The government again raised the issue of increasing the share of local content in the procurement of goods, works and services of oil companies. Even though the overall participation of domestic enterprises in the supply is increasing, the share of procurement of goods produced in Kazakhstan is still low. What is preventing an increase in these indicators? What support measures are needed for Kazakhstani businesses to be able to compete with foreign suppliers?
In the first half of 2024, subsoil users engaged in exploration and production of hydrocarbons purchased goods, works and services (GTS) for almost 2.6 trillion tenge, of which the share of Kazakhstani content exceeded 1.5 trillion, or more than 60% of the total amount spent.
Oil and gas companies bought goods for KZT361.5bn, including Kazakhstan-made goods for KZT91.6bn, which is over 25% of the total amount. They spent more than KZT1 trillion to purchase works, of which KZT800 billion (79%) from local enterprises, and more than KZT1.2 trillion to purchase services, of which KZT671.6 billion (55%) from local enterprises.
At the same time, the largest customers of TRU are operators of Tengiz, Kashagan and Karachaganak. They accounted for almost 70% of the total volume of purchases by oil companies. Tengizchevroil LLP (TCO), North Caspian Operating Company (NCOC) and Karachaganak Petroleum Operating Company (KPO) purchased goods, works and services worth KZT 1.8 trillion. Moreover, the share of in-country value (Kazakhstani content) reached almost KZT 970bln or 53% of total expenditures. The top goods purchased by them from Kazakhstani manufacturers included casing strings, tubing, valves, wellhead tie-in program modules, personal protective equipment, heat exchangers for GP3, outdoor power transformers and construction materials such as beams, planks, trusses, frame lumber.
All through the Register
In general, according to the Ministry of Energy, at the end of the first half of the year there was a growth of the average industry indicator of the share of Kazakh local content in the total volume of purchases of subsoil users of hydrocarbon and uranium mining, which amounted to 61.6% and 4 percentage points higher than in the same period last year (57.3%).
“Preservation of positive dynamics of growth of the indicator of intra-country value for the industry is provided by normative initiatives and practical measures on the part of the ministry,” – said at the government meeting on support of domestic producers held on August 13, Vice Minister of Energy Yerlan Akkenzhenov.
Thus, according to him, the ministry has introduced the practice of mandatory establishment or upward revision of previously approved indicators on local content, which allowed to make changes in nine contracts for subsoil use since the beginning of the year. Thus, the minimum share of in-country value in goods is provided or increased by 12% on average, in works – by 20%, services – by 22%.
As of today, in the oil and gas industry, 276 out of 312 existing contracts for subsoil use already contain obligations on the share of kazsoderzhdeniye in goods, works and services, the Ministry of Energy noted.
Changes have also been made to the Rules of Procurement for subsoil users and their contractors. When purchasing goods, they are obliged to take into account suppliers included in the Register of domestic commodity producers. And if there is a single Kazakhstani commodity producer in the Register, they must purchase goods from it from a single source. If there are two or more domestic commodity producers in the register, the purchase of goods is carried out only among them. The contract for the purchase of imported goods is concluded for a period not exceeding five years with the mandatory provision of the localization program by the producer of goods and ensuring its production in Kazakhstan.
“In addition, changed the form of reports submitted to the Ministry on intra-country value, allowing to monitor the qualitative and quantitative dynamics of the purchase of goods from domestic commodity producers in the purchase of subsoil users of works and services,” – said the Vice-Minister.
According to the Ministry of Energy, the above-mentioned Register of domestic producers of goods, works and services is formed on a voluntary basis in the order approved by the Presidium of the National Chamber of Entrepreneurs (NCE) “Atameken”.
Domestic producers of goods, works and services are individuals or legal entities that are residents of the Republic of Kazakhstan, registered in the territory of the country, producing goods, performing works, rendering services in the territory of the country in accordance with the criteria defined in the Rules of formation and maintenance of the register of domestic producers of the National Chamber of Entrepreneurs “Atameken”.
