Relationship of “NC KAZMUNAYGAS” to the government

Unexpectedly high international oil prices helped speed the Kazakh economic recovery, and so in 2004 for when British Gas put their 16.7 percent stake up for sale, the KMG took advantage of the opportunity to purchase half of the available stake.  Their purchase though, only came after the Kashagan consortium members refused the offer of $615 million by the Chinese oil companies CNOC and Sinopec, a bid which was rumored to have enjoyed the support of the Kazakh government.

Before the consortium members could look for another buyer for this stake, or absorb the offered share of Kashagan themselves, the Kazakh legislature passed new laws governing the sale of strategic oil and gas deposits, which gave the NC KMG first refusal on all new offerings, and which mandated that the Kazakh’s hold a fifty percent share in any new sales of strategic offerings.  The existing consortia were not exempted from the resale provisions.

NC KMG also holds a fifty percent stake in KazgerMunay, with 100 million barrels of reserves.  After the KMG E and P offering is completed they will have first refusal on the purchase of this asset, which they intend to buy.

KMG has a controlling interest (51 percent) in KazakhturkMunay LLP, a joint venture with the Turkish national oil company.  This project controls five oil fields currently being explored (West Elemes, North-eastern Saztobe, South-eastern Saztobe, SourthKaratobe and Lakybai, fields with high-quality oil, with low levels of contamination of resins and other additives.  The period of joint production for this project began in January 2004.

In addition, it controls and a fifty percent stake in Kurmangazy, with a reserve of 2.2-2.8 million barrels of oil.  This latter project is in partnership with Russia’s Rosneft, and is currently behind schedule due to a number of technical difficulties, and a disappointing result from recent drilling, where the well proved dry.  This has led to rumors that that Total might be brought into the project. 

NC KMG also holds a 73 percent stake in Zhambyl, with 1.26 billion barrels, and a 25 percent stake at Zhemchuziny (Pearl Blocks), with 733 million barrels.  In addition there are currently negotiations underway with interested foreign partners for the sale of stakes to Satpayev (1.85 billion barrels reserve), the off-shore Caspian “N” block (4.65 million barrels), Isatai (1.75 million barrels), Darkhan (11 billion barrels), and for the deposit at Abai (2.8 billion barrels).

In addition KMG controls JSC “KazakhstanCaspian Shelf,” which supervises the exploration of perspective oil blocks in Kazakhstan’s part of the Caspian Sea, as well as on shore.   

As already mentioned the single largest holding of KMG is KMG Exploration and Production, with nearly a third of the company’s total assets.  The company has seven other principal units KazTransOil (oil transportation), and KazTransGaz (gas transportation).  

JSC KazTransOil is the largest oil transportation company in Kazakhstan and transports about 65 percent of the oil produced in Kazakhstan. It is 100 percent owned by KMG.31  KazTransOil controls a domestic pipeline network, over 5800 kilometers of oil trunk pipelines and over 2100 kilometers of conduits.  In addition that company has forty pump stations, an oil storage capacity of 1.3 million cubic meters. This network was largely inherited from the Soviet Union.  In addition it controls seven percent of the country’s water pipelines and 13 percent of Kazakhstan’s oil-loading railroad track.  It also manages the port of Aktau, from which 7.7 million barrels of oil were loaded in 2005.

KazTransOil’s main pipeline goes from Uzen to Atyrau and then on to Samara in Russia (UAS pipeline), which is some 930 miles long and connects the major oil fields of KMG Exploration and Production to the Transneft export pipeline in Russia. KazTransOil also has several smaller pipelines including the Kalamkas-Karazhanbas-Aktau pipeline, a pipeline going from Zhanzhol to Kenkiyak to Orsk (in Russia) and the continuation of the pipeline which starts in Chardjou Turkmenistan, enters Kazakhstan near Chimkent and then goes on to Pavodar and the Omsk in Russia.  

KazTransGaz JSC is also 100 percent owned by KMG. It has rights to first refusal for the transport of all natural gas produced in the country.  It controls underground gas storage, domestic gas transportation and transport of natural gas for exit, serving as Kazakhstan’s agent in international gas transport.  KazTransGaz also is responsible for the sale of gas on the domestic market, the production and processing of natural gas within the country, and has a role in the country’s electricity market.  It owns more than ten thousand kilometers of gas pipelines and employees about four thousand people.

