The Kazakhstan Oil Rush

Last week in Astana the members of the Kazakhstan parliament once again expressed their disappointment with foreign investors, preferring to bring in the republic shirts and aluminium trays with a price tag of several thousand dollars. The Accounts Committee presented to the Senate the findings of an audit conducted at the international consortium Agip KCO. The Accounts Committee for Control over Execution of the Republican Budget (AC) found irregularities in the business decisions of Agip KCO, according to the Accounts Committee Chairman Kairbek Seitkul, who presented a report on execution of the 2008 budget at a plenary session of the Senate recently in Astana.
“Agip illegally increased the reimbursable costs paid by Kazakhstan under the PSA and, as a result, decreased the republic’s share in its income. How can one believe the price of a shirt at USD 5K or of aluminum paper trays at USD 45K per kilogramme?” Seitkul asked. According to him, these violations have become possible because the republic “does not have an effective customs control over the real price of imported goods, and the participants of the foreign economic activities, such as AGIP and its contractors, take advantage of this.”
No comment could be obtained on this statement from the consortium itself. It emerged that the consortium’s press-service was dissolved and transferred to the press-service of the new operating company North Caspian Operating Company (NCOC), which, in its turn, has just assumed the functions of the operator in the North Caspian (Kashagan) project. NCOC also declined to provide any comment to New Europe on the audit findings, saying that they had to agree on every phrase of a response statement with all of the operating company’s participants, including Shell, KazMunaiGas, ENI, ExxonMobil, and Total (each holding 16.81 percent), ConocoPhillips (8.4 percent), and Inpex (7.56 percent).
However, the findings of the Accounts Committee are not isolated facts. The head of the state mentioned similar instances when he talked to the investors about increasing the Kazakhstan content in the oil and gas projects. MP Vladimir Nehoroshev referred to the actions of the foreign oil companies operating in Kazakhstan as “cynical.” “It is known that the investors invite foreign chefs and order office supplies and even rubber gloves from overseas while all this could be purchased in Kazakhstan,” Nehoroshev said in an interview earlier.
In private discussions, Kazakhstan managers working in the foreign oil companies, including for AGIP, told New Europe about more such facts. “Yes, the rotation camps at the oil fields have Italian chefs who are trusted with preparation of the Italian personnel’s favourite pizzas and spaghetti. Also brought there are expensive wines from Italy, fruit from Brazil, and meat from Argentina,” one of the interviewees said on the condition of anonymity. “The foreign managers can afford to fly home almost every month with a return ticket costing the company up to USD 10K”, - another interviewee said.
According to the interviewees, such an “investor paradise” only became possible because of the lack of an adequate control from the state agencies. “The world’s oil market is not far away, it is already here, in Kazakhstan. Our reserves and the Caspian promises have brought here the world’s oil giants: Agip, Chevron, Total, ENI, ConocoPhillips, Inpex, and CNPC,” KazMunaiGas’ ex-president, Uzakbai Karabalin, used to say.
Experts believe that the republic’s oil sector has become a real Klondike for the investors who came here. “And we do not mean so much the profits from sale of oil, for which the price at the oil market is now propitious, as the returns on investment,” - an oil consultant of one of the law firms said.
He said, for example, that reports of foreign companies actively producing the “black oil” in Kazakhstan say that the so-called “Kazakhstan content” in their projects is approximately 30 to 70 percent. However, according to his information, the lion’s share of these numbers accounts for an insignificant part of Kazakhstan’s economy services and goods. Mainly, they are sand, food items, and minor construction works, while the domestic machinery, in particular oil and gas, in reality constitutes only one percent. “It’s true that in the recent years this list has included pipes and tanks,” said a representative of a private Kazakhstan company that had won, with great difficulty, a tender for supply of their products.
“Today the oil industry today is compared to a locomotive that should haul all the other sectors of economy, including the consumer manufacturers. And the growth that we have been observing in the oil sector over the past several years allows us to hope for such a development. Thus, by 2015, Kazakhstan expects to increase its oil production to 150 million tonnes. This should give serious hopes that the orders for oil and gas equipment, goods and services would fall as a “golden rain,” but, alas, the reality is quite different,” a Kazakh oilman said.
As a rule, the oil tycoons prefer to place all their orders for oil and gas equipment with their “own fellow countrymen,” also major companies. “During the first years, this was not limited to just hardware. Everything, from work clothing to food and even … cotton wool came from overseas,” another oilman said, adding that it is quite difficult for a local manufacturer to get an order from a foreign oil company.
The day before the Senate meeting, a lower chamber MP, Meiram Pshembaev, echoed the problem reported by the Accounts Committee’s in the AGIP findings in his parliamentary question. He said the plans on increased purchases of machinery from the domestic companies by the Samruk-Kazyna companies are currently at the risk of frustration. “The foreign oil and gas companies import almost USD four billion worth of equipment annually. At the same time, purchases from the local equipment makers are less than USD 30 million, i.e. less than one percent,” the MP said.
“In 2008, imports to Kazakhstan were USD 37.9 billion, out of which about 41 percent accounted for machinery and equipment for a total worth of USD 15.4 billion,” Pshembaev said. According to him, the second largest imports were metals and metal goods (USD 6.4 billion), and the third largest – oil products, including gasoline, jet fuel, and diesel fuel (14.3 percent or USD 5.4 billion).
The MP also said that among the Samruk-Kazyna companies, the largest users of machinery were Kazakhstan Temir Zholy and KazMunaiGas. “For example, during a nine-month period in 2008, Kazakhstan Temir Zholy purchased 52 billion tenge worth of equipment, out of which only five percent from domestic companies. KazMunaiGas in 2008 purchased 24.9 billion tenge worth of equipment, out of which over 80 percent from outside of Kazakhstan,” Pshembaev said. He also pointed out that at the 20th plenary session of the Foreign Investors’ Council the head of state had set up a goal to increase the Kazakhstan content in the real economy.