When searching for producers, customers should be guided by the “Register of domestic producers of the Republic of Kazakhstan”, “Register of issued certificates of origin of goods of the form ‘CT-KZ’” and the Register of domestic producers of goods, works, services (industrial certificate), formed by NPP “Atameken”.
Thus, the register, which is mandatory for use in the procurement of goods by subsoil users, is formed by the National Chamber of Entrepreneurs “Atameken”.
Contract in exchange.
Yerlan Akkenzhenov noted that in the oil and gas industry, the main focus of localization of new production facilities and increase in the kazakh content in procurement is expected to be on Tengiz, Kashagan and Karachaganak, as 70% of all procurement in the industry falls on the operators of these fields.
The Ministry of Energy forecasts an increase of 7% in the share of SGC in the purchases of TCO, NCOC and KPO goods this year (in 2023 the share of SGC was 12%), 11% in 2027 and 15% in 2029.
An analysis of the goods purchased by the three operators was conducted and 12 commodity groups, representing 60% of all their purchases, were identified as having “significant potential for localization”.
These product groups include electrical equipment and materials, instrumentation and automation, valves and components, pumps and seals, process filters, HVAC, pipe products, material handling equipment and materials, heat exchangers and heat exchange equipment, fire protection equipment, chemicals, oils, paints, insulation and refractory materials.
At the same time, considering the provisions on the stability of the Production Sharing Agreements (PSA) regime, the Ministry is currently negotiating with investors to revise long-term Programs for the development of local content of large projects with the fixing of KPI indicators for the above-mentioned target group.
The Ministry of Energy plans to amend the Tender Procedures for procurement of TRU in large oil and gas projects, including by introducing a mechanism for concluding long-term contracts based on the “Contract for Investment” principle and reducing the requirement for the number of domestic commodity producers. The contract is concluded between the operator and a domestic commodity producer. Investments are made either by a Kazakhstani company or by a foreign producer that localizes its production in the country. The money should be directed to the creation of production of specific products.
Also Vice-Minister said that during the last two years in the country localized five production facilities: Wika (Germany), Honeywell (USA), Petrol Valves (Italy), LLP “Sigma Solutions” (Kazakhstan) in partnership with N.Vent (USA), Eltherm (Germany), as well as Schneider Electric (France). This allowed to create 177 new jobs attracting $13.8 mln of investments, but most importantly – to acquire domestic competence in manufacturing and production of goods with high added value.
This year it is planned to localize three new productions of goods most in demand in the oil and gas industry together with Leser (Germany), Beruseal (South Africa), and John Crane (USA). These projects will create 34 new jobs and attract investments of $3 million.
What needs to be changed?
Meanwhile, there are quite a number of constraints that hinder the development of Kazakhstani production and the growth of the share of local content. For example, many small and medium-sized enterprises face a shortage of working capital to fulfill large orders. Access to credit resources can be limited by high interest rates and complicated lending terms, said Muratbek Makhanov, managing director of the oil and gas sector and ecology at Atameken.
Some local producers find it difficult to compete with imported goods in terms of quality, he said. This may limit their ability to participate in tender procedures.
“Large oil producing companies have high requirements for quality, safety and environmental friendliness of products and services, which can be difficult to fulfill for local companies. They face stiff competition from larger and more experienced international companies that can offer lower prices and a high level of service,” the expert notes.
At the same time, the procedure for obtaining the necessary certificates and permits can be lengthy, complicated and costly. Despite government programs to develop local content, not all companies can take full advantage of these support measures due to bureaucratic hurdles or lack of information.
To make it easier for Kazakhstani companies to access tenders from operators of large oil and gas fields such as Tengiz, Kashagan and Karachaganak, bureaucratic barriers need to be reduced. For example, simplification of the procedure for participation in tenders, including requirements for documents and certification, especially for small and medium-sized enterprises. It is necessary to introduce measures that will reduce the costs associated with the submission of bids, as well as high guarantees.
