Analyses of the oil industry and its impact on the economy of the Republic of Kazakhstan

The oil and gas industry of the Republic of Kazakhstan is of strategic importance for the development of the Republic of Kazakhstan. Over the years, the industry has shown high growth rates of production, an increase in the share of GDP of Kazakhstan. However, we can not say that this industry has a great multiplier effect in the development of the national economy. There are many bottlenecks, including in terms of increasing the «local content» in the oil industry of Kazakhstan. Domestic enterprises and firms are not sufficiently integrated into the production process of oil and gas companies, are not represented among the suppliers of necessary products. The oil and gas industry has not become a «growth point» for the economy of Kazakhstan. The article analyzes the specifics of the modern oil and gas sector of the Republic of Kazakhstan in the context of globalization processes in the world economy, assesses the development of the oil and gas sector and its contribution to the macroeconomic indicators of the national economy. The importance of the oil and gas sector in the development of the processing industry of Kazakhstan and the problem of increasing the local content in the product of the oil and gas industry of Kazakhstan is studied.

Oil and natural gases are the main sources of energy, and it is clear that their dominant role will continue not only until the end of the century, but also at the beginning of the next century. With an unconditional increase in the rate of growth in the use of alternative energy sources, oil and gas in 2020–2025, it is likely to provide at least half of the total energy consumption in the world.

Today, Kazakhstan's budget by more than 40 % of its occupancy rate depends on income received in the form of taxes and fees from the oil sector. From this fact it can be concluded that the oil sector is a strategic base and priority in the integrated development of the economy of Kazakhstan. That is why the development of the oil sector in the current economic situation is of particular importance.

According to the statistics Committee of the Ministry of national economy of Kazakhstan, crude oil production in 2018 amounted to 77.5 million tons in real terms, which is 6.3 % more than in 2017; in monetary terms — 12.2 trillion tenge. Almost two thirds (60.9 %) of production was in Atyrau region (47.2 million tons, +11.6 % per year), 23.3 % — in Mangistau region (18 million tons, +0.7 % per year) and 8.3 % — in Kyzylorda region (6.4 million tons, -6.2 % per year).

In the reporting period, gas condensate was produced in the amount of 12,863 million tons (decrease in production compared to 2017 by 3.1 %), natural gas — 55,486 billion cubic meters (+4.8 %).

According to JSC «NC «KazMunaiGas», the company produces 28 % of the total oil and gas condensate production in Kazakhstan, provides 65 % of oil transportation by oil trunk pipelines and 77 % of oil transportation by tankers from the port of Aktau, processes 82 % of Kazakhstan's oil with a share of the retail market of oil products in 17 %.

According to the press service of «KazTransOil», in 2018 increased oil supplies to 4 refineries of Kazakhstan. KazTransOil delivered 16 million 149 thousand tons of oil (1 million 383 thousand tons more than in 2017) through the system of oil trunk pipelines [1].

The export direction has been strengthened: oil exports for 11 months of 2018 reached 63.2 million tons and 33.7 billion dollars. US (+2.3 % in real terms, +43 % — in monetary terms).

World statistics give different estimates of oil and gas reserves in the Republic of Kazakhstan.

Today, the state balance of Kazakhstan takes into account the reserves of 256 fields of hydrocarbon raw materials, including oil — 223, condensate — 58 and free gas — 202 fields. In accordance with Table 1, the confirmed crude oil reserves in Kazakhstan for 2017 amounted to 5540 million tons. In terms of proven hydrocarbon reserves, we occupy one of the leading places in the world, second only to some countries of the Middle East, Latin America, as well as Russia and the United States. Kazakhstan's share in the world's proven reserves of hydrocarbons is 3.2 % for oil (about 5 billion tons), and 1.5 % for gas (about 2 trillion cubic meters). At the same time, projected resources for oil reach 9.3 billion tons, for gas — 6 trillion. m3 and condensate — 1.8 billion tons.

Table 1 Confirmed crude oil reserves, million tons

Crude oil resources in 2017 amounted to 77.5 million tons, including 68.1 million tons of production in the country and 6.0 million tons of imports. Of the total resources in the domestic market, consumption amounted to 14.2 million tons and 52.9 million tons were exported.

Let's calculate the share of Kazakhstan in the market of oil reserves of European and CIS countries in the world market. Let's present the obtained data graphically.

As can be seen from the data in Figure 1, Kazakhstan has significant oil reserves: only the country ranks thirteenth in the world in terms of proven reserves. However, the total reserves of Kazakhstan's oil is very difficult to estimate, as a significant part of it is concentrated in the shelf of the Caspian sea.

The difference in reserves estimates is due to the relative lack of knowledge of the Caspian sea basin.

Today, about 240 oil and gas fields are registered in Kazakhstan, some of them are presented in Table 2. It is estimated that Kazakhstan can claim half of all oil reserves in the Caspian sea, which can make the Republic one of the ten largest world oil producers and exporters in the first decade of the XXI century [2].

Table 2 Some of oil and gas fields registered in Kazakhstan

However, a serious obstacle to the development of oil reserves of the Caspian sea remains the uncertainty of its legal status, disputed by five coastal States for several years, which in principle does not stop the exploration and development of Caspian resources, but, nevertheless, creates a serious negative background. The process of solving this problem has moved from the «dead point» after the signing in February 1998 of the Agreement between Russia and Kazakhstan on the delimitation of the Northern part of the Caspian sea, which corresponds to the initial interest of the Republic in the division of the shelf into national sectors.

