
implementing them would welcome such spending.
If at the IPO preparation stage the issue of
compatibility of stakeholders’ interests is not
addressed, this may lead to negative consequences
for the company later on. In the Petrobras example,
the government-mandated sale of oil products
on the domestic market at subsidized prices, not
anticipated at the time of the IPO, was one of the
factors causing significant loss of shareholder value.
A similar issue was successfully addressed in the IPO
of KazmunaiGas Exploration Production, an NC KMG
subsidiary, in 2006. Prior to the listing KMG EP and
its parent company signed an agreement for delivery
of certain volumes of produced oil to the domestic
market at regulated low prices. Although such sales
were unprofitable compared to free-market trading,
investors had no problem with this arrangement
because it was known before the IPO, priced in
during the placement and did not prevent healthy
share price performance after the public offering.
So, if meeting stakeholders’ expectations is the
goal of a successful public company then this
company needs, before the IPO, to develop a clear
understanding of what these expectations are and
how to resolve contradictions between them. Maybe,
to achieve the harmonization of stakeholders’
interests, the level of state control over the company
should be reduced or shareholder returns (and IPO
valuation) should be partly sacrificed in favor of social
responsibilities, or hiring practices should be revised.
The key is to work out a single set of “the rules of the
game”, accepted by all parties so that the company
could be free to move forward implementing its IPO
story.
If such a set of rules, acceptable to all, cannot be
found, then the idea of an IPO should be questioned.
What if the status quo is not so bad after all?
Does Kazakhstan need a new Environmental Code?
Environmental problems today come to the fore.
The quality of water, air, the extent of atmospheric
pollution, the problem of waste processing – for
us these issues are becoming more and more
urgent year by year. Therefore, the creation of a
separate ministry of ecology, geology and natural
resources came quite natural. The new ministry has
actively taken up the work. A draft concept of a new
Environmental Code has already been submitted
for public comment. Why is it needed and what
are the “revolutionary” ideas proposed by the new
environmental ministry?
Ecology worsens year by year
Despite the declaration of the transition of
Kazakhstan to the path of sustainable development
(Kazakhstan-2030 and Kazakhstan-2050 Strategies),
the adoption of the “Concept for the transition
of the Republic of Kazakhstan to green economy”
in 2013 (transition to energy-saving and green
technologies), and the official course on adopting
the standards of OECD countries in various
fields, including environmental protection, the
environmental situation in Kazakhstan continues to
be extremely tense. Even according to official data,
the environmental situation in the republic can be
characterized as stably negative, without a clear
tendency to improve.
An analysis of current environmental problems
in Kazakhstan shows an increase in the
concentration of air polluting substances,
a deterioration in the quality of water used, and
an increase in the annual waste generation from
production and consumption
It is estimated that 75% of the country is at increased
risk of environmental destabilization. More than 5
million residents of Kazakhstan live in areas with
polluted air, of which 2 million live in conditions of
extremely high pollution levels. The annual volume
However, if a single understanding of the company’s
obligations can be developed and shared by all
stakeholders, the management will have a chance to
build a long term success story of such a scale that
the specific parameters of the IPO will go down
as details of limited significance.
of atmospheric pollution in Kazakhstan ranges from
3-4 million tons.
85% of industrial emissions are accounted for by 43
large corporations. In 15 large cities of the country,
the permissible level of air pollution is exceeded. The
most polluted atmosphere is in the East Kazakhstan,
Karaganda and Pavlodar regions. The land of the
Kyzylorda, Atyrau and West Kazakhstan regions is
also contaminated by heavy metals and oil products.
According to experts in the field of health and
environment, Kazakhstan’s losses due to the negative
effect on public health from air pollution are more
than $2 billion a year. This is the damage caused to
the health of the population due to the deterioration
of the environmental situation, taking into account
the total costs of treatment, diagnostics and
prevention of pathologies of the population, average
life expectancy, costs of payment of sick leave and
pensions for people with disabilities.
The oil and gas sectors rank first among industries in
terms of investment. Despite this, in the main areas
of oil and gas production and oil refining - Atyrau
and Mangistau regions - accidents and oil spills
occur. Associated gas flaring practices also cause
significant environmental damage. The increased
thermal background and the acidification of
environmental components around the fields during
gas combustion have a negative effect on the soil,
vegetation, and wildlife in the areas adjacent to the
oil complexes, not to mention the increase in the
greenhouse effect.
As a result of the activity of companies of the mining
and metallurgical complex in Kazakhstan, more than
20 billion tons of industrial waste accumulated with
an annual increase of about 1 billion tons, including
230 million tons of radioactive waste. 95% of the total
volume of ore mined goes to waste, often extremely
toxic and placed in inappropriate places for storage.
One of the most pressing environmental problems
is the state of water resources. Their presence and
condition are vital factors that have a decisive
CSI Energy Outlook 37
 influence on the country’s economic development.
However, the general condition and quality of
water resources in the Republic of Kazakhstan is
significantly deteriorating and their intense pollution
can have a devastating effect on the environment.
If we take into account the fact that Kazakhstan
has a low supply of fresh water resources, this is an
additional reason for having serious concern.
More than 1.5 billion tons of waste was accumulated
only in the ash dumps of Ekibastuz Power Plant.
Under threat of a breakthrough into the Irtysh
River is the ash storage of the Sogrinsk Power
Plant. Over 350 waste landfills were created by the
corporations of Mittal Steel Temirtau and Kazakhmys
in the Karaganda region. Long-term waste from the
Balkhash Mining and Metallurgical Enterprise has
led to pollution of the coast and the waters of Lake
Balkhash itself.
In addition to the above negative factors, there are
environmental disaster zones in the Aral and Semey
regions, as well as environmental threats associated
with the operation of military test sites and the
Baikonur complex.
Eco-legislation: unsustainable progress
The current Environmental Code, adopted in 2007,
introduced significant changes to environmental
regulation. With its adoption, the formal division of
the environmental branches (the Environmental Code
of the Republic of Kazakhstan; partially the Law “On
Highly Protected Natural Territories”) and the natural
resource legislation (Land Code; Water Code; Code
“On Subsoil and Subsoil Use”; Forest Code; Law “On
Protection, reproduction and use of wildlife”) was
drawn.
For the first time, environmental requirements
were brought to the legislative level and the
Analytical articles from CSI experts
competencies of local authorities in the field of
environmental protection were formalized, the
procedure for conducting state control was drawn
up, and comprehensive environmental permits were
introduced.
The main tasks of the 2007 Environmental Code were
to generalize and systematize environmental issues
at the legislative level. It was necessary to raise the
status of environmental requirements and standards