It is necessary to strengthen the requirements for the minimum share of local content in projects implemented in large fields. Mandatory quotas on the use of local suppliers of goods and services. And tax incentives or subsidies should be provided for local companies participating in tenders so that they can compete with foreign suppliers. It is also necessary for operators to increase the percentage of advance payment.
Creation or expansion of programs of state subsidies of interest rates on loans for participation in tenders and execution of orders would also help the growth of Kazakhstani suppliers. Introduction or creation of programs to support the introduction of modern technologies and innovations in local enterprises to enable them to meet the high requirements of international customers.
At the same time, it is necessary to keep stricter control over the fulfillment by operators of the requirements for the use of local TRU. And it is necessary to develop a system of fines and sanctions for operators who do not fulfill the requirements for local content or unfairly conduct tenders.
“Kazakhstan producers often cannot compete with foreign companies in terms of technology and product quality. This requires significant investment in modernization of production facilities, which can be difficult for local enterprises. Many of them use outdated production facilities that cannot ensure the production of goods of the required quality and in the required volume. And obtaining international quality certificates and licenses to manufacture products for the oil and gas industry can be a long and expensive process,” Muratbek Makhanov said.
At the same time, the implementation of localization projects requires significant capital investments. In some cases, the cost of production in Kazakhstan is higher due to expensive imported components and materials, which makes the final products less price competitive.
State programs to support localization may not be sufficiently effective or may not cover all necessary aspects. Although government policy is aimed at increasing the share of Kazakhstani content, its implementation in practice may face bureaucratic obstacles and lack of proper control.
That said, large oil and gas operators often prefer to work with proven foreign suppliers that provide consistent quality and timely delivery. Foreign manufacturers can offer more favorable delivery terms, including lower prices and shorter lead times, making their products preferable for large operators.
Practically, the government needs to take a set of measures, including in the form of financial and fiscal support, which will help Kazakh enterprises to produce goods, works and services that can compete with foreign suppliers.
What goods, works and services are supplied by Kazakhstani businesses to oil producing companies in the country, according to the data of Atameken.
Main types of goods
| Shut-off valves | Ball valves and gate valves |
| Pipe fittings | Bends, transitions, tees |
| Pipe products | Seamless and seamless pipes, tubing and tubing pipes |
| Rolled metal products and metal structures | Steel sheets, slices, bars, binding wires |
| Machinery and equipment | Surface and underground pumping units for pumping, extraction and injection of liquids |
| Pressure vessel | Separators, heat-exchange equipment, furnace heaters, drainage tanks, sumps, reservoirs |
| Electrical equipment | Cable products, control stations, cabinets, transformers, generators and automation systems |
| Chemical products | Reagents, corrosion inhibitors, demulsifiers, anti-corrosion coatings, oil, lubricants and other substances |
| Personal protective equipment | Overalls, shoes, helmet, respirator, gloves and others |
Main types of works
| Construction and installation works | Construction, reconstruction, modernization and repair of industrial and civil facilities, including buildings, structures and infrastructure |
| Exploration and drilling works | Exploration and drilling of wells, well workover and workover operations, well development, hydraulic fracturing |
| Design works | Development of design documentation and technical solutions for construction and operation of facilities, technical supervision, expertise |
Main types of services
| Transportation services | Logistics, delivery of goods, special equipment rental, oil and gas transportation |
| Engineering and consulting | Technical consultations, project management, optimization of production processes |
| Equipment maintenance and repair | Support of oil equipment operability, scheduled and preventive maintenance, emergency and recovery services, emergency response, well killing, well killing |
| Labor safety and ecology | Ensuring safety at production facilities, environmental analysis and control over compliance with environmental standards and emissions |
| IT Services | Process automation, software development and cybersecurity |
| Catering and cleaning services | |