KazTransGaz is also a partner in KazRosGaz JSC, holding an equal share with Gazprom.  This company, established in 2002, supervises the import-export operations of natural gas between Kazakhstan and Russia, and is responsible for supplying gas from the Karachaganak field for processing at Orenburg. It currently only employs about forty people.  

KazTransGaz  is also the sole owner of JSC InterGasCentral Asia, Intergas Central Asia (ICA) makes a substantial part of its income from the transit of gas from Turkmenistan to Russia.  These revenues are negotiated on an annual basis with its shippers, principally with Gazprom, which controls the gas from the time of purchase at the Turkmen border. The tariff for 2007 was set at $1.10 per 1000 cubic meters. By contrast Uzbek gas transiting into Kazakhstan (largely for sale in Kazakhstan) is under Gazprom’s direct control from the time it crosses the Uzbek border, and then Gazprom swaps Kazakhstan for the same volume of gas (in 2007 3.5 billion cubic meters) to be delivered to Orenburg from Karachaganak.As a result of their increased income, ICA has recently spent some $26 million in pipeline overhauls. 

NC KMG also controls a 19 percent stake in the Caspian Pipeline Consortium Pipeline (CPC). It also owns a fifty percent interest in Kazakhstan Pipeline Ventures LLC, with British Petroleum, which is has a 1.75 percent stake in CPC. 

NC KMG also holds a shared interest in the Kazakhstan-China pipeline project with CNPC.  The first stage of the project, approximately 279 miles if pipe stretching from Keniyak to Atyrau, was completed in 2003. The next section, 613 miles of pipe from Atasu to Alashankou, was completed in December 2005, opening direct shipment to China.  The final section will connect Keniyak and Kumkol.

NC KMG will be Kazakhstan’s representative in the Baku-Tbilisi-Ceyhan pipeline project, although it is unclear what stake they will eventually acquire, and how much will be cash rather than equity.  In November 2006 NC KMG announced that it would invest $1.6 billion to build a link to the BTC pipeline, by 2010. This would cover the coast of construction of a pipeline between Iskene (in Atyrau region) and the port in Kuryk, the purchase of tankers to transport oil from Kuryk to Baku, and the construction of a terminal to unload the tankers in Azerbaijan. The first Kazakh oil could be shipped from Tengiz to BTC as early as 2008, and is expected to grow from 145,000 bbl/d to around 400,000 bbl/d. BTC will be a primary export route for Kashagan oil, and a Memorandum of Understanding between NC KMG and the companies making up the Kashagan consortium group.

In addition NC KMG controls “Auction Society (AO), National Sea Transport Company (AO NMSK Kazmortansflot), created in 1998, when the Ministry of Transport and Communication was given fifty percent of the stock, and the company itself holding the other half is held by the Ministry of Transportation and Communication.  The company is considered a natural monopoly, with taxable income.

Kazmorstransflot consists of two daughter companies, TOO TenizServis and Kazmortransflot Ltd.  TOO TenizServis is in charge of on-shore (port) infrastructure necessary for oil production and export, and its shares are divided equally between KMG and AP NMSK Kazmortransflot.  They control docks 4, 5 and 9 in Atyrau, which were transferred to them in return for their financing rehabilitation of ports 4 and 5. Aktau-morport (Aktau Sea Port authority) controls the rest of the ports, and also sets the tariff structure for the port, leading it to sometimes clash with Kaztransmorflot, both on tariffs, and on Kaztransmorsflot’s practices for off-loading freight.