to the level of a legislative act of direct action, as well
as introduce international standards into the practice
of environmental protection.
However, the Environmental Code has not become
an effective tool for improving the ecology and
38 CSI Energy Outlook
sustainable development of the country. Since its
adoption, 64 amendments have been made to it,
and a significant part of them have been in the
last three years. This demonstrates the need for
further improvement of environmental legislation by
updating and systematizing it in order to create all
the necessary conditions for achieving Kazakhstan’s
strategic goals.
It should be noted that so far the state policy of the
Republic of Kazakhstan in the field of environmental
protection has been focused on protecting the
environment. Thus, the current approach gives
priority to tougher penalties for environmental
violations, and the promotion of sustainable
development remains in a declarative form.
Within the framework of the proposed draft of the
new Environmental Code, the promotion of the
country’s sustainable development, including in the
field of environmental protection, and the transition
to a green economy, has been identified as the main
priority of environmental legislation.
New Code: Course on Sustainable
Development of the Country and Society
The draft of new Environmental Code proposes
to revise terminology in the field of environmental
protection. In particular, the term of “nature user”
used today is proposed to be replaced by “polluter”,
“operator” or “person who has an impact on the
environment”, which more accurately defines an
individual or legal entity that negatively affects the
environment. The use of the term “nature user” in the
Environmental Code is not entirely appropriate, since
the use of natural resources is regulated by other
laws (“land user” in the Land Code, “water user”
in the Water Code, “subsoil user” in the Code
“On Subsoil and Subsoil Use”, etc.).
It is proposed to consolidate the definitions of
“green” goods, works and services, as well as the
criteria presented to them. Norms will be laid aimed
at stimulating an increase in the share of “green”,
“green” public and quasi-public procurement (green
public procurement).
Based on the principle of the “circular economy”,
it will be provided that substances and objects
in circulation (including when stored in an
environmentally sound manner) should not be
recognized as waste, and payment should only
be made for “pollution” that gets into the air water
or soil. One of the main innovations is environmental
standards will be brought into line with the principle
of “polluter pays”
Such an approach implies a proportional distribution
of the economic burden between the entire chain
of pollutants to maintain an acceptable state of the
environment, primarily the costs of “precautions
and prevention” of pollution. All funds received
from environmental payments, damages to the
Cleanliness requires incentives
The draft of the new code proposes measures to
stimulate investment in “green” technologies, as
well as the purchase of “green” goods, works and
services. The study and implementation of integrated
environmental permitting systems are proposed,
as well as the use of economic incentive methods
for people investing in the implementation of the
best available technologies (BAT), the use of green
technologies, restoration, conservation of biodiversity
and ecosystems, including the possibility of providing
incentives such as
--state co-financing;
--subsidies;
--loan financing;
--deduction of amounts spent on environmental
protection (including those directed as
sponsorship in support of environmental
institutions, foundations and public organizations
working in the field of ecology, biodiversity
conservation);
--zero CIT rate for organizations implementing
green projects developing ecotourism (hotels,
tourist centers), subject to the introduction of
additional environmental criteria (environmental
environment, as well as fines for environmental
violations should be targeted and used exclusively
to finance environmental initiatives and projects.
According to the draft of new Environmental Code,
an integrated pollution prevention and control
system will be introduced
certification).
Thus, despite the progress made in improving the
environmental policy of the Republic of Kazakhstan,
there are objective reasons for adopting a new
Environmental Code, which will shift emphasis
to new environmental principles and introduce
new measures aimed at developing mechanisms
for improving the efficiency of environmental
management in the country.
At the inauguration, President Kassym-Zhomart
Tokayev emphasized that the country needed a
unified environmental policy, and announced the
need to adopt a new Environmental Code.
During the first executive meeting of the Ministry
of Ecology, Geology and Natural Resources of the
Republic of Kazakhstan, created in June 2019, the
head of the ministry Magzum Mirzagaliyev said that
the development of a draft of the new Environmental
Code is one of the priority tasks assigned to him by
the President.
Active work of the ministry and repeated public
statements about introducing the draft Code to
the Parliament at the end of this year suggests that
Kazakhstan will enter 2020 with a new Environmental
Code, which will set new emphasis and rules for the
interaction of production entities with the state.
CSI Energy Outlook 39
 Why Kazakhstani goods are not purchased
by foreign companies?
Local content development in the procurement of
the largest companies in Kazakhstan is highlighted as
one of the main focuses in the strategic government
documents. However, despite the existence of
directives, the local content level in the procurement
of goods is still very low among the three major oil
and gas operators in Kazakhstan (TCO, NCOC, KPO).
There are regulations, but
no procurement
It cannot be said that no one thought about
local content development in Kazakhstan. On the
contrary, local content issue was first mentioned
in the Petroleum Law adopted in 1995. However,
Figure 1. Subsoil and Subsoil Use Code does not regulate the local content level in goods
Analytical articles from CSI experts
At the same time, the Code specifies that some
regulations do not apply to the Production
Sharing Agreements (PSA) and the TCO Formation
Agreement, which provide special working conditions
for the companies. So, major oil and gas operators
such as Tengizchevroil (TCO), Karachaganak
Petroleum Operating B.V. (KPO), and North Caspian
Operating Company N.V. (NCOC) are all operating
under these terms. There are no clear local content
requirements in these agreements. However, it is
worth noting that these large operators are still
implementing joint and individual initiatives to
develop local content in Kazakhstan.
40 CSI Energy Outlook
there were no local content requirements in the
procurement of subsoil users at that time. In 2009,
in order to support the local producers of goods
the Government introduced a Certificate of Origin
“CT-KZ”. The certificate provided the holder with
various preferences and conditional discounts in
tenders and procurement of national companies
and subsoil users.
In 2010, the Law on Subsoil and Subsoil Use was
adopted and later transformed into the Code, which
entered into force on 29 June 2018. Thus, currently
the Subsoil and Subsoil Use Code obliges subsoil
users to comply with the local content requirements
of at least 50% of the total volume of work and
services purchased for subsoil use operations during
the calendar year.
Every year, subsoil users spend huge amounts of
money on the procurement of goods, works and
services. Certainly, special attention is paid to the
procurement of three major oil and gas operators in
Kazakhstan - TCO, KPO and NCOC. About 75% of all
procurement of subsoil users (not only in the oil and
gas industry) is concentrated in the procurement
of these three operators.
Figure 2. The three major oil and gas operators account for almost 75% of all subsoil users purchases

