MOU KAZMUNAYGAS-SOCAR SHALL BE REGARDED AS A STEP IN TRANS CASPIAN PROJECT

UZAKBAY KARABALIN, PRESIDENT KAZMUNAYGAS NC JSC

 

Caspian Energy (CE): Mr. Karabalin, what do you think about the current state of KazMunayGas NC JSC and its development prospects?

Uzakbay Karabalin, President KazMunayGas NC JSC: Today KazMunayGas, the largest oil&gas company in Kazakhstan, plays a key part in the country’s economy. First of all, we are working to ramp up oil production in the country and increase its efficiency both on and offshore. Under offshore projects, the company is actively developing the infrastructure and service sector pursuant to offshore petroleum operations.

Establishing new and strategically important for the country routes, we work out a diversified system of hydrocarbons transportation.

Kazakhstan launched petrochemical facility construction projects with KazMunayGas’s participation, with gas produced at West Kazakhstan fields used as primary crude. The oil&gas complex development is impossible without the simultaneous progress of adjacent fields of economy of Kazakhstan. So far, our petroleum equipment requests have performed over 20 national plants, so the company is supporting national machinery-building. KazMunayGas’s development affects not only oil&gas sector but, to a great extent, the state economy as a whole.

The company creates jobs for thousands of Kazakh people; we fund scientific projects and put in practice innovative methods of field development and oil extraction.

The current strategy of Kazakhstan’s development identified KazMunayGas as an inseparable part of the oil&gas complex of Kazakhstan as well as necessary component of national system of management of economical and social development of the country and an active participant of foreign economic activity.

 

CE: Is the development of promising structures in Kazakh Sector of the Caspian Sea (KSCS) expedient?

Uzakbay Karabalin: Nearly 120 structures have been identified in the waters of Kazakh Sector of the Caspian Sea. It is very likely to discover large hydrocarbon fields in this area. Experts anticipate the hydrocarbon reserves of KSCS in 12 to 17 billion tons. Considerable perspectives of Kazakh Sector of the Caspian Sea are justified by first outcomes of exploration drilling under the North Caspian Project.

 

CE: What are the changes in Kashagan project, including its cost and reserve estimate? When are you going to receive first oil? Which operations are still to be performed?

Uzakbay Karabalin: As you know, the contracting consortium under the North Caspian Project turned in with the updated Kashagan development plan in the end of June. According to the submitted document, the field development project cost is rising to $136bn. Furthermore, oil production commencement was postponed until the mid 2010. The draft plan of Kashagan field development is also subject to significant revision. The revisions to have been made do not concern the field reserve assessment. The revisions submitted by the contractor are currently being examined.

 

CE: Could you share about the preliminary results of Kurmangyzy project on the shelf of the Caspian Sea?

Uzakbay Karabalin: The work at this field is performed according to the schedule. Last year the basic exploration alongside seismic survey was performed and the first well was drilled. Acquired data are being processed to be used in the future.

Up to 2009 we are scheduling the works on identifying most promising oil&gas fields, geological modeling of the structure, drawing recommendations on the location and drilling the second exploration well.

 

CE: Are you planning to proceed with exploration at Tub-Karagan in the center of the KSCS?

Uzakbay Karabalin: Yes, geophysical and geological surveys shall continue at the field through the nearest couple of years. These works are required to determine the location of the second exploration well, construction of a 2,500m deep well and 3D seismic survey.

Electric explorations (differential-normalized method) have been completed at Tub-Karagan so far. At present the processing and interpretation of acquired data and analysis and summarization of geological and geophysical materials with an account for drilling data is underway.

 

CE: How effective today is the development of other fields in Kazakhstan (in particular Kazakhstan’s oil&gas projects in the Caspian: Atash, N, Zhambay, Zhambyl, Abay, Isatay, Darkhan, Satpayev and development of Khvalinskoye and Tsentralnoye together with Russia)?

Uzakbay Karabalin: Exploration operations at Zhambay and Atash are underway. The seismic surveys at Zhambay to have been performed in 2003 through 2005 have revealed structural taps of interest. The largest of them are Kosarna, Yedil and Karabulak. In a couple of years we will be performing preparatory works and drilling the first at these fields. During the same period of time we will proceed with exploration at Atash field in order to clarify its geological structure, drill an exploration well and perform 3D seismic survey.

