How much did Kazakhstan earn from sale of oil and what are the plans of the Republic concerning development of the industry?

The Republic of Kazakhstan starts another stage of oil and gas deposits development located on its territory. The period of easily produced hydrocarbons passes away therefore the government needs to rebuild the policy in the field of oil production.

Production of oil and gas

As advised Kanat Bozumbayev – Minister of energy – on the 5th of September in Atyrau at extended meeting for development of oil and gas sector of the country over the last 28 years i.e. over the years of independence more than 1,5 billions tons of oil and 741 billions cubic meters of gas were produced in the Republic. Whereas total volume of financial proceeds to the National fund was around 31,6 trillions of  KZT. In the year 1991 the annual volume of oil production was 25 millions tons whereas in the year 2018 it had already exceeded 90 millions tons having increased by more than 3,5 times. According to the Minister’s words Kazakhstan is standing in one row with leading countries-exporters of oil, coming to the 12th place in oil reserved being produced – 4,6 billions tons and to the 22nd place in gas reserves – 3,9 trillions cubic meters.

“A comprehensive system of oil and gas transportation has been created. Caspian oil pipeline ensures the shortest route and the most profitable economic conditions for oil export from Tengiz, Karachaganak and Kashagan deposit fields. Export route to China has been created”, – stated Kanat Bozumbayev and added that oil export was increased by more than 5 times reaching 66 millions tons per year among 36 countries of  the world.

Investments to projects

Head of the Ministry of energy advised that during medium-term period in oil production the basic increment of investments – equal to 44,5 billions US dollars – falls to realization of three projects: Future Growth Project of  Tengiz (36,8 billions of  US dollars), Growth projects of 1st stage of  Kashagan (2 billions of  US dollars), Production rate extension project on Karachaganak (4,5 billions of  US dollars).

Realization of  Future Growth Project since 2023 will increase annual oil production rate in Tengiz by 12 millions tons. Now around  28 millions tons are produced here. In Kashagan the production rate has been already achieved as much as 380 thousands barrels per day. Whereas it is planned that in 2022 the production rate will grow up to 420 thousands barrels, in 2027 – up to 500 thousands barrels per day.

“By 2025 annual oil production rate in the country is expected to come to a level of more than 105 millions tons”, – shared Kanat Bozumbayev.

Depletion of deposit fields

In the meanwhile rapid growth of oil and gas production had its negative impact on natural resources of the Republic. Abrupt decline in production is observed on so called brownfields. For example, in Kyzyl-Orda region reduction of production by 1 million tons is observed annually. In medium-term perspective decrease in production will occur in Aktobe and Mangistau regions.

Chairman of the executive board of  “Samruk-Kazyna” national welfare fund JSC – Akhmetzhan Yesimov believes that in order to produce residual reserves on such deposit fields investments and new technologies are required. “In this area we see positive experience of  Russia, where they adopted a row of relevant laws aimed at stimulation of tight oil production”, – he says and proposes to introduce differentiated tax rates for such deposit fields even to the extent of exemption from taxation.

On his part the Minister of environment, geology and natural resources – Magzum Mirzagaliyev – reminded that these brownfields ensure great employment rate among population and it is necessary even now to mobilize geological survey. “Since between opening and startup of a new deposit field not less than 10-15 years passes by”, – stated the speaker. According to his words currently oil balance of Kazakhstan is equal to 4,5 billions tons of oil and 1,6 trillions cubic meters of gas, 317 deposit fields with 427 millions tons of condensate. The main part of reserves is located in Atyrau and Mangistau regions, 79% of reserves is located on Tengiz, Kashagan and Karachaganak deposit fields.

In the Minister’s opinion the main challenge of the geology is that we have a low rate of reserves increment. “From the beginning of independence we extracted 1,4 billions tons of oil, whereas increment of reserves has been equal to 2,1 billions tons”. Whereas the increment ratio is 1,5. This figure may seem high, however this is reached thanks to Kashagan project. Without this project the ratio would be 0,9%”, – emphasized Magzum Mirzagaliyev.

Along with that he noted that Kazakhstan has significant perspectives for new discoveries. Geologists spotted 15 sedimentation basins with projected resources of up to 130 billions tons of conditional fuel. Specifically on the territory of five main basins: Caspian, Ustyurt-Bozatschinskiy, Mangyshlakskiy, South-Turgaiskiy and Zaisanskiy it is necessary to carry out exploration at deeper beds. For this purposes it is necessary to allocate money from the state budget and try to involve money of investors. On the territory of poorly explored basins – North-Turgaiskiy, Irtyshskiy, Aralskiy, Syrdaryinskiy and Shu-Saksuiskiy – the exploration shall be carried out at expense of the state due to high risk level.

According to the Minister’s data all large deposit fields of Caspian basin – Imashevskoye, Kashagan, Tengiz, Zhanazhol, Kenkiyak, Karachaganak and Chinarevskoye – are located in the cutoff part. In the opinion of geologists it is necessary to additionally study its cutoff part in subsalt horizons at great depths, where significant potential for large discoveries is available.

Geology and exploration

According to Magzum Mirzagaliyev the Republic of  Kazakhstan Ministry of environment, geology and natural resources along with the Ministry of energy and KazMunaiGas National company JSC (KMG) started development of geological exploration program for 2021-2015, where the area of prospective sites and necessary financial resources will be indicated. Besides, a complex of measures will be taken to improve the legislation and provide tax privileges with the purpsoe of attracting investments. The program pays special attention to development of geological science with emphasis on scientific support to regional search and exploration works, restoration of material and technical facilities, strengthening of relations between the science and production.