Sources: CSI analysis, JSC “Information and Analytical Center of Oil and Gas”, Nadloc

It is noteworthy that the expansion projects at Tengiz,
Kashagan and Karachaganak are under way, which
will eventually lead to further growth in production
and, consequently, procurement of goods, works
and services. From the perspective of local content
development, this trend may have a positive impact
on the economy.
How about the current state of local
content development?
According to the results of 2018, the lowest local
content level of the three operators was in the
procurement of goods. On contrast, local content
levels in the procurement of works and services were
considerably higher.

Figure 3. Local content level in goods is much lower than in services and works, 2018

Sources: CSI analysis, data from KPO, expert data

CSI Energy Outlook 41

 СТ-KZ – only in KZ?
What’s the reason behind this situation? Are the
local goods really so bad that subsoil users have
to purchase the necessary goods abroad? Or
they purposefully support companies from other
countries, despite the good local market.
There are several reasons. The first is the quality
of local goods. Indeed, they do not always meet
the requirements and specifications of oil and gas
operators. The point is that there is little competition
in the local market, and it makes no sense for local
companies to compete for new customers, bring
in new technologies and work on the quality of
their products. Their unwillingness to develop is
further fueled by the government’s support for local
producers, which provides local businesses with some
Figure 4. Local suppliers of goods are still struggling to compete in quality with import suppliers
The second reason is the lack of trust in local
suppliers from oil and gas operators. In many cases,
Analytical articles from CSI experts
local suppliers of goods are late for the delivery of
equipment and materials. Any delay has an impact
on the timeline of the project and can lead to the
stoppage of the production process, which in turn
entails additional costs for the company as a whole.
For instance, one day of downtime costs $15 million
for oil and gas operators. That is the reason why
subsoil users do not want to risk and lose money.
Obviously, not all Kazakhstani manufacturers produce
low quality products. But they often do not know
whether customers need their product or not. This is
the third reason - local suppliers do not have access
to the information about the upcoming procurement
of large subsoil users.
42 CSI Energy Outlook
kind of airbag. Being aware that operators will give
preferences to local products, domestic companies
are putting minimum effort to improve the quality of
manufactured goods. As a result, the low quality of
Kazakhstani goods eventually leads to an increase in
the expenditures of oil and gas operators, as it forces
them to allocate additional funds for the repair
or replacement of low-quality equipment.
In addition, there is a difference between the quality
standards of local goods and those of international
ones. Even though local goods meet quality
standards established in Kazakhstan, oil and gas
operators often complain about the quality of these
goods. Therefore, they are more likely to prefer more
expensive and time-tested imported materials and
equipment due to their reliability and long service
life.
Kazakhstan has a National Agency for Development
of Local Content NADLoC of the Ministry of Industry
and Infrastructure Development, which is determined
as the National Institute of Development in local
content development in accordance with the
resolution of the Government of Kazakhstan since
2012. NADLoC Agency publishes information on
procurement plans and tenders of subsoil users on
web-portals such as “Register of goods, works and
services in the course of subsoil use operations and
their producers” and “Kazakhstan content”. However,
there is no information on procurement of major oil
and gas projects. Currently, subsoil users themselves
contact potential suppliers to conduct tenders.
There is also the Information and Analytical Center
for Oil and Gas (IACOG), which monitors the oil and
gas industry in Kazakhstan. It analyzes the dynamics
of fulfillment of contract obligations of subsoil users
of the energy sector on local content requirements
in the procurement of goods, works and services,
personnel, as well as the amount of funds spent on
training, professional development and retraining
of Kazakhstan citizens. However, local content
development statistics data is not publicly available,
but is a commercial product of IACOG. As a result,
all information on local content and procurement of
large subsoil users in the country is not available for
public.
The lack of transparency of information, the absence
of a single coordination center and an overall
strategy for local content development lead to the
fourth reason. Today, the functions of local content
development are “broken down” into various
subdivisions of government agencies. Moreover,
the government policy on import substitution
Figure 5. The state should support the transition of Kazakhstani producers of goods to the international
quality standards.
Secondly, it is necessary to create a new information
platform that would combine the functions of
NADLoC and IACOG. This platform should ensure the
transparency of statistics on local content, aggregate
all necessary information from subsoil users and
produce reports in the form of analytical reviews. By
the way, such platform could ease the life of subsoil
users as well.
For example, the analytical center will be able to
determine which categories of goods, works and
services are necessary and can be localized in
Kazakhstan. Moreover, this portal will place the
information on long-term plans of subsoil users on
procurement of goods, works and services, as well
is not being fully implemented, as evidenced by
the low indicators of local content development
in procurement of local goods.
In-Country Value
These problems can be solved. To solve this, we do
not need to create new institutions and look for
years to find the ideal working model. First of all, it is
necessary to improve the quality of goods produced
in the country. For this purpose, it is necessary to
take state measures on implementing international
quality standards for domestic products. This will not
only increase sales and confidence in local producers
of goods, but will also affect the production process
by attracting new technologies for equipment
certification.
as publish statistics on the volume of local products
purchased by subsoil users. In general, this would
allow businesses to obtain information about the
market and plan their activities.
Thirdly, since there is no single authorized state body
in this sphere, and there is no need in its creation, it is
possible to organize a compact project management
office for the development of local content projects.
Its main functions should be: monitoring of new
localization projects, bringing projects from idea
initiation to production launch, as well as building
interaction between subsoil users and local businesses.
CSI Energy Outlook 43
 Figure 5. Our proposed measures to address local content issues