Kaztransmorsflot is also engaged as the commissioner of a major ship-building effort, necessary to support the growing use of tankers to freight oil across the Caspian, a business which will substantially increase once Kazakh oil from Kashagan begins going to Baku.  They have contracted with Tengizchevroil to bring on a new class of ship (12,000 metric ton “Astana” class ships) in 2007, and are working with EnkaInsaatveSanayi A. S. (in partnership with Agip KCO) to bring on even larger ships.Prior to the opening of BTC, in 2005, Kazmorstransflot shipped some 4,714,000 metric tons of oil across the Caspian.  And they are currently charged with responsibility for the expansion of the port at Kuryk.  The company would also like to expand into an international freight company trading between China and Europe.  The company currently has two-way “dry” freight traffic, moving metals, grain and asbestos, among other cargos between Kazakhstan, Russia and Azerbaijan. 

NC KMG also controls Atyrau International Airport, which has plans for major expansion of internal flights as well as direct connections to Russia, China, Uzbekistan and Azerbaijan, and Eurasia-Air Helicopter Company. Although there are periodic rumors that the company wishes to rid itself of the last two firms.

KMG own’s the Atyrau refinery (oil refinery), and a major interest in the Shymkent refinery, acquired through the sale of PetroKazakhstan to CNPC.  These two refineries, as well as a third refinery in Pavlodar supply most of Kazakhstan’s domestic fuel.  

The Atyrau refinery, in operation since 1945 is currently held by KMG TradingHouse, which acquired it from KMG Exploitation and Production as part of the latter enterprises effort to divest itself of non-essential assets in advance of its public offering.  KMG Exploitation and Production acquired the Atyrau refinery, which processes part of the production KMG Exploration and Production, when it consolidated the Soviet era holdings in western Kazakhstan.  The throughput at the refinery from January to June 2005 amounted to nearly 1.8 million metric tons, up 37.4 percent year on year.  This reflected $340 million spent in the reconstruction of the refinery, with plans for furthermodernization to get the oil processing rate up to between 85 and 92 percent. The modernization of this facility was done by the Marubeni Corporation of Japan, with support of a $500,000 feasibility study funded by the Japan Bank of International Cooperation.

NC KMG also controls 45.2 percent of the Pavlodar refinery, built in 1978.  The government hopes to increase its stake in this company, which in the Soviet era refined Siberian oil, and is the largest refinery in the country.  The remainder of the refinery is held by MangistauMunaygaz. NC KMG seems almost certain to gain a controlling interest of this refinery once MangistauMunaygaz is sold, it is currently owned by Central Asian Petroleum Ltd., an Indonesian controlled firm, which is rumored to be interested in selling it for $4 billion.  

Pavolodar has faced substantial shortages of oil for processing in recent years, a point of some displeasure on the part of Kazakhstan’s Ministry of Industry and Energy, which claims that a number of Russian providers such as Rosneft, Surgutneftegas, were not given spots in the oil supply schedule, and Lukoil received a much reduced slot, and supplies like Tatneft and some small companies working in Timan-Pechora region were unable to get supply to cargo in time to meet scheduled deliveries.  The large Russian companies sought refining capacity in Kazakhstan as a way to meeting deliveries to China.

NC KMG acquired a 52.5 percent stake in the Shymkent refinery, built in 1983, as part of the 33 percent share that CNPC sold KMG in the immediate aftermath of their purchase of PetroKazakhstan, which had owned the refinery, and succeeded in trans-forming it into the most modern facility in the country, producing some 6 million tons of oil products per year.

Other NC KMG Assets

KMG also controls JSC KazMunayGas Trade House, which helps set Kazakhstan’s export policies, and is responsible for the sale of NC KMG’s oil and gas products, including establishing business relations with other oil producing countries.  In addition it controls the chain of KMG petrol stations. KMG Trade House also has a licensed subsidiary in Switzerland.

The company also controls KazMunayGas-Service LLP, which provides administrative and logistics support for JSC NC KMG and its various daughtrer companies.It also controls Munayshy Finance B.V., which is the KMG E and P’s financial subsidiary. 

 

 

 

 

 

 Chapter II. The organizational structure and functions of the “NC KAZMUNAYGAS”

  2.1 Organizational structure of “NC KAZMUNAYGAS”

The supervision of KMG is exercised by a five person board of directors, which is headed by TimurKulibayev, President Nazarbayev’s son-in-law, who holds this post simultaneously with that of Vice-Chairman of the “Samruk” holding company. Kulibayev, is married to Nazarbayev’s middle daughter Dinara, and is the son of a former senior communist party official.  He chaired KazTransOil before the creation of NC KMG. His presence likely serves as a way to protect the interest of the Kazakh president and his family. More than anything else it helps insures that Kulibayev is able to preserve and expand his own political position, increasing his likelihood of being the next president of Kazakhstan. 

