20 years – Development of the Energy Sector of Kazakhstan

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altSauat Mynbayev, Minister of Oil and Gas of the Republic of Kazakhstan

ACHIEVEMENTS. PROBLEMS. PROSPECTS

According to the proven oil reserves, Kazakhstan is ranked the ninth in the world. (Slide 1). This data is from independent resources. I believe we have ground to expect an increase in reserves in the future taking into account the estimates of our geological reserves and the large-scale geologic research. We had somewhat reduction of the reserves before 2001, but later on you can see an essential increase. I must say, this increase was mainly due to opening of Kashagan fled, and increase in reserves at Tengiz feld. In general, this demonstrates the success achieved in the geological sector of Kazakhstan.

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The crude production increased over threefold in 20 years, the gas production – five times. (Slide 2). The volume of hydrocarbons is expected to increase essentially in the future. In these terms Kazakhstan is one of few states with the production peak ahead,  At the present slide, do not be confused by the last line. Production growth of commodity gas is non-essential, in fact. The issue is that our gas is mainly associated gas. It means that for the purpose of full extraction of liquid fractions, a part of the gas produced is injected back to the stratum. However, frstly, this gas may be extracted in future. Secondly, in case of the changes in the commercial marketing terms or the implementation of technological innovations, the production volumes of gas may be easily increased.

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At Tengiz, we are currently working on the Future Growth Project, which is planned to increase the extraction volume from current 26 million tons to 36 million tons per year. I assume, it will be submitted for review to the authorities.

Great work on development of Kashagan project has been conducted. The commercial production is expected to start in December 2012 – June 2013. As you know, the production volume at the frst stage of the project is expected to reach 370 thousand barrels per day with potential increase to 450 thousand barrels. Yes, the uncertainty still remains with regard to the consequent second stage. But, I believe that close cooperation between the contracting companies and authorities, the compliance of suggested decisions to the best world practice, consideration of mutual interests may provide the project with the greater success.

Regarding N Block: our national company KazMunayGas with 51% share works in partnership with ConocoPhilips and Mubadala companies. The frst well ( R-1) has been already drilled in Rakushechnoye Sea and the frst confrmation of hydrocarbons presence received. The exploration operations are conducted in full compliance with the work program and we expect their success continuation.

Regarding Zhemchuzhina structure: KazMunayGas is operating in partnership with Shell (55%) and Oman (20%). Besides, the exploration works proved presence of oil and logical risk always exists. Dry wells at Tyub-Karagan and Kurmangazy structures verify this fact. Nonetheless, we defnitely have a solid ground to account for a signifcant growth in reserves and production of liquid hydrocarbons.

The environmental aspects of the activity relating to the hydrocarbons production become crucial due to the increase in production.
I would like to show the dynamics of one indicator only, the volume of the fared gas. Note that these volumes are in inverse ration to the production and in 2010 the volume of the fared gas achieved 1.4 billion cubic meters, which was 3.6% of the produced gas including the volumes of technologically in-evitable faring. This indicator is lower than let’s say in Norway, but it is higher than in many countries, including those with a long oil extraction history. I must note that the gas on Auezov and Khazar structures. The project parties are preparing the feld development strategy, Satpayev and Zhambyl blocks are the initial stage of exploration, however, we expect con-frmation of essential reserves of raw hydrocarbon deposits. Satpayev structure is being developed under the cooperation with the Indian ONGC Videsh Limited (OVL) with the share of 25% to 35%. Zhambyl Block is being developed in cooperation with the Ko-rean National Oil Corporation (27%). In the near future, we are going to com-mence exploration in Abay Block with the Norwegian StatOil; later, at Khvalynskoye and Tsentralnaya structures in the partnership with the Russian GasProm and LukOil. The issues with the Russian state authorities are remaining open. Our plans are to create a partnership with the Italian ENI at Shagala and Isatay Blocks. Finally, I should note the NC KazMunayGas in 2010 and 2011 opened felds at Liman and Urikhtau structures. They are under detail exploration and evaluation process. The register of the Ministry of Oil and Gas includes 61 exploration contracts. The geolegislative requirements to this aspect will be strengthened.