KazMunayGas NC JSC and the Ministry of Energy and Mineral Resources of the RK are now negotiating the issue of subsoil use rights to Zhambyl and N fields. At the sane time KazMunayGas is talking to Korean Petroleum Project Consortium on the terms of joint work under Zhambyl Project.

Furthermore, the company is talking with Chinese Petroleum Project Consortium about joint work at Darkhan field; with Statoil about Abay field and with ONGC Videsh Limited about Satpayev field.

In May 2005, KazMunayGas NC JSC and LUKOIL OJSC signed the statutory documents under Khvalinskoye field development project to incorporate in the Russian Federation a joint venture, Caspian Oil&Gas Company, to act as a subsoil user in the future Production Sharing Agreement (PSA). Currently, Kazakhstan and Russia are coordinating Khvalinskoye field development process schedule and Lukoil-Volgograd NIPImorneft subsidiary is making the feasibility study under the PSA. Alongside, specialists with KazMunayGas and LUKOIL are going on adjusting the terms of draft PSA.

Following all said procedures, including the independent audit of field discovery expenses, the Caspian Oil&Gas Company may address governmental agencies of the RF for authorization to hold talks with the RF Government on PSA terms.

Tsentralnaya structure is developed by KazMunayGas together with Center-Kaspneftegaz(a joint venture of Gazprom and LUKOIL). The parties signed the Agreement of Information Exchange and Confidentiality and the Agreement of Principles of Joint Operation of Hydrocarbon Resources at this structure. The documents fix the basic terms of the future joint development of Tsentralnaya structure until the consortium is established. The required set of exploration works was performed during the last three years. KazMunayGas and Center-Kaspneftegaz have finished adjusting the feasibility study on the terms of the PSA. In the nearest future the said feasibility study shall be submitted to RF’s governmental agencies for expert review. The Joint Operation Agreement is being drawn also with the purpose to establish a consortium, following which the parties shall perform with the initiative to be granted subsoil use rights on the terms of PSA.

 

CE: Is it possible to erect an oil refinery in Ceyhan?

Uzakbay Karabalin: We launched this project a year away; in particular, we drew the long-range concept of plant construction and studied the long-term forecast of petroleum products consumption in Turkey.

At the moment we are determining strategic partners under the project. Talks about further cooperation with potential participants are going on. ORP’s capacity and investments will be announced after the determination of participants and signing the relevant contracts. Terms of these contracts and investments shall be disclosed following the execution of these agreements.

 

CE: Is this true that KazMunayGas is going to develop field in Turkmenistan?

Uzakbay Karabalin: Extension of business geography is one of KazMunayGas’s priorities. That is the task we are setting on the basis of our experience, availability of required capital and advanced technology covering the development of oil&gas fields. Today KazMunayGas is able to perform as an investor outside the country. The company is performing exploration data acquisition and their following interpretation. The terms of oil&gas projects implementation in Turkmenistan are pondered with Turkmen government.

 

CE: Could you list the principles of recently signed Agreement of Strategic Cooperation in Oil&Gas Industry and Memorandum of Joint Implementation of Trans-Caspian Project between SOCAR and KazMunayGas NC JSC? When will the agreements between entities of the two countries be signed? What are their basic provisions?

Uzakbay Karabalin: The Agreement of Strategic Cooperation in Oil&Gas Industry is declaring the parties’ intention to proceed with the mutually beneficial cooperation in the oil&gas industry and containing agreements on transfer and transit of Kazakhstan’s oil, petroleum refining and petrochemistry, and joint use, on mutually beneficial terms, of oil&gas infrastructure of the State Oil Company of Azerbaijan Republic.

In accordance with signed Memorandum the parties intend to jointly implement the Trans-Caspian Project. It will be covering oil export terminals on Kazakh shore of the Caspian Sea, tankers and vessels, oil loading terminals on Azerbaijani shore of the Caspian Sea and tie-up facilities towards Baku-Tbilisi-Ceyhan system. The Tarns-Caspian system is a part of Kazakhstan Caspian Transportation System (KCTS) being designed.