It also includes a vice-minister of energy and natural resources, and of course, UzakbaiKarabalin, the president of KMG.  GuglielmoMoscata, the president of Gas Mediterraneo and Petrolio Sri, a former general director of Agip S.p.A.is the one foreigner, and is listed as on “independent” director. 

The management of NC KMG is made up exclusively of citizens of Kazakhstan, and in fact most are even ethnic Kazakhs.  The members of NC KMG management, though, have quite diverse backgrounds, and were obviously chosen to bring a wide variety of skill sets into the company.

The president of KMG is UzakbaiKarabalin, who has been employed in one form or another in the Soviet and then Kazakh oil industry since 1973, holding leading posts in KazakhOil, KazTransOil, and also serving as Deputy Minister of Energy and Mineral resources before being appointed head of KMG in 2003.  Karabalin also spent two years working with AGIP in Italy, his one major form of direct exposure to western management techniques. 

The company’s number two, KMG first vice-president ZhaksybekKulekeyev has a background in mathematics.  A statistician Kulekeyev was serving on the faculty at the Almaty Institute of the National Economy at the time of independence.  He did not enter state service until late 1995, when he was appointed first vice-president of the country’s State Committee on Statistics and Analysis, then chairing the state statistical agency and finally, in late 1999 he was named Minister of Economics, served as Minister of Education and Science and then Rector of the Academy of State Management. He only joined KMG in early 2006, after the president’s son-in-law TimurKulibayev resigned the post of first vice-president.  

KMG’s other vice president, MakhambeetBatyrbayev is also a career oilman who worked at both Emba and at Tengiz and who is a laureate of the USSR’s prestigious Gubkin Prize, bearing the name of the prestigious oil and gas institute  in  Moscow.   KairgeldyKabyldin, is managing director of KMG’s Transport and Infrastructure Projects.  He was Vice-President of KazTransOil (and its predecessor organization) from 1997-2002, when TimurKulibayev was its president.  From 1978 until 1997 Kabyldin worked on oil transmission issues, in his native Pavlodar region and then in the Ministry of Energy and Fuel Resources of the republic of Kazakhstan.

KMG’s senior management also features someone with several years of experience in Kazakhstan’s security system.  DaniyarAbulgazin, who is Managing Director for Economics and Finance, is a 1991 graduate of the Felix Derzhinsky Higher School of the KGB of the U.S.S.R., its last class before the dissolution of the country. He was reassigned to work in various branches of the republic’s financial structure in the late 1990s, rising to be Vice-Minister of Finance.  He joined Kazakh Oil in 2002, and has been with the company ever since. 

KMG’s E&P’s Board of Directors includes three westerners among its eight members; these are all designated independent non-executive directors. The company is run by AskaBalzhanov, who was named General Director of the company in June 2006.  Like most of his colleagues Balzhanov is a career oil and gas person, having served as head of KMG’s off-shore oil and gas operations before coming to KMG E&P.

2.2 Relationship of “NC KAZMUNAYGAS” to the government

Through the President and the Cabinet

NC KMG has both a direct and indirect relationship to the government, and to the president of Kazakhstan, NursultanNazarbayev. His son-in-law TimurKulibayev remains a prominent member of Kazakhstan’s national oil industry, a relationship which is returned to in the conclusion. More importantly, the president of Kazakhstan himself still is at the center of the country’s oil and gas policy.  He appoints the Prime Minister, a choice ratified by parliament, and although the Prime Minister formally appoints the rest of the government, he does so with clear support from the president.  Similarly, the president is also consulted in key appointments in the country’s oil and gas sector, although many of these are made formally by the Ministry of Energy and Natural Resources. NC KMG is also subject to regulation by the Committee for Financial Control and Stte Procurement of the Ministry of Finance, the Ministry of Environment Protection, and the Ministry of Labor and Social Protection.   Moreover, President Nazarbayev seems to take advice from a small group of people who have held key positions in the oil and gas sector in the last decade, in ministries, in KMG, and in the office of the president.

