Why Kazakhstan companies do not participate in implementation of large scale oil and gas projects? Expert’s opinion.

Recently the president of the republic instructed the government and local executive authorities to strengthen the work pertaining to increase of supply of domestic goods and services to oil and gas companies. However to what extent are the Kazakhstan oilfield service companies ready to provide such scope of services? These and other questions answers Nurlan Zhumagulov – general director of the Union of Kazakhstan oilfield service companies – in the interview to petrocouncil.kz.

– President Tokayev recently called oil and gas companies for more active involvement of local companies and local specialists in projects. Tell us, Nurlan, to what extent are domestic suppliers ready to satisfy demands of operators? What do they lack to become participants of large scale projects?

– First of all our Kazakhstan companies lack money to implement large scale projects. Let’s take for example Future Growth Project of  Tengizchevroil LLP (TCO). The budget of construction works here in simply huge. It is clear that any customer tries to minimize risks by selecting a major contractor and placing whole responsibility thereon rather than to divide a large scope of contract works in several lots. However such contract works can be managed only by large foreign companies, which have experience in implementation of such expensive projects.

– What kind of work scopes are you talking about?

– About contract works for the amount of more than 300 millions of  US dollars. We spoke with representatives of such leading Kazakhstan oilfield service companies as Isker, Neftestroyservice, Ariadna and Montazhspetsstroy. So they say they can handle projects costing up to 200 millions of  US dollars. Whereas it is difficult to provide bank guarantee for projects with higher cost. Our Kazakhstan banks are not ready to finance against contract. Because the National bank requires solid pledge. Whereas oilfield service consists first of all of engineering personnel. Oilfield service companies do not usually have much property to pledge.

This is, probably, the main problem of oilfield service companies of the country. i.e. large contract works should be divided into smaller ones so that Kazakhstan enterprises also can participate in projects and we need that Kazakhstan banks start issuing loans against contracts.

– If I am not mistaken Kazakhstan suppliers also stand for reduction of orders budget from 20 millions to 10 millions of  US dollars.

– Yes, we speak of  budget of projects to be implemented by operators outside of major projects. For example in TCO the operator agrees works costing more than 25 millions of  US dollars with Kazmunaigaz. The enterprise itself decides what contractor to choose for works costing less.

Similar limits there are established in Kashagan and Karachaganak projects. Here the amount, which is to be agreed with Kazakhstan party i.e. with PSA LLP – an authorized body acting on behalf of the Republic of  Kazakhstan Ministry of energy –, is equal to 20 millions of US dollars.

So, PSA proposes to reduce this limit to 10 millions of  US dollars. This figure was approved more than 10 years ago. Several depreciations took place since then. Consequently dollar became more expensive. However no agreement has been reached on these issues to date.

Not less than 1000 companies are operating in oilfield service industry with the number of personnel exceeding 180 thousands of persons. Turnover of oilfield services in the sector of mineral resources utilization is 8 billions of US dollars per year in average. 55-60% of all purchases of oil producing companies fall in to oilfield service. According to data of KazService.

– What is the situation regarding performance of oilfield service orders as of today?

– If we calculate based on results of the last year, local companies expand into half of the market, whereas foreign companies expand into the other half.

But we have to divide into major and operational projects. Operational projects are some kind of current works, whereas major projects are short-time projects with extensive investment of capital. As a rule customers try to observe deadlines. For this reason they involve foreign contractors so that they do job quickly, solve tasks and leave. In realization of major projects the share of  Kazakhstan business roughly decrease. Usually our domestic companies are involved in subcontracting works. But the margin there is totally different. Plus they are selected on the basis of  lowest prices. Frequently subcontractors provide only personnel.

– In other words local companies act as subcontractors and deploy basically workforce without investing into equipment or technologies, right?

– Yes, and we raised this issue several times. And now there is a great change, at least at FGP.

– What kinds of works can Kazakhstan companies perform?

– Major projects are approved by foreign shareholders not operators. Therefore they select well-tried western engineering companies. FGP was a bad example. Because basic engineering works were performed abroad, in Farnborough (Great Britain). When detailed design is performed abroad the international standards, requirements are introduced, meetings with potential suppliers of different equipment are held. All western companies have their representative offices and are based in Europe. It is difficult for our companies to compete with them.

If engineering works were performed in Kazakhstan, it would significantly simplify the task for Kazakhstan suppliers. Our factories could communicate directly with customers, present their products.

When approving production increase project in Karachaganak PSA set the requirement that not less than 50% of engineering works are performed here in Kazakhstan and with participation of  local partner. At FGP project there were also local partners: Kazakhstan institute of oil and gas and Kazgiproneftetrans received 20% of work scope. The remaining 60% shared Worley Parsons Limited and Fluor Limited.

Concerning Kalamkas-sea and Khazar projects it is not clear what share of engineering works will be performed in Kazakhstan.

Shareholders of  North-Caspian project say that detailed engineering works in Kazakhstan will cost them much, that there are no highly qualified engineers, that we have little experience on marine projects.

– The issue of personnel is discussed for a long period of time. Though TCO and NCOC have been operating in Kazakhstan for more than 20 years. Was it not possible to train necessary personnel over this time?

– We have to acknowledge that great flow of workforce is observed. Trained personnel leave to work abroad, because salary received by them here is very low. Having work experience at such projects as Kashagan and Tengiz you can easily get employed at any other world project.

Western companies pay to engineer much more, than here. Whereas wages in Kazakhstan do not increase though prices are growing everywhere practically to everything.

Status quo

Other issue of no small importance is status of  Kazakhstan companies. Currently any foreign shareholder may register an enterprise in Kazakhstan in form of  LLP or JSC, employ personnel from among Kazakhstan citizens and be considered a Kazakhstan company if 95% of personnel are citizens of the Republic of Kazakhstan. Our legislation does not consider shareholder’s equity and foundation capital.

We would like that legislators consider this issue and take into account that 50% of share as a minimum belong to Kazakhstan citizen since Kazakhstan citizen will spend earned money in Kazakhstan. Remarkable examples are NSS and PSI Group, which invest money earned in oilfield service sector into development of production here in Kazakhstan. Whereas a foreign company operating in Kazakhstan under the image of a local company is giving efforts to provide profit to parent company. Therefore foreign companies should establish joint ventures along with local companies on parity basis.