It is also necessary to consider a new approach to of the manufacturing industry and increase the
local content development which is called In-Country competitiveness of domestic producers of goods
Value. This is not just about procurement, it is and suppliers of works and services for the oil
a concept that pursues longer-term goals, including and gas industry.
development of human potential. For example, based
All these measures should be taken in the near
on business development strategies, we can prepare
future, especially in view of the country’s accession
qualified personnel for the purpose of replacing
to the WTO (since November 2015, Kazakhstan has
foreign specialists with Kazakhstani personnel. In
been officially recognized as a full member of this
addition, we must create competitive, knowledge-
organization) and during the transition period, which
intensive and high-tech industries to meet the needs
was provided to our country for the implementation
of the subsoil use sector.
of integration processes, including the revision
Thus, in order to ensure a significant breakthrough in of aspects of the state policy on local content
local content development in our country, systematic development.
measures are needed to boost the development
Analytical articles from CSI experts

44 CSI Energy Outlook

Figure 6. Measures to be taken before the end of Kazakhstan’s accession to the WTO
Note from the authors:
This article was first published in another CSI Group
information product - CSI Monthly, which is a
monthly review of current issues from company
employees (publication issue 01 dated August 5,
2019).
The article mentions that one of the reasons for the
insufficient local content development is no access by
local suppliers to procurement information of large
subsoil users. We would like to note the progress
made in solving this issue. On August 29, 2019, it was
announced that the operator of the North Caspian
project - NCOC – published needs for goods, works
and services, so that Kazakhstan companies could
plan the development of their own production
First things first – Quality of data
Wearing of equipment and its subsequent failure is
a problem familiar to everyone. But if a breakdown
of the electric kettle at home means only unplanned
expenses for the family budget, the breakdown at
the production facility leads not only to additional
financial expenses, but also can become a threat
to human life.
Emerging new technologies makes it possible to
minimize these problems. The epithet “digitalization”,
which has become very popular now, is not
just another “nice-to-have” innovation, but a
fundamentally new approach to operate production
and service facilities. Such concepts as “smart
oilfield”, “smart polyclinic”, “smart home” chime more
and more.
(petrocouncil.kz). Previously, only announcements of
procurements of certain goods, works and services
were available. This initiative has been implemented
as a result of successful negotiations of NCOC
management and Oil & Gas Strategic Partnership
Development Council (Petrocouncil), created under
the auspices of NCE Atameken and KAZENERGY
Association, as well as PSA. Thus, Petrocouncil
website contains the procurement plans of two of the
three major oil and gas operators - KPO and NCOC.
By the way, KPO publishes annual and medium-term
plans for the purchase of goods, works and services
on the company’s website.
And now,
on the wave of “digitalization” hype, jus in the past
couple of years, people created a lot of control
centers with huge, all-wall screens with employees
which thoughtfully looking through these screens
However, such control сenters are not the entire
digitalization, but only the top, the most visible part
of it. The presence of a control center is not a sign of
successful digitalization. It is only one of the tools for
multi-disciplinary teams that make decisions based
on the data presented on the screens.
CSI Energy Outlook 45
 And what about data? Its quality is often a huge
problem. Data is often collected in small pieces,
manually and from different sources, at different
time intervals in electronic spreadsheets and even in
large handwritten journals. And there is no trust in
such data from either the staff or the management,
because no accurate decisions can be made on their
basis.
Because of this approach to data collection, the
concepts of the Digital Oilfield are not yet fully
implemented in Kazakhstan. In fact, there are talking
just about individual elements of the “smart oilfield”
concept. This means that enterprises are not able to
capitalize advantages of full spectrum of possibilities
that full digitalization provides.
What is a solution? The best practice of large
extractive enterprises shows that before the
implementation of a full-scale Digital oilfield the
automated process of maintenance and repair
of equipment (MRO) should be in place.
In the early 2000s many companies started
automating business processes with the automation
of processes of accounting and budget planning.
And it was absolutely justified, because first of all
it was necessary to establish financial discipline.
Another cause was the fact that Kazakh managers
received foreign education mainly in economic
specialties. So, after return in Kazakhstan they were
started with automation of those processes which
they understood and which they studied abroad.
Unfortunately, the automation systems of production
records were not affected. It was believed that the
established processes should not be touched - they
“finely” worked for many years without digitalization.
However, such an approach seriously complicated
the process of making important decisions and
delayed the speed of response to the problems, since
the comparison of manually collected data and its
Analytical articles from CSI experts
accounting analytics; thanks to the automation
they have carried out already. However, results of
cost accounting without a data from an automated
MRO system are arbitrary and subjective due to
assumptions of accounting policies, rather than
on actual production data. For example, the
costs of transport without MRO’s data cannot be
determined per each vehicle, but only as a whole on
the transport department – the cost center as per
accounting policy. As the result, this does not allow
to form detailed management reporting
and, accordingly, to make appropriate management
decisions.
Automated system of MRO assumes development
and regular update of electronic passports of
equipment, putting in order data sources and
processes for the collection and updating of all used
data. This forms a basis for further digitalization and
allows knowledgeable decision making, effective cost
optimization, development of predictive models and
business process automation.
Unfortunately, the top management is not in a hurry
to automate the maintenance and repair process
nowadays. It is due to absence of straightforward
approach for calculation of direct economic effect
from implementation of MRO at initiation stage
of the project. Expenses are high enough and
payback period is lengthy. However, the companies
should understand - at such design when there is
no digitized data per units of the equipment and
technological facilities, and only processes of the
financial account are automated, the companies
cannot calculate expenses fast and precise enough.
Moreover, the costs will continue to increase,
because when data collected manually it become
outdated very fast. As a result, where it was initially
enough to replace one kettle, the entire kitchen will
have to be changed.

analysis takes a lot of time.

For example, how is a traditional equipment
check carried out? An employee goes around the
installations on a fixed schedule, fixes the status,
notes some shortcomings, and then manually, most
likely without doublecheck for errors, consolidates
all collected data into a spreadsheet that other
employees will use for analysis. Clearly, with
this approach, equipment’s technical condition
assessment and its further updates is very
time-consuming and data quality is not stable.
Another case, a company has decided to optimize
its operating costs. They already have financial and

