BY 2016 VOLUMES OF THE KAZAKH GAS TRANSPORTED VIA THE CASPIAN SEA TO EXCEED 38 MILLION TONS A YEAR, U. KARABALIN SAID

The world policy has focused its attention on the Caspian hydrocarbon resources since the moment the Azerbaijan fields were discovered. Collapse of the Soviet Union and declaration of independence in the post soviet republic resulted in appearing of new players at the global energy market. Kazakhstan represented by its national company KazMunayGaz JSC is one of the most active one among them. The company steadily follows the policy aimed at development of stable partnership relations with neighboring petroleum countries being a strategic partner of Azerbaijan within the pipeline project Baku-Tbilisi-Ceyhan named after Heydar Aliyev and other initiatives. We talked to Uzakbay Karabalin, the President of KazMunay Gaz about the results of 2005 and outlooks related to the development of the company.

Caspian Energy (C.E.): Mr. Karabalin, was the previous year successful for the company? What were the most significant events of the year?

Uzakbay Karabalin: I will confidently say that the company significantly progressed in indicators related to its industrial-financial activities. The main achievement was preservation of the growth dynamics in the primary production. The number of the most significant events of the previous year includes purchasing of the half a share of BG Group Plc in the North-Caspian project. Thereafter KazMunayGaz became a full participant in prospecting of the largest field Kashagan.

The company also carried out negotiations and signed the Production Sharing Agreement with the Russian company Rosneft on Kurmangazy, the other field located in the north part of the Caspian Sea. The first exploration well at Kurmangazy deposit was drilled in 2005. The specialists highly value potentials of this large oil-bearing structure located in the favourable area from the geological point of view. According to their forecasts, the volume of recoverable hydrocarbon reserves can comprise no less than 1 billion tons. It is necessary to arrange the work in a proper manner and wish good luck to our specialists and Russian partners.

C.E.: How would you evaluate the work of structural subdivisions of KazTransOil JSC, Intergaz Central Asia JSC, KazTransGaz JSC, KazRosGaz JSC?

Uzakbay Karabalin: On the whole, all the largest subsidiaries successfully completed the year. In 2005 the national company KazMunayGaz extracted 9 million 364 thousand tons of oil and gas condensate, which is 445 thousand tons higher compared to indicators of 2004. The growth of production was provided due to new technologies stimulating pressure maintenance. Considering the share of our company in the joint ventures the total production volume reached approximately 15 million tons. In 2005 oil procession at Atyrau petroleum refinery comprised 3 million 514 thousand tons, which is 20.7% higher compared to 2004. The volume of oil transportation through the system of KazTransOil JSC was 38 million 197 thousand tons in 2005. The volumes of transported gas also went up. Last year Intergaz Central Asia JSC pumped 128 billion cu. m. through the main gas pipelines.

The company’s profits in 2005 comprised about $5 billion. The amount of paid taxes and payments also grew. In 2005 the subsidiaries and dependent structures of KazMunayGaz JSC paid over $1 billion to the state budget of Kazakhstan.

I would like to mention with satisfaction that the international rating agencies proved the success of our business. Moody's Investors Service, the international rating agency raised the credit rating of KazTransOil JSC and KazTransGaz JSC from Baa3 level (positive forecast) to Baa2 level (stable forecast). Thus, the company will be able to attract debt financing on more advantageous conditions to implement the investment development program. At present KazTransOil JSC and KazTransGaz JSC have the highest credit ratings in the corporate sector of the Republic of Kazakhstan.

C.E.: Is the implementation of the State Program aimed at development of the Kazakh sector of the Caspian Sea approved by Nursultan Nazarbayev, the President of Kazakhstan effective?