Institute for geological sciences named after Kanysh Satpayev will be involved with the purpose of carrying out scientific research, which institute shall be determined as national operator of geological science. The Minister asked the mineral resources exploiters to support the domestic science and to place orders to the fullest extent for scientific research in Kazakhstan, which will allow to strengthen material and technical facilities of institutes and will attract youth to science.

Environmental problems

Regardless of fourfold reduction of  burning of associated gas volumes over the last 12 years and consequently reduction of emissions to the environment a row of environmental problems remain unresolved.

In particular, there are significant amount of oil wastes accumulated in Mangistau region. Now an agreement has been reached between the Ministry of  Environment and KMG, in accordance with which the national company assumed the obligation to process till 2023 all wastes, amount of  which is equal to 3,6 millions of cubic meters.

Another not less important task in the field of environment is implementation of reverse water supply. Now the average level of reverse water supply in oil companies is equal to 30-40 percent. The Ministry sets the goal of  bringing this indicator to 70% by the year 2025.

Whereas the problem of  water supply itself  becomes one of the pressing issues especially in oil and gas production regions of the Republic. In this regard the Minister calls for saving underground waters of  Kokzhide field in Aktobe region from contamination.

“Kokzhide field is unique and able to cover the needs of  Western region. The water reserves were approved in 1983 as equal to 196 thousands of cubic meters of water per day”, – said Mr. Mirzagaliyev.

Now within the deposit field 8 mineral resources exploiters carry out intense production of raw hydrocarbons. There are existing risks of contamination of unique potable water source. The Ministry plans to strengthen control over oil operations in this region.

Goods instead of raw materials

In the meanwhile in the nearest future the Republic plans to increase the share of raw hydrocarbons treatment at the expense of support to petrochemical projects. This is dictated by the growth of demand for petrochemical products in the world as well as by great added value of such goods. The cost of  low density polyethylene and finished goods made therefrom is 10-20 times higher than the cost of initial raw materials.

According to the data from Akhmetzhan Yesimov today the world market share of petroleum and gas chemical industry reached 2 trillions of  US dollars and continues to grow. According to forecast of the International energy agency the economic growth till 2050 will cause increase in production of  initial petrochemical products by 60% in the world.

The head of “Samruk-Kazyna” fund explains that volatility of prices for polymers are by several times lower than prices for oil and gas, which gives more forecastable revenue; and investments to petroleum and gas chemistry give in average fourfold multiplicative effect for economy on each invested tenge.

He says that due to lack of such production we lose larger part of  the most valuable components of natural gas such as ethane, propane and butane, which go to export at methane price.

The speaker gave an example of support to petrochemical projects in other countries and proposed to adopt their experience. For example, according to his data in Saudi Arabia there are tax vacation for investors within 10 years as well as a 30% discount to world price of  liquefied hydrocarbon gas. In Uzbekistan customs duties are canceled on import of process equipment, which is planned to be deployed when manufacturing petroleum and gas chemical products.

As of today Kazakhstan has all prerequisites for development of  petrochemical industry. Aromatic hydrocarbons production facility has been launched on Atyrau oil refinery, which allows to produce up to 133 thousands tons of  benzene and 496 thousands tons of paraxylol, which are basic raw materials for the industry.

In Atyrau region, on the territory of  “National industrial petrochemical technological park” free economic zone two anchor projects are implemented in production of  polypropylene and polyethylene with total capacity of  1,7 millions tons per year, the cost is 9,1 billions of  US dollars.

Putting into operation of  the polypropylene production factory is scheduled for the middle of  2021. At the moment all basic equipment has been ordered, piles have been driven in, foundation works are carried out. This year gas turbine station will be launched, in the next year (2020) water treatment unit will be launched.

Concerning the project of construction of polyethylene production  factory with capacity of  1,2 millions tons and at a cost of  6,8 billions of US dollars, an agreement was reached with Austrian company Borealis about  joint development of  technical and economic feasibility report.

“The key issue of  today is workout of  inter-government agreement, which stipulates guarantees and measures of  state support”, – noted Mr. Yessimov.

Example of Norway

In the meanwhile the petroleum and gas chemistry is not a single industry, which is able to bring additional income from raw hydrocarbons. One of the area, which as of today has a great potential for development, is petroleum service industry.

“Petroleum service industry is able to become one of drivers for growth and diversification of  country economy. By increasing oil and gas production we must create a modern petroleum service cluster according to Norway example, where income from petroleum service exceeded income from export of  hydrocarbons”, stated Kasym-Zhomart Tokayev – president of  Kazakhstan.

He believes that development of  petroleum service will give rise to development of domestic small and medium business, creation of  productive and qualified jobs, localization of  productions with high added value. “Today in projects of  three large operators – TCO, NCOC and KPO – the share of  local production is equal to 34%. Whereas in goods it does not exceed 7%. In the meanwhile the volume of purchases in these companies is equal to 4,6 trillions of  KZT and around  80% of purchases in the whole industry”, – said the head of the state.

He said, that the main part of  engineering and construction and assembly works is performed by foreign companies as usual, that the government jointly with mayors’ administrations shall intensify the work in increasing of supplies of domestic goods and services to oil and gas companies.

“First of all it is necessary to increase quantity of our companies in engineering and construction of  module structures. If it is necessary then we have to make relevant changes in the legislation. For example, in Kalamkas-sea and Hazar projects it is required to ensure deployment of domestic steel structures”, – emphasized the president and called oil and gas companies to more actively involve local companies and local specialists into the projects.

The head of the state believes that Kazakhstan banks shall finance and provide bank guarantees to local petroleum service companies against contracts provided guaranteed contract works.

“Real contract, for example, with TCO is an excellent security for any bank. The national bank shall pay attention to this problem”, – said Mr. Tokayev.

Whereas market participants shall ensure quality training of  local specialists and grow national human resources – managers of oil and gas projects.