Kazakhstan does not have access to the open sea. Therefore the export access, mainly provided through pipelines, is essential. This is a map of the existing pipeline system. The frst direction is Atyrau – Samara with the following entry to the Eastern Europe via Russia. The second is CPC with the access via the Black Sea. The third is an operating oil pipeline to China, Atyrau – Kenki-yak, Kumkol – Atasu – Alashankou. The fourth goes via Aktau port to Makhachkala, Baku and Neka. Then via the Black Sea the pipeline Baku – Tbilisi – Ceyhan goes to the Mediterranean, through SWOP operation with Iran it goes to the Persian Gulf. With the commencement of the second stage of Kashagan, we expect to launch a logistic route of Kazakhstani – Caspian Transportation System (KCTS).

The third slide demonstrates the actual and forecasted transportation volumes of the exported oil. We have done great work in this feld during 20 years of our independence. It includes CPC construction, Aktau port expansion, opening of a conceptually new route between Kazakhstan and China, enlargement of rail road supplies. Speaking of a forecasted period, we will be able to provide full export capacities subject to the implementation of all the plans existing. As you know, CPC expansion project has been started, the capacities of 52 million tons per year of Kazakh oil, indicated on the slide, will be supposedly achieved in the frst quarter 2015.

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A linear section of Kazakhstan – China pipeline has already been completed. The capacity increase up to 20 million tons is the issue relating to the construction of additional oil pumping stations. This project may be easily implemented as the resource base increases. The slide does not include Kashagan production volumes at the second stage, but they are hardly possible prior to 2019. Accordingly, KCTS is not included either. These projects are mutually related. Thus, considering the potential of the Ka-zakhstani – Caspian Transportation System operation, we assume that the issue of the planned export routes is clear. Obviously, each project has some operational, technical issues, which will be solved in a timely manner. We are committed to it. And we see such commitment at our neighbors, partners and investors.

On the fourth slide you see the actual and forecasted dynamics of oil supplies to the domestic market. This volume is processed on three Refneries in Atyrau, Shymkent and Pavlodar. Their capacities are not enough. Today, a part of high-octane petrol consumed domestically is imported. Such dependence on import causes the domestic supplies halting during the fuel crisis or price explosions, as it happened this summer. Of course, building an open economy requires us following the global price trends. However, we can and must protect the internal market from price surge. For this purpose, the government, though late, started the implementation of the Program on the expansion and modernization of these refneries. According to this Program, the reconstruction of all three refneries is provided for by 2015. This will, frstly, allow for an increase the refning capacities up to 17.5 million tons, secondly, deepen the oil refning to produce all types of oil products internally, and thirdly, provides for the pro-duction of benzene complying with Euro-5 standard. The works on the refneries have already been started.

We are planning to construct a new oil refn-ery plant during the period of 2019 – 2020 under the Industrial program. For 20 years the gas consumption increased more than twofold. We expect such twofold growth during next decade.

At the same time the northern-eastern and central Kazakhstan is not gasifed. The rea-son is simple. The gasifed regions - where “blue fuel” is produced, including the west-ern Kazakhstan, as well as the regions with historically developed system of gas pipeline, including south Kazakhstan and Kustanay region. Considering our distances and den-sity of population, the laying of main lines is the issue of economical feasibility, especially taking into account a relative price competitiveness of natural gas against coal used in these regions; even despite of the ecological costs relating to its use. Nonetheless, we keep on reviewing the various options of the gasifcation of the north and central regions.

We have an internal gasifcation project under implementation; it is the Beyneu – Bo-zoy – Akbulak gas line. It will connect the western gas producing regions with the main gas consuming market in the south Kazakhstan, which has a ready infrastructure for gas consumption and, what is the main, an essential growth potential in terms of both industrial development and population.