The document shall be regarded as advancement in the Trans-Caspian Project. Its basic terms were set forth in the Agreement of Assistance and Support of Oil Transfer from The Republic of Kazakhstan across the Caspian Sea and via the Republic of Azerbaijan to the global markets using Baku-Tbilisi-Ceyhan system, signed in June 2006 between Presidents of Kazakhstan and Azerbaijan.

 

CE: Are you planning to install Trans-Caspian oil and gas pipelines?

Uzakbay Karabalin: Our concept of the Trans-Caspian system suggests developing oil transportation in tankers in amount of up to 20 million tons per year. Further we will be discussing the efficiency of alternative methods of transportation.

Speaking of Trans-Caspian gas pipeline: among all others, we do not leave this project without attention, we examine it and study its expedience and economic efficiency. Alongside, it is untimely to speak of implementation of the Trans-Caspian project.

 

CE: With an account of diversified export and oil transfer infrastructure, how much oil is Kazakhstan going to run through Baku-Tbilisi-Ceyhan? When are you going to launch the export?

Uzakbay Karabalin: The Kazakhstan Caspian Transportation System is scheduled to provide the transfer of 500kbd (23 million tons a year) of crude at the initial stage with the subsequent increase to 750-1,200kbd (35-56 million tons a year). KCTS is getting started up in 2011-2012.

 

CE: Are you performing any operations to create export infrastructure (program of enlargement of ports of Kuryk and Aktau)? What is the estimated cost of operations? How far have you proceeded with these issues, and which are still the matters of concern?

Uzakbay Karabalin: Aktau port enlargement project is not under the responsibility of KazMunayGas’s. It is implemented by the Ministry of Transport and Communications of Kazakhstan and Aktau International Trade Seaport Republican State Enterprise.

As to port of Kuryk, the question of building marine terminal here was raised several times. The construction of port of Kuryk under KCTS program is a production necessity. The port infrastructure will enable Caspian oil transfer to international markets without impairing its quality.

Furthermore, the construction of new port of Kuryk was set forth in the Comprehensive Plan of Development of Seashore of Kazakhstan’s sector of the Caspian Sea (KSCS). This Plan anticipates the installation of oil loading terminal and piping as well as an onshore processing facility, ship-repairing plant and a shipyard, railroad, energy supply facilities and so on.

At the moment, KazMunayGas, assigned by the government, is drawing “General Layout of Kuryk Camp with Related Infrastructure And Concept of Kuryk Seaport Development”, which substantiates the list, location and basic technical and economic parameters of direct and accompanying infrastructure of the seaport as well as development of a residential colony. This work will be completed this November.

The terminal will be designed for the full throughput of Yeskene-Kuryk oil pipeline. The project is underway and we hope the new port will be put in operation by 2011-2012.

 

CE: Could you provide some details on Chinese direction of oil exports with an account of completed installation of Atasu-Alashankou oil pipeline. How much oil are you going to run to China?

Uzakbay Karabalin: China is one of promising directions for the transfer of Kazakh oil. Atasu-Alashankou is already the second link of Kazakhstan-China oil pipeline mega-project. The first, Kenkiyak-Atyrau, was installed in spring 2003. The third section shall run from Kenkiyak field towards Kumkol field. As a result, we can link Caspian oil deposits to increasingly developing Chinese market.

The initial throughput of Atasu-Alashankou oil pipeline is 10 million tons a year. In accordance with the plan, the next phase of the project is the installation of 20 million tons a year Kenkiyak-Kumkol-Atasu oil pipeline and extension of Atasu-Alashankou section to 20 million tons a year.

 

CE: Does Kazakhstan view the opportunity of expanding export through the CPC (as projected to 67 million tons) and Atyrau-Samara (Kazakhstan is negotiating with Transneft to expand the throughput capacity of the company’s pipeline from 15 million tons to 25 million tons per annum)? What are the demands of Kazakhstan?