46 CSI Energy Outlook

Rating of oil and gas
producing companies
in Kazakhstan

CSI Energy Outlook 47

 The rating of oil and gas producing
companies in Kazakhstan represents the
opinion of CSI Group consultants regarding business
performance in terms of financial and operational
indicators, with the identification of market leaders.
Information sources
The rating is based on publicly available information,
including annual reports of the companies and
related organizations, audited financial statements
(from the Internet resource of the Depository of
financial statements for public interest organizations
of Kazakhstan), data from the official websites of the
Rating of oil and gas producing companies in Kazakhstan
Most of the above companies are assets of JSC
National Company KazMunayGas (NC KMG):
--Operating assets: MMG (50%), OMG (100%),
PetroKazakhstan KR (33%), EMG (100%),
Kazgermunai (50%), Karazhanbasmunai (50%),
Kazakhoil Aktobe (50%), Kazakhturkmunai (100%);
--Non-operating assets: TCO (20%), NCOC (8.44%),
KPO (10%).
NC KMG share in these companies represents 26.1%
of the total oil production in Kazakhstan in 2018.
48 CSI Energy Outlook
companies, as well as the Kazakhstan stock website
Exchange (KASE).
Selected companies
CSI approached the selection of oil and gas
producing companies using the 80/20 principle: the
selected companies represent 92.6% of Kazakhstan’s
total oil and condensate production in 2018 (613.8
and 662.6 million barrels, respectively).
Thus, CSI consultants analyzed the financial and
production indicators of the following 19 oil and gas
companies for 2017-2018:
Difficulties in collecting information
When collecting information for the rating, we faced
three types of difficulties.
Problem with the availability of the latest
data (for 2018)
Most of the company reports were collected in the
period July-early August 2019. The annual financial
statements for 2017 were available for all resident
companies included in the rating. The problem arose
with the reporting for 2018. Only some oil and gas
companies by this time uploaded the annual financial
statements for the past year to the depository
website.
When contacting a number of companies
regarding the disclosure of information for 2018,
they responded that the data would be available
later. According to the Rules for the submission of
financial statements to the depository, public interest
organizations (including joint-stock companies,
subsoil user organizations) should submit annual
financial statements to the depositary no later than
August 31 of the year following the reporting year.
Thus, it was found that many companies submit
their reports at the last moment, just before the
established deadline.
No statements in open sources
The main part of oil and condensate in the country
is extracted by three large operators: TCO, NCOC
and KPO (together 58.1% of the total production).
However, only TCO publishes annual financial
statements. In this regard, CSI sent a letter to the
Authority in the Production Sharing Agreements
(PSA) for the North Caspian and Karachaganak
projects (PSA LLP) with a request to assist in
obtaining the financial statements of KPO and NCOC
for 2017-2018 (including date on revenue). We have
received a response that this information
is confidential and should not be disclosed under
the terms of the PSA.
The rating was compiled for three groups of indicators:
It should be noted that the Republic of Kazakhstan
started the implementation of the Extractive
Industries Transparency Initiative in 2005. This
global standard helps ensure transparency and
accountability in managing the country’s natural
resources. In this regard, we hope that in the
near future transparency issues in the financial
performance of the largest oil and gas production
projects’ operators in Kazakhstan will be fully
resolved.
Lack of data on production and reserves in
open sources
In addition to financial indicators, CSI consultants
collected production indicators to compile the rating.
When searching for information, we encountered
a lack of production data for some companies that
are not related to NC KMG. By the way, NC KMG
provides data broken down by its assets on its
website (11 of 19 companies in the sample are assets
of NC KMG).
A more serious problem is the lack of company data
on 2P reserves. Initially, we planned to make a rating
taking into account these data. However, nowadays
it is generally accepted in Kazakhstan to show
reserves according to the old methodology. NC KMG
in its annual report shows A, B, C1 reserves for its
operating assets. Despite this, there are already good
examples when companies declare their 1P, 2P, 3P
reserves, such as Zhaikmunai and Caspi neft.
CSI Energy Outlook 49
