FT REPORT – KAZAKHSTAN: State company to become gatekeeper to oilfields

By Isabel Gorst, Financial Times
Published: Jun 27, 2007

Every oilman dreams of landing a really big oilfield. But Askar Balzhanov, the chief executive of KazMunaigas, Exploration and Production, Kazakhstan’s state oil producer, has a better chance than most. Founded in 2004 during a reorganisation of KazMunaigas, the state oil company, KMG E&P lies at the core of Kazakhstan’s plans to expand the state’s influence over its huge oil reserves.

Kazakhstan parcelled out several oilfields, including the giant Tengiz and Karachaganak deposits, to foreign companies in the 1990s. But the government has since passed legislation ensuring state companies of a bigger role in the oil industry in the future.

KMG E&P was entrusted at its inception with two large, but old and technically difficult, oilfields near the east coast of the Caspian Sea. Production of 192,000 barrels a day is expected to remain stable for at least five years, providing the company with time to discover, or buy more reserves.

Mr Balzhanov says that $2bn raised during KMG E&P’s initial public offering on the London Stock Exchange last October would be spent shopping for oil. Profits last year surged 180 per cent to $972m as oil prices hit record highs. But it will be special government privileges as much as ready cash that will help the company build its portfolio.

KMG E&P has been promised right of first refusal on any new oil acreage. The company is also benefiting from Article 71, a new law empowering the state to pre-empt the sale of oilfields to outsiders.

“These privileges mean that it is no longer possible for a private investor to get an oil production asset in Kazakhstan without partnering with the state oil company,” says Martha Olcott, a senior associate at the Carnegie Endowment for International Peace, said,

Eric Mielke, an oil analyst at Merrill Lynch agrees that KMG E&P would become “the gatekeeper” to Kazakh oilfields. “Kazakhstan’s objective, like Russia’s, is to ensure the government plays a bigger role in the oil industry. But it is going about it in a much more market friendly way than that we have seen in Russia”, he says.

Terms for foreign oil investors have become tougher with higher oil prices. But the government has pledged not to revise existing contracts. Article 71 has been invoked three times so far, providing KMG E&P with a legal avenue into oilfields earlier purchased by a Chinese company. If all three of these transactions go through, KMG E&P will gain 100,000 barrels of extra oil production on sweet terms.

China International Trust and Investment Corporation’s (CITIC), has offered KMG E&P a loan, repayable in future oil revenues, to help pay for a half share in Karazhanbas, an oilfield near the Caspian coast acquired by the Chinese company last year.

China National Petroleum Corporation (CNPC) has agreed to sell the state oil company shares in the KazGerMunai and PetroKazakhstan ventures in central Kazakhstan. Terms of the latter transaction have yet to be finalised.

Mr Balzhanov says he would prefer to buy more exciting assets in west Kazakhstan or the Caspian, but the government required a strategic footprint in oilfields in the central part of the republic. However, he denied that Article 71 had been employed to restrain China’s advance. “China is an aggressive investor offering the best terms for oil assets. It is impossible for Kazakhstan to refuse them,” he says.

The government has approved legislation entitling KazMunaigas, KMG E&P’s parent company, to a minimum 50 per cent share in oil projects in the Caspian Sea, one of the world’s most promising oil provinces.

“We need a really big oilfield – 100m barrels or more. We are slowly persuading the parent company that we must be allowed to work in the Caspian as well,” says Mr Balzhanov.

An opportunity may arise this year if the Oman Oil Company goes ahead with plans to sell its stake in the offshore Pearls block where Royal Dutch Shell and KMG are exploring.

Ms Olcott describes KazMunaigas as a young state oil company that had yet to decide what to do with the huge offshore assets which will could allow Kazakhstan to become an important force on world markets.

“They are inventing the game plan as they go along,” she says.

International oil majors are competing fiercely for opportunities in the Caspian, but negotiations with the government are slow. Some are concerned about the prospect of admitting inexperienced Kazakh companies to high-cost, technically complicated offshore projects.

KazMunaigas has built a sizeable portfolio in the Caspian, including a minority stake in a foreign group led by Agip of Italy developing the vast Kashagan field. Production is expected to begin at Kashagan by 2011 and build to a peak of 1.5m b/d.

Paolo Scaroni, the head of ENI, Agip’s parent company, says KMG’s presence at Kashagan is welcome, ensuring an open dialogue between foreign investors and the state. “We should never forget that it is their oil, not ours,” he says.