The gas line construction is based on the matching contribution with the Chinese party. The linear part construction completion is scheduled for 2013. The capacity on the frst stage is 5 billion cubic meters per year. It might be expanded up to 15 billion cubic meters due to the construction of the compressor stations (CS). This pipeline can be used as an export pipe to China. However, as you may remember from the starting slides, the commodity gas production will grow very slowly. Despite, if we produce much more commodity gas due to commercial or technical reasons, as I said before, then we will have a prepared gas transporting infrastructure. I should note our opportunities and obligations grown on in regard to the gas transit. During the years of independence, we have been performing our transit obligations rigorously.

In 2010 the Turkmenistan – Uzbekistan – Kazakhstan gas pipeline was put in operation. It has already transported 14 billion cubic meters of gas this year. Its capacity is 30 billion cubic meters a year. We agreed to expand its capacity to 55 billion cubic meters as per China’s request. The agreement has been signed. I believe the construction will start this December.
So, the gas industry will remain one of the key industries of Kazakhstan with an essential growth potential in all aspects, including extraction, internal consumption, transit and possible export.

On July 1, 2011 the Agreements on Establishment of a Customs Union unifying Ka-zakhstan, Belarus and Russia came into force. From January 1, 2012 the Agreements on Common Economic Space comes into force. It means the creation of a common energy space. What are its main parameters?
a)    National transportation tariff regime;
b)    Free oil products trade;
c)    Regarding oil, we have instated that after 2014 Kazakhstan will supply its domestic market for 100%. It is due to preservation of the various tax regimens, and export duty, in particular;
d)    Transition to a common technical regulation and standards.
Considering that our country is oil exporting, the stability of the supplies will, cer-tainly, improve.
And the last, as you may know, the Head of the State determined the industrial innovative development program as the priority for the next period. In short it means that the material sector can develop. But we are interested in the outrunning growth of the pro-cessing sectors, in the Kazakhstani products production with higher value added. Objectively, these will be the productions aimed at a deeper raw materials processing. In the last year and a half 227 projects with the total amount of investments more than 6 billion US dollars (926 billion KZT) were put into service since the Program implementation.

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I would like to make mention of some projects somewhat relating to the oil and gas industry. A part of them is going to establish a principally new branch of the national spe-cialization. It is petrochemistry. I have already said about the three oil re-fnery plants. In the frame of modernization of Atyrau Refnery, we already started the construction of the aromatics production complex, specifcally, 133 thousand tons of benzole, 496 thousand tons of paraxylene. The general contractor on construction is the largest Chinese Engineering Company, Sin-opec Engineering. The Complex is planned to be put into service in December 2013.

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The construction of an integrated gas chemical complex was also begun It consists of two stages.
The frst stage is establishment of propylene production with the capacity of 500 thousand tons per year. The construction of the facility was begun in 2010, The general contractor on frst stage is Sinopec Engineering. The cost of the frst stage is about 2 billion US dollars. The agreement was concluded on the guaranteed marketing of the products with Sinopec Engineering and the American Vinmar International Ltd. The construction of the frst stage is planned to be completed in 2015. The second stage is establishment of pro-pylene production with the capacity of 800 thousand tons per year. The strategic partner on the second stage is the South Korean LG CHEM Company. In 2010 the joint venture agreement was signed between this Company and Kazakhstan Petrochemical Industries Inc., LLP and the Memorandum of Understanding regarding the project funding. There is a sales agreement concluded with LG CHEM. The cost of the second stage amounts to 4.3 billion US dollars. The construction is expected to be completed in the fourth quarter, 2016.

Besides, the construction of a plant on production of high-quality paving bitumen meeting the climatic conditions of Kazakhstan with the capacity of 400 thousand tons a year was started on Aktau plant in Mangystau region. The general construction contractors are JSC NGCC KazStroyService and CITIC Construction, LLP. The bitumen plant will be put into operation in 2012. I fnally note that the oil and gas sector have been and remains the basic sector of the fuel and energy complex. Under the modern conditions it also plays the key role in the processing industry development, implementation of the strategy on Kazakhstan’s joining the 50 top most competitive countries of the world.

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