Uzakbay Karabalin: The North-Caspian project is one of the most significant elements of this program. It is being implemented within the framework of the Production Sharing Agreement on the north part of the Caspian Sea from November 18, 1997. In compliance with the PSA, the exploration period lasts 6 years and starts when the PSA takes effect. The PSA provides opportunity to prolong this period for two years. The period of prospecting and production makes 20 years starting from the date of the commercial discovering (two prolongations for 10 years are allowed). We expect the total volume of investments in the project to comprise about $60 billion. I would like to note that the Hydrocarbon Resources Development Program at the North-Caspian project for 1998-2004 is completely over. Six scheduled exploratory wells were drilled in compliance with the Hydrocarbon Resources Development Program 1998-2004: two – at Kashagan, per one well – at Kalamkas, Aktoty, Kayran and Southwest Kashagan (a small deposit located to the southwest of Kashagan). All exploratory wells gave positive results and have hydrocarbon reserves. The prospecting works are ongoing at Zhambay, Kayran, Eastern Kalamkas (C1) and Northern Kalamkas (C2). The exploratory works are implemented jointly with Lukoil at Tyub-Karagan and Atash deposits. Kurmangazy, Khvalynskoye and Central projects are being implemented jointly with Rosneft and other companies-partners. The necessary preparation is ongoing to implement N, Abay, Isatay, Darkhan and Zhambyl projects. Jointly with Oman Oil Company and Shell we start prospecting of Zhemchuzhina deposit where the forecasted recoverable resources can comprise around 100 million tons. In December 2005 the participants within the project signed the PSA.

C.E.: Considering the size of the project on development of Kashagan deposit in this area would you give more information about the project?

Uzakbay Karabalin: The field development includes three stages. The first stage from 2008 to 2010 will start the pilot commercial development of the northeast part of the field and bringing the level of oil production up to 21 million tons a year (450 thousand barrels a day). The second stage, which is expected to last from 2010 to 2014, provides expansion of the field due to Eastern Kashagan and increasing the level of oil production up to 42 million tons a year (900 thousand barrels a day). The third stage (2015 – 2041) provides extension of the prospected field (Western Kashagan) and reaching stable oil production on the level of up to 56 million tons a year (1,200 thousand barrels a day). 17 production islands, land-based complexes for oil and gas procession and pipelines connecting offshore and onshore facilities will be constructed within development of the field.

It is worth to note that geotechnical and climatic conditions, movable ice floes and high ecological sensitivity of the field require using the advance scientific and technical achievements. Thus, it is possible to say that the development of Kashagan deposit is a multistage, difficult and long process.

C.E.: Whish works are being currently implemented at Kashagan?

Uzakbay Karabalin: The pilot commercial development at Kashagan field is currently being implemented. It provides construction of offshore and onshore technological facilities, field pipelines, A and D production islands for exploitation drilling and technological structures. Such activities as purchase of equipment and materials, fabrication of barges, structural steel, pipelines projecting and others are being currently implemented.

The studies related to opportunity to inject associated gas in the strata as a method of pressure maintenance are held within the pilot commercial development of the project. I would like to note that successful solution of this matter will provide the best economic effect thus settling a difficult technical matter related to sulfur utilization and achievement of scheduled indicators of oil recovery. Two thirds of recovered gas is expected to be injected again in the strata, one third will be transported to the shore.

C.E.: How would you evaluate the real chances of the oil pipeline export to the north, east, west and south?

Uzakbay Karabalin: If to speak about existing pipeline capacities, today Kazakhstan exports oil in two directions: through the pipeline of the Caspian Pipeline Consortium (CPC) and Atyrau-Samara oil pipeline.

The volumes of transportation via the oil pipeline of CPC grow from year to year. Judge yourselves: 32 million tons of oil was piped in 2005. We work on further expansion of the throughput capacity of this pipeline together with other shareholders. Finally its throughput capacity is expected to reach the project level, which makes 67 million tons a year. Now we discuss principles and conditions to implement the project of expansion and prepare a text for the corresponding memorandum.

Through the Atyrau-Samara oil pipeline the Kazakh oil is delivered to the Russian network of pipelines to be further transported to Europe. Its stable annual loading comprises approximately 15 million tons. But considering the scheduled growth of oil production volumes in Western Kazakhstan KazMunayGaz jointly with Russian Transneft studies the opportunity to expand the capacity of this direction up to 20-25 million tons a year.

As for new directions, we implement a number of projects on possible export pipelines. Thus, we are working out the project on setting the Aktau-Baku transport system, which provides tanker oil transportation from the Kazakh coast of the Caspian Sea to Baku, and further through Baku-Tbilisi-Ceyhan oil pipeline. To date we carried on negotiations with participation of KazMunayGaz, SOCAR, BTC Co. and foreign investors. The draft agreement between Kazakhstan and Azerbaijan that will be a legal ground for oil transportation through the Caspian Sea is already prepared and undergoing reconciliation procedures. The construction of the Kazakh-Chinese oil pipeline Atasu-Alashankou was over in December 2005. The initial capacity of the oil pipeline will be 10 million tons a year. In future it is expected to expand up to 20 million tons a year. The pipeline is being currently filled.