Uzakbay Karabalin: Prior to expanding the capacities of the Caspian Pipeline Consortium (CPC), the Russian party proposed to settle a matter regarding restructuring of project debts and eurobonds issue. All project participants including KazMunayGas supported this offer.

The project participants are currently negotiating the expansion of the CPC’s throughput capacity. I think the shareholders are capable to find a way out to create necessary conditions for successful project implementation as each of them is interested in its efficiency.

Atyrau-Samara is one of the main export oil pipelines intended for delivering Kazakhstan oil through the oil pipeline system of the CIS states to the Black and Baltic Seas-based terminals and the European markets. In 2006 the pipeline transported approx 16 million tons.

At the moment KazMunayGas NC JSC and Transneft JSC (Russia) are projecting expansion of the Atyrau-Samara oil pipeline’s capacity up to 20 million tons per annum and its further increase to 25 million tons a year. It became possible due to transportation of light oil brands from Tengiz, Karachaganak and Kashagan by introducing new technologies of consistent transportation to preserve oil quality. In this connection, Transneft JSC’s position on methodical and practical aspects of probable consistent transportation of Kazakhstan’s light oil brands is very important to us.

 

CE: Are you planning to expand the Iranian export direction intended for oil/petrochemicals export?

Uzakbay Karabalin: I do not exclude the Iranian direction for Kazakhstan’s oil export. The feasibility study of the Kazakhstan-Turkmenistan-Iran oil pipeline project is currently being worked out jointly with Total, JNOC and Inpex. The signatories are scrutinizing the issues related to not only crude hydrocarbons transportation via this route but also refining at Iranian oil refineries.

 

CE: Upon upgrading the Atyrau Oil Refinery (AOR) has acquired a second breath. Does Kazakhstan plan to produce and export oil products in compliance with the European standards?

Uzakbay Karabalin: Certainly. We launched reconstruction being guided by this objective. As a result, the refinery is equipped with new processing plants on gasoline and diesel fuel secondary treatment. Now we are setting up manufacture of petrochemicals meeting up-to-date standards and environmental requirements.

New plants will enable to manufacture oil products on the level of top European standards.

At present the AOR is processing up to 5 million tons of raw materials per annum. In the near future we intend to upgrade the vacuum unit of the ELOU-AVT and slow-coking plants.

 

CE: Does KazMunayGas plan to purchase foreign assets? Did the company give up the intention to participate in the Europe’s refining capacities?

Uzakbay Karabalin: Quite recently KazMunayGas represented by its subsidiary, KazMunayGas Trade House JSC, has signed the agreement on acquisition of 75% in the Romania’s petroleum company Rompetrol Group NV (TRG – The Rompetrol Group).

TRG is among 25 largest international oil companies in the European Union as of yield. The head office is based in the Netherlands. Operations and assets are mainly concentrated in France, Romania, Spain and Southeast Europe. TRG supplies consumers with stable deliveries in line with the European standards. The Group is active in the fields of refining and sales. It deals with E&P activities and offers other services for the oil industry. The company owns two oil refineries with the aggregate capacity of 4 million tons per annum and 630 filling stations across 13 countries.

The transaction can be regarded as a biggest one in the history of the Kazakhstan’s oil refining industry. KazMunayGas JSC is capable of increasing its processing capacities by means of two oil refineries in Romania and, thus, considerably expanding the retail network on the European market. Acquisition of the major shareholding by TRG enables to participate in the petrochemicals sales market in Europe including France, Romania, Moldova and Bulgaria and use TRG as a ground for future expansion.

In addition, as you know in 2006 KazTransOil JSC acquired shares in Naftrans Capital Partners with the controlling stake in Naftrans Terminals that owns several Georgia-based oil transfer assets including the Batumi oil terminal and Petrotrans which transports oil and oil products.

This transaction allowed KazMunayGas to buy high-liquid assets in the Black Sea, take advantage of privileges in operation of Black Sea port of Batumi with a good strategic and geopolitical location and provided freighters with efficient routes for oil transportation to global markets.

We look forward to seeing KazMunayGas a world-class large vertically integrated company and are consistent about achieving this goal.

Thank you for the interview.