The government of Kazakhstan holds the major reins of power in the country’s oil and gas industry. Although there has been a much greater effort in recent years to introduce greater transparency into the decision-making structures that affect this sector, there is obviously a long way to go before the industry is fully transparent. However, the recent IPO for KazMunayGas Exploration and Production provides a great deal more information about the operation of the industry than was previously available Through Legislation

KMG, as all other oil companies are governed by a series of laws passed by the government of Kazakhstan. All subsurface use contracts are drawn up in accordance with four major pieces of legislation: the Subsurface Use Law, The Petroleum Law, the Tax Code and the PSA Law. 

The 2004 PSA Law, which replaced earlier legislation from 1995, required for the first time that all new production sharing agreements include at least a fifty percent stake to be held by KMG, and their participation would effectively be funded by the other partners.  In addition, PSA’s were now restricted solely to off-shore deposits, and the companies developing these deposits were required to have greatly expanded “local content” to the projects, both in terms of services and products.    

Many of these provisions were then extended to all projects, in October 2005 with the promulgation of a set of modifications on legislation governing the utilization of natural resources and oil operations. One set of critical changes occurred in October 2005 with the promulgation of a set of modifications on legislation governing the utilization of natural resources and oil operations. Most critically this substantially increased the role of the government in the transfer of shares of existing projects by elaborating a greater right of the government to protect the country from contracts which threaten the “economic interests” of Kazakhstan. This has led to a greatly enhanced position for KazMunayGas.  It also allows the state to refuse to allow transfers of ownership on grounds of national security.

KMG and its various daughter companies are also subject to the country’s Corporate Governance Code.60 The laws that constitute the governing scheme for the oil and gas sector in Kazakhstan have been subject to many important amendments—one of the most significant coming in 2005.   At that time, restrictions were placed on the flaring of gas.  Up to that point, the managers of Kazakhstan’s major hydrocarbon consortia had flared up to of the gas produced for their deposits.

The changes to the hydrocarbon regime and indeed many of KMG’s tactical moves clearly follow the plans laid out for the oil and gas industry in two other important pieces of legislation: The Government of Kazakhstan’s Plan for its Sector of the Caspian Sea, passed in May of 2003, and The Government of Kazakhstan’s Development Plan for the Petrochemical complex of Kazakhstan.

The first of these documents, on the development of Kazakhstan’s sector of the Caspian Sea, is by far the more important of the two. The underlying purpose of the plan is to make the Kazakh “sector as attractive and mutually beneficial to investors as possible”—at least according to official line.  But it is clear that the document also aims at protecting Kazakhstan’s interest in the Caspian, outlining its expectations for how its natural resources are to be used.  The plan outlines three main tasks in the development of theCaspian: 1) increasing the production to the stable high level and developing infrastructure; 2) the creation of domestic industries and formation of own scientific-technological basis; 3) the advancement of human development and advanced technical training.  The document also sets some notable goals for consortia member operating in the Caspian, most notably listing the coming online of gas production at Kashagan as one of its key steps in implementing its plan.  

In addition, this legislation outlines Kazakhstan’s strategy toward Russia and other foreign actors, detailing Kazakhstan’s agreements with both Russian and Azerbaijain as to the delineation of the Caspian, but also dealing with transportation issues.  The need for the development of a multitude of exports routes is mentioned in the plan. 

The plan list three stages of implementation: the fist from 2003-2005, was to focus on the development of infrastructure and the training of Kazakhstani personnel; the second between 2006 and 2010 was intended to be a period of rapid growth of hydrocarbon production (although in fact the Kazakhs are somewhat off schedule); and the third, from 2011 to 2015, is to bring the off-shore production to a stable high level, enhance capacities for hydrocarbon export transportation and oil and gas processing.  The plan lists,KMG as the government body tasked with the implementation of this plan, which gives them substantial ability to pressure their consortia partners to hire and purchase locally (even beyond the minimum requirements of their contracts).