Assylbek Jakiyev: “The consequences of the crisis will be felt for another 2-3 years”

Oilfield service is one of the important sectors of the economy of Kazakhstan. Hundreds of Kazakhstani SMEs have been working in the sector, thousands of Kazakhstanis have been working to support their families. The coronavirus pandemic plunged oil prices and had a major negative impact on the service industry, since oil and gas operators have greatly reduced their costs. What is the situation in the industry today? How does the state help SMEs working in the sector to overcome the crisis? On the eve of the Oilman Day in the beginning of September we interviewed the Official representative of National Chamber of Entrepreneurs of Kazakhstan ‘Atameken’ for cooperation with oil and gas operators and the development of oilfield services, Chairman of the Council for the Development of Strategic Partnerships in oil and gas sector ‘Petrocouncil’ Assylbek  Jakiyev about situation in the industry.

How do Small and Medium Enterprises (SMEs) in the oil and gas industry feel today? What do they live for and what do they hope for?

The oil and gas industry of Kazakhstan has been hit hard by the effects of the global pandemic and SMEs operating in the sector have experienced serious difficulties due to the overall global downturn in the industry, especially when the oil price reached minimum historical value of $ 23.3 per barrel. Due to the severe crisis in the industry, and there is no other name for it, many SMEs downsized their staff. If at the beginning of the peak of the 2020 crisis the Ministry of Energy reported about 3.5 thousand people, now this figure is even higher.

New projects of operators were stopped and postponed, such as the NERP (North and East Ring Project) project of Tengizchevroil LLP (TCO), Kalamkas-Sea of North Caspian Operating Company (NCOC), and the Karachaganak expansion project budget of Karachaganak Petroleum Operating (KPO) has been reduced. Since new projects are not expected in near future and accordingly, the question of how to support SMEs in the sector that had good development with projects such as the Tengiz Future Expansion Project (FGP) is on the agenda.

Historically, the procurement of the Big Three (TCO, NCOC, KPO) accounts for most of the industry’s procurement, more than 80%. For example, operators spent about 7 trillion tenge in 2019, the number decreased by 570 billion tenge in 2020. The crisis greatly affected the oil dependent Atyrau and Mangystau regions. We also observe from social networks a series of strikes of SMEs’ staff with low salaries and layoffs, but it should be considered that due to the decrease in project budgets and low rates Kazakhstani SMEs should also adapt to new realities and conditions. The issue of the survival of Kazakhstani contractors and subcontractors is critical and supporting local SMEs should become a key task in the industry.

In general, I would like to say that if we are looking for positive aspects, then it should be noted that restrictions in the industry (including the temporary ban of foreign specialists’ involvement) led operators to attract Kazakhstani companies-contractors. This is especially seen in the implementation of the FGP project.

On the other hand, the coronavirus crisis has opened new opportunities in terms of digitalization. For the second year already, oil and gas operators transferred their employees to the distance work and only 10-20% of office staff remained in the offices (critical staff). For operators accelerating digitalization is critical. Some of them have already introduced such positions such as digital champion. The annual market for IT services of the ‘Big Three’ alone accounts for $ 180-200 million. At the same time, the share of local companies participating in the digitalization is extremely small.

Another challenge for oilfield service companies is the cost of quarantined workers. Operators are demanding from their contractors and subcontractors to send their workers to a 14-day quarantine before rotation. At the same time, due to the high demand for hotels and hostels, the owners of these businesses turned out to be the winners.

Over the past 5-7 years there has been an increase in the development of local content due to the systematic approaches in local content support by operators and other stakeholders. In general, the share of local content in services reaches 40-50% but the procurement of Kazakhstani goods the indicator has reached only 7-10%.

According to the Deloitte, from 2015 to 2019 the oilfield service market grew by an average of 14% per year and the total market capacity in 2019 was about $ 8.9 billion. The main growth was due to construction phase at the FGP with the budget of $ 40 billion. Many of our Kazakhstani companies were able to earn money on the project. But if we take 2020, the oilfield services market decreased by 25% and amounted to about $ 6.7 billion.

According to our estimates, the budgets of oil and gas operators fell to 30-40% during the crisis. We should assess in detail the real damage to the industry which we plan to do soon. But one thing is clear that the consequences of the crisis will still be felt for the next 2-3 years.