 Rating methodology
For the rating, we calculated all the indicators per
production volume (​​per ton of oil), except for the
oil production volume itself and ROACE. When
preparing the rating, seven indicators mentioned
above were included. The results for each indicator
were ranked according to the principle:
--“the higher the better”: oil production volume,
revenue, net income, CAPEX, Free Cash Flow and
ROACE;
--“the lower the better”: production costs.
Despite the fact that 19 companies were included
in the sample, there are no open operational and
financial information for two operators (KPO and
Rating results
Rating of oil and gas producing companies in Kazakhstan
50 CSI Energy Outlook
NCOC, for more details see page 48). Therefore, the
maximum score for the best result is limited to 17. So,
the points were assigned according to the ranking: 17
- the highest place, 1 - the lowest place. In the end,
we calculated the sums of points for 2018 for each
company. The company with the highest score takes
the first place, in other words, the company is the
leader in most of the seven indicators.
Further, in order to find out the changes in the
rating, the results were ranked and the total points
were calculated in the same way for 2017. Changes
between two years were also shown in points.
This methodology was applied in order to compare
not the size of the companies, but business
performance and its dynamics.
Rating of oil and gas producing companies
in Kazakhstan

On average, oil production of the selected

companies increased by 3% in 2018
compared to 2017 level. For two consecutive
years, the leaders by production volume are
three major operators in Kazakhstan: TCO,
KPO and NCOC. TCO is a leader with 209,785
thousand barrels of oil produced.
The most significant increase compared
to the previous period is 59% observed at
NCOC, with 95,012 thousand barrels in 2018.
KPO oil production has decreased by 3% to
the level of 80,264 thousand barrels. There
are also good results at Kazpetrol Group with
an increase of 49% and Maten Petroleum
with an increase of 23%.
The reverse situation is at Zhaikmunai with
a decrease of 23% and in Kazakhoil Aktobe
with a decrease of 16%. Sazankurak is in last
place with oil production of 474 thousand
barrels in 2018, which is 10% lower than the
previous year. MMG, OMG and CNPC-AMG
have almost the same production levels as in
the previous period.

Zhaikmunai takes the first place with revenue

of $103 per barrel of oil produced. Further,
there is TCO with the level of $82 in the
second position. The leader rating also
includes CNPC-AMG with revenue of $63.
Kazpetrol Group showed a significant
increase in revenue - by 34% compared to
2017, and also Kazakhturkmunai performed
well - with an increase of 31%.
PetroKazakhstan KR is in the last place with
revenue per production of $16 per barrel. The
only negative change (-4%) was observed at
Turgai-Petroleum.

CSI Energy Outlook 51

 TCO has the smallest unit production
costs in the amount of $4.87 per barrel,
however this is 12% higher compared to
the previous period. Further in the rating,
there are the companies of the Kyzylorda
region, PetroKazakhstan KR with $6.41 and
Kazgermunai with $7.94.
Compared to 2017, Kazakhoil Aktobe has
significantly reduced its unit production cost
by 33%. The remaining companies,
in general, have a slight increase compared
to the previous period.
The maximum unit production costs are
at Zhaikmunai in the amount of $43.81, which
is 20% higher than in 2017.

In terms of net income per production, the

leader is TCO with $32.60 per barrel of oil
produced, which is 40% higher than in 2017.
Rating of oil and gas producing companies in Kazakhstan

Sazankurak’s net income is slightly lower –

$31.67, with an increase of 68% compared to
2017. In the third place is CNPC-AMG with
net profit of $12.73 per barrel.
Kazakhturkmunai has achieved the highest
growth at the level of 1,079%, increasing net
income from $1.04 per barrel to $12.29.
Zhaikmunai is the only company from the
analyzed companies with negative net
income in 2018.

52 CSI Energy Outlook

The leader in CAPEX per oil production is
Zhaikmunai with the amount of $68.19 per
barrel of oil produced, which is 53% higher
than in the previous period. The second
place is occupied by TCO with CAPEX of
$45.59 per barrel, which is 37% higher than
in the previous period. The top-3 is closed
by CNPC-AMG with the level of $14.13 per
barrel.
PetroKazakhstan KR has the highest increase
in capital costs compared with 2017 - 103%.
Also, a significant increase of 57% has been
observed at Turgai-Petroleum.
The lowest unit capital costs are at Kazakhoil
Aktobe in the amount of $0.81 per barrel,
which is 28% lower than in the previous
period.