We consider the project related to gas supply from Kazakhstan to China the most interesting and urgent from the point of view of gas export development and we are jointly working with the Chinese side over this project. China has already announced about its needs in additional gas volumes and shows great interest in this project. Several variants to deliver gas from Kazakhstan by joining the Chinese gas pipeline, which connects western and eastern regions of China, are being viewed now. In February the Joint Project Management Group viewed and coordinated the projects of performance specification on development of grounds for investments in the construction of Kazakhstan-China gas pipeline.

C.E.: When the intergovernmental agreement about joining Kazakhstan to Baku-Tbilisi-Ceyhan oil pipeline will be signed? Has the program on expansion of Kuryk and Aktau ports for export through Aktau-Baku corridor been approved? How much will these works cost? What are the future plans on expansion of these transport junctions in the Caspian Sea?

Uzakbay Karabalin: As I have already said, the Agreement between the Republic of Kazakhstan and the Azerbaijan Republic on promotion and support of the Kazakh oil transportation through the Caspian Sea and the territory of Azerbaijan is currently worked out. We hope to sign the Agreement this year.

The existing draft agreement provides absence of monopolistic use of future offshore terminals and compatibility of standards applied in projecting, construction and exploitation of Aktau-Baku system with the standards applied in Baku-Tbilisi-Ceyhan oil pipeline project. The offshore terminals and interconnectors to main pipelines located at the Kazakh and Azerbaijan coasts will serve as regulation units. Expansion of the production capacities of ports at the Caspian Sea is of great importance for Kazakhstan. It will lay a ground to solve problems related to future deliveries of export-oriented production (first of all hydrocarbons) to the world markets.

In compliance with the long-term forecasts based on the plans of oil extracting companies, the volumes of transportation of the Kazakh oil through the Caspian Sea are expected to exceed 38 million tons a year by 2016. According to the participants within the North-Caspian project, a necessity in a new transportation system joining the coasts of Kazakhstan and Azerbaijan and allowing preserving the quality of light Kashagan oil will appear by 2010. The given system must initially provide transportation of 5 million tons of oil. In future the amount of transported volumes is expected to gradually grow up to 20-30 and over million tons a year.

But at present the port Aktau has physical restrictions to develop the sea transport. Thus, the problem related to formation of new capacities to transport growing oil volumes from the Kazakh coast of the Caspian Sea turns to be more urgent. For this reason we decided to construct a new oil terminal in Kuryk port located to the south of Aktau. In line with the conception approved by the government of our country, two ports Aktau and Kuryk will be developed to increase Trans-Caspian transportation.

However, it is early to speak about the cost of projects on development of Aktau and Kuryk ports. The amount of required investments will be defined only after working out of the project documentation.

C.E.: It is well known, that the survey of the well at Tyub-Karagan field located in the central part of the Kazakh sector of the Caspian Sea resulted in absence of oil-bearing collectors and structures of industrial value. How would you evaluate the area taking into consideration "the dry" well?

Uzakbay Karabalin: The drilling of the exploratory well at Tyub-Karagan field was implemented from the semi-submersible drilling rig. Within a short period of time (over two months) the well was successfully bored without problems to the target depth comprising 2,500 m. All necessary survey works including formation and study of cutting sampling, development survey and other works have been implemented at the well. Some core samples showed presence of residual oil. However, the further development survey did not discovered wells and horizons with signs of movable hydrocarbons. The pilot analysis of the received geotechnical data shows that Tyub-Karagan structure, which is situated at the turn of two plates Skifskaya and Turanskaya turned to be in the zone of abnormal development of tectonics. It explains unfavorable conditions for oil and gas accumulation characterizing the area of the structure where the well was drilled. Most likely, probable hydrocarbon-fields were destructed in the process of the geological formation of the structure.

