Kazakhstan needs to provide local producers with tax incentives for creation of special industrial zones to localize production of goods around large projects.

In addition, the Ministries of Finance, National Economy, as well as Trade and Integration need to consider the possibility of exempting Kazakhstani producers from customs duties and VAT on imported goods for the needs of large operators, which will provide incentives to open production in Kazakhstan.

This opinion was expressed by the Minister of Energy of the Republic of Kazakhstan,KanatBozumbayev, during his speech at a meeting on the development of oil and gas engineering, which was held on July 17 in Atyrau.  

According to the Minister, in general, the volume of local content in the oil and gas industry increasedover the past five (2014-2018). In particular, the share of local content in goods increased by 60% or from 74 billion to 120 billion tenge. That is how much money subsoil users spent on the procurement of goods produced in Kazakhstan. The amount of procurement of Kazakhstani services by operators increased from 771 billion to 835 billion tenge, or 10%, and works – from 834 billion tenge to 1.5 trillion, or 80%.

There is a slight increase in the procurement of goods, works and services in three major projects: Tengiz, Kashagan and Karachaganak. However, if we take the years separately, the share of local content in the procurement of goods is very low. In 2018, TCO, NCOC and KPO imported goods worth about 245 billion tenge, and local goods were purchased for only 19 billion tenge, which is about 7% of the total volume of purchased goods.

In the remaining oil and gas projects of Kazakhstan, the share of local content in goods is 38%. At the same time, the volume of procurement of goods in the three above-mentioned major projects is 50% of the total procurement of the oil and gas sector of the republic.

Kanat Bozumbayev believes that the main growth potential of Kazakhstani goods, including in engineering, is focused on these three projects.

He said that a working group on the development of oil and gas engineering with the participation of representatives of oil and gas operators and Kazakhstani producers was established in the republic under the instruction of the Prime Minister.

The list of subsoil users has been analyzed and a list of 26 types of goods has been created. A plan of measures for the development of oil and gas engineering for 2019-2025 in the amount of 58 billion tengehas been developed. 18 domestic enterprises interested in the production of goods in accordance with the quality and technical requirements of operators have been identified. By the end of 2019, operators must conclude 2-3 contracts with manufacturers from the formed list.

“One of the ways of partial import substitution is the localization of production of original equipment. According to the analysis, the forecast for the procurement of such equipment by three operators for a 10-year period is 1.7 billion dollars,” the Minister said.

According to him, the shareholders of large oil and gas projects should hold talks with foreign suppliers and put forward requirements for the localization of part of their production in Kazakhstan. Production should be opened by foreign companies independently or jointly with Kazakhstani partners. The local company will perform works of increasing complexity, starting with warehouses, repair and maintenance and simple assembly operations and ending with the manufacture of finished products.

According to Mr. Bozumbayev, to date, NCOC has already signed 20 memoranda on the localization of goods, it is planned to sign another 50 memoranda. KPO selected 8 producers that constantly carry out supply of goods, with 4 of them it signed memorandums on starting production in Kazakhstan. TCO carries out localization work with 19 producers, with 9 of which it signed agreements with plans to increase the share of local content.

“I believe that project operators with the participation of KMG and the authorized body of PSA LLP need to negotiate during 2019-2020 with all manufacturers and conclude agreements on localization of production,” the Minister said.

According to him, it is necessary to consider the possibility of exemption of local producers from customs duties and VAT on imported goods for the needs of large operators, which will be an incentive for creation of production. It is also advisable to provide local producers with tax incentives for creation of special industrial zones to localize the production of goods around large projects.

Meanwhile, one of the effective ways to develop domestic engineering would be to create private industrial zones.

“The fact is that large operators do not pay customs duties when importing goods for their needs. Accordingly, it is unprofitable for Kazakhstani or foreign companies interested in the localization of goods in Kazakhstan to launch production. Their production becomes uncompetitive with foreign goods. Therefore, there is a proposal to equalize the position of producers by creating a registry of private industrial zones, where participants will enjoy tax preferences,” the official representative of Atameken for interaction with oil and gas operators and oilfield services development, Assylbek Dzhakiyev, said in an interview to petrocouncil.kz.

According to him, a private industrial zone must be located in the Atyrau region, where such major oil and gas operators as Tengizchevroil LLP and North Caspian Operating Company are situated.

He noted that the Oil and Gas Sector Strategic Partnership Development Council (Petrocouncil) established under Atameken NCE and KazEnergy Association is actively working with foreign associations, manufacturing companies that are interested in the localization of production in Kazakhstan.

As part of the development of private industrial zones in Atyrau, it is necessary to resume work on the Aktau declarations.

Procurement plans for oil and gas operators should be transparent and published in advance. Petrocouncil with the support of PSA LLP published procurement plan of Total E&P GmbH Dunga, the operator of Dunga field.

“Petrocouncil has reached an agreement with all general contractors of major oil and gas projects that they will also publish their procurement plans. NCOC committed to announce plans for the procurement of goods in advance. We are currently negotiating with the management of TCO,” said Mr.Dzhakiyev.

He notes that now it is expected to implement the NCOC project for the development of the Kalamkas-Sea field, which according to some data is estimated at 6 billion dollars. There is information that the bulk of the procurement of goods, works and services is planned to be given to foreign companies. It is necessary even now to plan and engage in the localization of production, involving the Kazakhstani business community and associations as much as possible in this matter.