Caspi neft has the largest free cash

flow in the amount of $18.52 per
barrel, which is 48% higher than in
2017. The second place is occupied by
CNPC-AMG with $17.68 per barrel, and
the third place goes to Kazgermunai
with $14.53 per barrel.
The highest increase in free cash flow
per unit of production was recorded
by Kazpetrol Group and Kazakhoil
Aktobe, who ended 2018 with a positive
cash inflow, whereas in 2017 it was
negative. For the second year in a row,
Zhaikmunai has negative cash flow,
however, in 2018, the indicator reached
the level of -$16.03 per barrel.

* Free Cash Flow = Cash from

Operating Activities - Capital Costs

CSI Energy Outlook 53


Currency leverage ratio and its impact
on operating profit
Rating of oil and gas producing companies in Kazakhstan
All companies operating in the oil industry are
quite dependent on world oil prices. In the case
of vertically integrated companies, the effect is
minimized due to the fact that lower oil prices
negatively affect upstream revenues, but positively
affect downstream costs, i.e. a change in oil prices
may not be so harmful to the company as a whole.
Oil producers in the upstream sector also have a
similar effect due to the currency structure of revenue
and costs, which serves as a natural hedge of the
company’s currency risks. Usually a decrease in oil
prices is accompanied by a weakening of the tenge,
which partially compensates for the negative impact
of a decrease in oil prices on financial indicators, if
the major part of operating and capital costs are
denominated in tenge.
For demonstration of this effect, we decided to
analyze the sensitivity of operating profit on changes
in the exchange rate using the example of one of the
54 CSI Energy Outlook
Caspi neft has the highest indicator of
111% among all companies. Kazgermunai
is in the second position with ROACE level
of 86%, which is 51% higher than in the
previous period. MMG closes the top-3 with
an indicator of 84%, thereby showing an
increase of 39%, compared with 2017.
The lowest values in 2018 were at Zhaikmunai
with -1%, Sazankurak with 17% and Turgai-
Petroleum with 21%.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 + 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
∗ 𝑅𝑂𝐴𝐶𝐸 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
largest Kazakhstan enterprises – JSC Embamunaigas
(hereinafter EMG; included in the CSI rating of oil
and gas producing companies). We calculated the
currency leverage ratios of the Company for 2017
and 2018: the higher the ratio, the higher the benefit
from weakening of tenge and vice versa.
In 2018, the currency share in EMG revenue
amounted to 93.6%, and in expenses** - 2.4%
(therefore, the share of local content in all operating
expenses amounted to 97.6%). As a result, the EMG
currency leverage ratio is 4.16, i.e. when the tenge
depreciates by 1%, operating profit rises by 4.16%. For
comparison, in 2017, the share of foreign currency
in the Company’s revenue and expenses amounted
to 93.4% and 4.2%, respectively. Thus, the currency
leverage ratio in 2017 was 3.76. The increase in this
indicator in 2018 is mainly due to higher oil prices.
It is also worth noting that the high local content in
EMG costs allows to protect the Company from the
possible depreciation of tenge.
** The following categories of expenses were taken into account:
cost of goods sold, selling expenses, general and administrative
expenses
From an analytical point of view, there is a need to
calculate the currency leverage ratio and compare
the values ​​for a number of oil companies. In this issue
of CSI Energy Outlook, the ratio is calculated only
for EMG, due to the availability of all the necessary
information for calculations in open sources for
this company. In the future release, if there is data
on other companies, the currency leverage ratio
may be included in the overall rating of oil and gas
producing companies.
In general, by knowing the currency leverage ratio
value, a company and potential investors, analysts
can predict the impact of changes in the exchange
rate on the operating profit of a company and draw
appropriate conclusions and make certain decisions.
For example, company management may begin to
consider the use of financial instruments for currency
hedging.

Disclaimer
This rating is for informational purposes only. The CSI Group materials cannot replace the knowledge,
rating and its description are not a recommendation judgment, and experience of the users, their
to buy, hold until maturity or sell any securities or management, employees, consultants and (or)
make any investment decisions and are not a call for clients during the adoption of investment and other
any action. business decisions. CSI Group receives information
from sources that are, in the company’s opinion,
Any statement, estimate or forecast included in
reliable, but CSI Group is not responsible for the
CSI Energy Outlook regarding the expected future
accuracy of the information, i.e. does not audit
results may not be accurate, and therefore should
or otherwise verify the data presented and is not
not be relied upon as an obligation or assurance
responsible for their accuracy and completeness.
regarding future results. CSI Group does not assume
any obligation or liability with respect to the recipient
or any other person for damage or loss of any
kind resulting from the use or erroneous use of
this document or its part by the recipient or other
person; does not accept and does not assume any
future obligations to update the document or its part
or to clarify or notify any person about inaccuracies
contained in the document or its part that may be
revealed.