The figures indicate about difficult situation in the oilfield service industry and therefore I would answer directly that everyone survives as best he can. I know that many companies participate in tenders with zero margin to take the contract and not lay off their employees, others are diversifying and looking for projects with state participation, for example, in infrastructure projects. Others simply froze their activities or sell their assets and are waiting for “good weather”.

We all do hope that oil prices will stabilize, and the massive vaccination will be reached soon.

What measures are proposed by government to support the oilfield services industry?

According to the Ministry of Labor, the fifty largest Kazakhstani service companies working in the oil and gas industry employ about 70 thousand people, and if we add all the subcontractors, the number will double. This demonstrates of the strategic importance of the industry for the country. However, when the crisis in the industry was at its peak in 2020, at the level of the National Chamber of Entrepreneurs ‘Atameken’ we raised the issue of supporting SMEs to authorities by providing some deferrals for the payment of some tax payments for the year, but the authorities did not support. Considering that the industry includes around one thousand legal entities it deserves extensive support. According to KazService, the oilfield services industry generated taxes in the amount of 500 billion tenge in 2019 which is equal to 5.2% of the republican budget revenues in aggregate.

I do not want to say that government agencies do not help but the fact that the initiative comes from business is true. Accordingly, as the voice of business we should raise questions, but government agencies should also hear and support us. We also understand that the three largest projects are governed by Production Sharing Agreement (PSA), and we need to be careful considering the importance of the investment climate.

I remember that during the visit of the Prime Minister of Kazakhstan Askar Mamin to the Atyrau region in 2019 the First Deputy Chairman of the Board of the National Chamber of Entrepreneurs of Kazakhstan ‘Atameken’ Yeldar Jumagaziyev at that time said that after all positive reports on the development of the local content he had a sense of ‘déjà vu’ at a meeting dedicated to the development of the oil and gas industry. Indeed, during the five-year period of my work as director of the regional chamber of entrepreneurs of the Atyrau region issues of local content development were raised every year and various road plans were drafted but the reality was completely different. Or another example, for a long time we raised the issue of creating the Atyrau oilfield service park (using the example of the Aksai industrial park) where it would be possible to open localization projects for TCO and NCOC. There was understanding from operators, but it was necessary to resolve the issue of customs payments since under the PSA all imported goods were not subject to customs payments and, accordingly, localization was more expensive. We went to the government agencies and got the support (by minutes of meetings) of the prime minister. There was a meeting with the Deputy Prime Minister where the heads of state bodies supported the initiative. But we did not receive support when the question ‘went down’ to the relevant ministries.

Government support is critical to the industry. It is especially positive that President Kassym-Jomart Tokayev supported the implementation of the second phase of the Kashagan project. Also, the role of PSA LLP authority is important which works to promote the interests of the country and respectively, Kazakhstani business on the world’s largest projects as Kashagan and Karachaganak. Recently, at a meeting with PSA management we came to an understanding about supporting local content, the importance of requiring the creation of a joint venture by foreign companies, the publication of detailed procurement plans, the openness of data on the inclusion of local companies in the tender list, the implementation of the “investment in exchange for a contract” program.

What projects will be implemented by Oil and Gas operators in the near future?

If we take large operators, TCO with the FGP project is the largest service operator with a share of about 70%, NCOC and KPO – 8% each, the national company KazMunayGaz (KMG) – about 10%. The era of such large projects as the FGP is leaving and it must be admitted. Now the most important thing is that the government negotiates with investors on the implementation of planned projects such as the 2nd phase of Kashagan, TCO NERP, further expansion of the Karachaganak project. That is, as before, big hope is for the investors of the Kashagan, Tengiz and Karachaganak projects. If we take KMG’s initiatives for the development of the northern part of the Caspian Sea, I think that none of the large oil and gas transnational companies (TNCs) will invest in such high-cost projects in the near future. Moreover, the largest TNCs such as Shell, BP, ExxonMobil emphasize renewable energy development. And if they decide to invest, they will demand special conditions as during the assessment of the Kalamkas-Sea project, when Shell demanded to soften the conditions for local content. Regarding the implementation of petrochemical projects, the entrance of large Chinese companies demonstrated a clear level of conditions for Kazakhstani contractors between Western TNCs and Chinese companies. Therefore, we need to work with Western TNCs in the implementation of billion-dollar projects.

What activities are done by Petrocouncil to support SMEs working in oil and gas industry?