It should be mentioned that it is impossible to draw unambiguous conclusion about low exploitability of the whole area of the field considering preliminary results of the survey. With the view of final interpretation of the geological-geophysical data and working out recommendations on further surveys it is necessary to carry out a detailed analysis and summarize all available materials including those related to the territory adjacent to the block. Meanwhile, the Caspian and Yujno-Mangyshlak provinces are long known for their reserves. Tyubedzhik and Zhangurshi fields located at the territory of Yujno-Mangyshlak oil-bearing area are geologically close to Tyub-Karagan field. The commercial hydrocarbon reserves were discovered in the Russian sector of the Caspian Sea at the structures named after Y.Korchagin and Khvalynskoye field. Thus, the productivity of Tyub-Karagan structure on the analogy of nearby fields can be viewed as perspective one. That is why the negative results yielded from the only one exploratory well at Tyub-Karagan structure does not reduce opportunity to discover hydrocarbons in the given region.

I would like to note, in compliance with the statistics, only one third of exploratory wells in the world yield positive results, thus providing financial profitability and give the petroleum companies opportunity to make investments in exploration of new perspective structures.

C.E.: Considering the rates of growth of hydrocarbon production in Kazakhstan, are you going to expand the capacities of Atyrau Oil Refinery LLC and produce energy products meeting the European standards?

Uzakbay Karabalin: KazMunayGaz Company intends to become the largest exporter of both crude oil and various processed products. The company associates implementation of this target with reconstruction of Atyrau Oil Refinery.

Now the capacity of the refinery on crude oil processing does not exceed 5 million tons a year. The depth of procession is lower than the medium level of refineries in Kazakhstan and Russia. The refinery mainly processes high-paraffin heavy oil. Low quality of processed products prevents reaching of acceptable level of the production profitability. Mazut, which comprises 40% in the total production volume, is in low requisition at the market. Low-octane gasoline is also difficult to be sold. Diesel fuel, which is of high demand, is sold at low pieces due to high content of sulfur. As for dark oil products, they are exported as semi-processed goods. All these factors prevent to achieve high competitiveness of the production.

It was decided to reconstruct Atyrau Oil Refinery in order to settle this matter. The project is being implemented jointly with the group of Japanese companies represented by Marubeni Corporation.

After reconstruction that is to be over in May 2006, the refinery will be able to process 4.3 million tons of oil every year including 1 million of light oil from the fields located in Westerns Kazakhstan. Thus, the processing volume will remain the same, but the assortment of manufactured products is expected to expand significantly. The refinery will produce several brands of high-quality gasoline, diesel and jet engine fuel, vacuum gas-oil, LNG. When the refinery is reconstructed, we will have opportunity to manufacture oil products of European quality and extend our expansion at the domestic and foreign oil products markets.

C.E.: Does KazMunayGaz intend to take part in purchasing of Petro Kazakhstan Company and other projects including those outside the republic? It is well known, KazMunay Gaz showed interest in the control packet of shares of the Lithuanian oil refinery...

Uzakbay Karabalin: As for the matter related to preference in the process of choosing a buyer on assets of PetroKazakhstan Inc., it is out of the company’s competence. The Republic of Kazakhstan cannot influence the purchase-sale process because PetroKazakhstan Inc. is not a bowels user and develops its business in Kazakhstan through its subsidiary companies. If to speak about the investment potential of our company, we should mention a number of important points. Investments abroad in the form of cash or commodity are objectively necessary for Kazakhstan at the given stage of development due to a number of reasons. First, it will increase profits of corporations and strengthen their economic and political positions. Secondly, investing will give opportunity to purchase foreign assets and access the foreign markets. KazMunayGaz is interested in expanding its influence at the international energy markets and due to direct investing in the real estate intends to take part in the international projects aimed at prospecting of fields and hydrocarbon production, their transportation, transit and sale. Now KazMunayGaz shows real interest to purchase the control packet of shares in Lithuanian Oil Concern Mazeikiu nafta. It is a powerful complex, which includes the only oil refinery in Baltic countries (the production capacity of procession is up to 12 million tons of oil a year), the Butingsky Oil Exporting Terminal (the capacity is 8 million tons a year) as well as the Birzhaysky oil pipeline. The negotiations related to the purchase of Mazeikiu nafta are ongoing. Our intention to purchase foreign assets is explained by aiming at large profits. KazMunayGaz as a national company is the authorized body of the government in large oil and gas projects such as Karachaganak and Kashagan implemented with participation of foreign investors. In these projects we watch over the interests of the state. Besides, KazMunayGaz is a commercial organization, which should make profit. That is why we carry out our business in such a manner that we can compete successfully with private companies including multinational ones.