CSI Energy Outlook 55

 CSI Oil and Gas Practice: team and contacts
Olzhas Khudaibergenov -- Many years of managerial experience in analytical organizations
-- Experience in conducting comprehensive economic research, preparing
strategic and program documents
Senior Partner
-- Managerial experience in enterprises in various sectors of the economy
khudaibergen@csi.kz -- Member of various government, state and non-state commissions, work
+7 7172 95 48 49 and expert groups

Alikhan Baidussenov -- Many years of experience in developing strategies, financial and economic
models for the largest oil and gas companies of Kazakhstan
-- 15 years of experience in the oil and gas industry
Managing Partner
-- Experience in managing a transformation program in the Upstream
a.baidussenov@csi.kz sector, as well as development projects, efficiency improvement and
+7 7172 95 48 49 reengineering of business processes
-- Managerial experience in the group of KMG companies
-- Experience in support of M&A transactions and IPO preparation (KMG EP)
-- Master in Economics, Al-Farabi KazNU
-- Executive Education Program, London Business School

Alexander Gladyshev -- Expert in international capital markets, investor relations, IPO, corporate
governance, corporate communications
-- 13 years of experience in the oil and gas industry:
Partner, CSI Media
-- Managing experience at KMG EP (Managing Director for Investor
a.gladyshev@csi.kz Relations and Corporate Communications)
+7 7172 95 48 49 -- Vice President, Oil & Gas Analyst, Merrill Lynch (London, UK)
-- Head of Investor Relations at Yukos Oil Company (Moscow, Russia)
-- CFA Charterholder
-- Moscow State Institute of International Relations, International Economic
Relations
-- Moscow Institute of Physics and Technology, Applied Physics
and Mathematics

Denis Korsunov -- 13 year experience in the extractive industry: Upstream Oil&Gas (10 years),
production of natural uranium (2 years) and precious metals (1 year)
CSI Oil and Gas Practice: team and contacts

-- Projects’ contributor: preparation of KazMunaiGas EP and Kazatomprom

Associate Partner for IPO, transformation of Upstream business-unit of NC KazMunaiGas,
d.korsunov@csi.kz development of strategies of NC KazMunaiGas (Upstream) and
KazMunaiGas EP, implementation of information systems for activity-based
+7 7172 95 48 49 costing, budgeting and business-planning
-- EMBA 2015, Nazarbayev University Graduate School of Business
-- ACCA fellow member, Certified Internal Auditor (CIA), Professional Project
Manager (PMP)

Olga Kupriyanova -- More than 10 years of managerial experience in oil and gas companies
-- Experience in implementing and managing large-scale campaigns to
introduce changes
Partner
-- Experience of optimization and reengineering of business processes,
+
o.kupriyanova@csi.kz transformation of business units
+7 7172 95 48 49 -- Master of Science in International Human Resource Management (MSc
IHRM, Cranfield University, UK)
-- Master of Business Administration (МВА in Finance and Accounting),
KIMEP

56 CSI Energy Outlook

 Abzal Narymbetov -- 13 years of experience in various projects, including the North Sea, France,
Indonesia, Russia, Turkey and Kazakhstan
-- Support and successful completion of reserve estimation for 13 oil and
Partner gas projects according to international SPE PRMS standards, as well as
a.narymbetov@csi.kz conduction of trainings and seminars on reserve estimation and asset
management
+7 7172 95 48 49
-- MBA, Geneva Business School (Switzerland); MS, IFP School-Gubkin
(France, Russia); BS, Middle East Technical University (Turkey)

Bekzat Baimenov -- Successful accomplishment of projects in the area of strategic consulting

-- Expertise in strategic management and project management
Project Manager -- Leadership experience in oil and gas sector
-- Experience in development and implementation of KPI for multinational
+
b.baimenov@csi.kz consortium NCOC and agent companies in the Kashagan project
+7 7172 95 48 49 -- MBA, Nazarbayev University,Graduate School of Business
-- Master in International Affairs and Administration (MIAA), Missouri State
University, USA

Talant Botbayev -- Expert in operational efficiency, logistics and supply chain

-- More than 7 years of managerial experience in large international
companies in oil and gas, oilfield services, FMCG and construction
Project Manager industries
+
t.botbayev@csi.kz -- Successful completion of projects in the engineering and public sectors
+7 7172 95 48 49 -- MSc, Supply Chain and Logistics Management, University of Warwick (UK)

Kamilya Seilkhanova -- More than 5 years of experience in strategic consulting and work in
finance department of the oil and gas major TOTAL
-- Successfully accomplished consulting projects in oil and gas,
Project Manager telecommunication and governmental sectors
k.seilkhanova@csi.kz
+
-- Experience in analyzing foreign economic activities; studying international
+7 7172 95 48 49 practices in local content development; analyzing economic effects of
broadband
-- Master of Science in Petroleum Economics and Management, IFP School,
France

Madina Abdibayeva -- Expert in financial modeling

-- Experience in auditing oil and gas and electricity enterprises in Kazakhstan
Senior Consultant -- Bachelor of Business Administration with a specialization in Accounting,
Audit and Finance. KIMEP University (Kazakhstan)
+
m.abdibayeva@csi.kz -- Master of International Business, Grenoble Graduate School of Business
+7 7172 95 48 49 (France) (Honors)

Yerassyl Kanapyanov -- Analytical and research experience in strategic consulting

-- Experience in conducting analysis on the business climate in Kazakhstan,
policies in the field of developing local content in the oil and gas industry,
Consultant developing business plans and financial and economic justifications
y.kanapyanov@csi.kz -- Master of Science in Finance, Graduate School of Business, Nazarbayev
+7 7172 95 48 49 University

CSI Energy Outlook 57

2 Kunayev st., 10 floor, Nur-Sultan
+7 7172 95 48 49
info@csi.kz
csi.kz