Since the creation of Petrocouncil in the fall of 2018 the oil and gas Council has done significant job to develop local content. Most importantly, Council became an important dialogue platform with strong working relationships with operators, general contractors, foreign companies and SMEs. We interact strongly with PSA; we also discuss with KMG and its subsidiaries to promote the interests of local content.

For the next 2-3 years, our priorities are to support Kazakhstani companies in the country’s oil and gas projects, which means increasing the share of local content; supporting Kazakhstani companies in setting up joint ventures with foreign partners; attracting Kazakhstani IT companies into the industry and creating an IT ecosystem in the oil and gas industry through the AtyrauHub project; the creation of a competence center for personnel training in collaboration with the Atyrau University of Oil and Gas, the localization and creation of the Atyrau oilfield service industrial park, as well as organization of various thematic events with operators.

We provided support to 54 local companies in interaction with operators, general contractors, in the creation of joint ventures. Support was especially important when there were issues of demobilization at Tengiz last year.

In essence, we are opening operators to SMEs. For example, more than 1,000 local entrepreneurs took part in our more than 30 major events together with operators. Therefore, organizing the interaction of Kazakhstani SMEs with oil and gas operators, organizing B2B meetings will remain a key task for us in the future.

What are the opportunities for localizing goods in the oil and gas industry?

There are opportunities, and we need to unite to deal with the issue systematically. According to the Ministry of Industry, the potential for the development of new products from the big three operators was about $ 274 million in 2019. We all understand that large TNCs came here to produce oil and our task is to assist operators in increasing the share of local content as it is beneficial for all stakeholders. If we take operators’ procurement in 2020, then the top categories of NCOC include administrative and support services (18%), manufacturing products (18%) and construction works (12%). KPO’s top 3 procurement include manufacturing products (35%), construction work (24%), mining products (12%), while TCO has administrative and support services (33%), manufacturing products (24%), transport and storage services (15%).

The publication of the operators’ procurement plans was a great achievement. We informally called it as “Atyrau Transparency Act”. This issue was problematic for local SMEs for a long time and many Kazakh SMEs complained that the operators are closed and challenging to get elementary information about the plans. We took this work as a priority and would like to proudly note that all operators opened their procurement plans: TotalDunga and NCOC in 2019, TCO in 2020. I would like to note the consent of the operators as well as the support of PSA. Not so long ago, we discussed these issues with Eimear Bonner (ex-general director of TCO) and Richard Howe (ex-managing director of NCOC) at the Atyrau region maslikhat meeting (regional parliament) and found understanding. Literally five years ago this seemed impossible. As a member of regional parliament of Atyrau region I will continue to work to promote the interests of SMEs in oil and gas projects.

We also collaborate with our partners from chambers of commerce, associations to create joint ventures and bring Kazakhstani oilfield service companies to overseas projects. For example, with the support of TCO Kazakhstani companies were able to attend the largest worldwide OTC exhibition in Houston and visit Chevron office. Also, meetings were organized with the global IT companies in India with the support of TCO and Chevron. Together with Dutch association of Suppliers in the Upstream Oil and Gas Industry and Offshore Renewable, Kazakh embassy in The Netherlands, Shell we organized meeting with Dutch service companies in The Hague. Similar meetings were held in Italy, Malaysia, Singapore, and other countries. This year we visited Uzbekistan and plan to support Kazakhstani service providers in Uzbek projects as well as in Russia.

We not only tell operators to support us but also try to provide support to operators. Operators contact us to provide support on various issues including protection of investors’ rights, CT-KZ issues, legislation, etc. Recently, we discussed these issues with the chairman of the board of National Chamber of Entrepreneurs of Kazakhstan ‘Atameken’ and National Chamber is ready to be a reliable partner of the operators and collaborate, including training after the completion of the FGP project. There is a Project office under the National Chamber chaired by the Prime Minister where work is carried out to support local content in public procurement and procurement of Samruk-Kazyna JSC.

We try not to limit ourselves to specific issues. For example, with the ADAL political party we discussed the issue of “yellow pages” of KMG, that is, the prompt transfer of the company’s non-core assets to the competitive environment. The national operator should not work and create joint ventures in those industries where there are strong interests of Kazakhstani entrepreneurs. This issue has been discussed for a long time and KMG is ready to implement the plan, but we hope that the current management of the company will speed up this process.