Another obstacle to the rapid development of oil production in the Caspian region is the problem of oil transportation to the main markets and the presence of fierce competition from Russia and the Gulf countries, there is also a problem of poor quality of North Caspian oil, which has a high content of sulfur and hydrogen sulfide.

The resource potential of the Republic allows to increase oil production to 120–140 million tons per year. The domestic market may consume about 20 million tons in the next 10–15 years, which may lead to further growth of this figure to 26–30 million tons.

Let's calculate the share of Kazakhstan in the oil production market according to Table 4 and present the data in the form of the following Figure 2:

Oil production in 2017 in Kazakhstan amounted to 209.6 thousand tons/day. — this is 79.2 million tons of oil, of which about 56.4 million tons are exported.

In order to coordinate the situation on the market and ensure stable income, the Organization of oil exporting countries was established in 1960. It currently consists of 12 States, which account for 85 % of proven oil reserves, more than 40 % of oil production and about 60 % of exports.

It should be borne in mind, however, that some companies provide other estimates of stocks, which in turn may not coincide with the estimates of the government. The fact is that it is very difficult to make such an assessment: every year new information appears, forcing a new look at the situation with hydrocarbon reserves around the world.

As can be seen from Figure 3, oil production in Kazakhstan is increasing annually. Thus, if in 2010 the amount of oil produced amounted to 79.7 million tons, in 2018 it is already 90.3 million tons.

In the future, the volume of oil and gas production in Kazakhstan will tend to increase significantly. Experts predict that in the near future Kazakhstan may enter the «top ten» of the leading oil-producing countries, standing on a par with Kuwait. The growth of Kazakhstan's oil and gas production is associated with two factors. First, this is due to a significant increase in foreign capital inflows, especially foreign direct investment in the oil and gas industry. Secondly, a significant impact on the situation in the oil and gas sector of Kazakhstan's economy has a favorable situation on the world markets of hydrocarbons, which recovered after the global economic crisis. Oil and gas areas of the Republic, where according to official statistics there are more than 180 oil and 50 condensate fields, occupy an area of about 62 % of the territory of Kazakhstan.

The growth of Kazakhstan's oil and gas production is associated with two factors. First, this is due to a significant increase in foreign capital inflows, especially foreign direct investment in the oil and gas industry. Secondly, a significant impact on the situation in the oil and gas sector of Kazakhstan's economy has a favorable situation on the world markets of hydrocarbons, which recovered after the global economic crisis [3]. Oil and gas areas of the Republic, where according to official statistics there are more than 180 oil and 50 condensate fields, occupy an area of about 62 % of the territory of Kazakhstan.

Oil production in the country is carried out by about 50 companies, while currently only 11 companies have annual indicators with a volume of over 1 million tons of oil, including gas condensate. They produce almost 90 % of the total production of Kazakh oil. The leader of oil production is considered JV «Tengizchevroil» with annual production of 28.6 million tons (according to 2018). The second and third places are taken by Karachaganak petroleum operating and KazMunaiGas Exploration and Production.

The rapid development and even more impressive prospects of the oil industry of the Republic of Kazakhstan form favorable conditions for the creation of a powerful processing industry here, which is able not only to fully meet the domestic needs for oil refining and petrochemicals, but also to supply it to foreign markets. Recently, the authorities of the Republic of Kazakhstan pay much attention to the problems of oil refining and petrochemistry. This is a good basis for further development.

Oil refining industry of Kazakhstan is represented by three large enterprises — JSC «Atyrau refinery», PetroKazakhstan Oil Products (formerly JSC «Shymkentnefteorgsinte» and JSC «Pavlodar petrochemical plant». Their total production capacity allows to process up to 18.5 million tons of oil.

As can be seen from the data in Figure 4, there is an increase in the production of petroleum products in Kazakhstan. There are three major oil refineries in Kazakhstan — in Pavlodar, which provides oil products to the Northern region of the country, in Atyrau — in the Western region, and in Shymkent — in the southern region. Modernization of Pavlodar petrochemical plant was completed in December 2017. At the same time, the modernization of Atyrau refinery was completed. Earlier in September 2016, the project «Construc- tion of a Complex for the production of aromatic hydrocarbons at the Atyrau refinery» was completed. The project «Construction of a deep oil refining Complex at Atyrau refinery» is at the launch stage.

In March 2018, the launch of the main installation of the complex — catalytic cracking was carried out, as a result of which the production of high-octane gasoline was increased by more than 2 times.

As for the reconstruction and modernization of the Shymkent refinery, the first stage was completed in June 2017, the second — March 15, 2018. To date, mechanical completion and commissioning works have been carried out. The leadership of the Atyrau and Shymkent plants decided to build a catalytic cracking unit, with which it will be possible to achieve the deepest oil refining to obtain additional volumes of light oil products. This explains the significant amount of investment in these two refineries.

Despite the efforts of the government to diversify and modernize the economy, the oil and gas sector is still the basis of economic and industrial development of Kazakhstan. Although the share of oil production in GDP has steadily declined in recent years, its decline is primarily due to the delay in the introduction of new fields, in particular, Kashagan, as well as a significant decline in world oil prices in 2014-2015. Another constraint on production growth is the limited capacity of export transport infrastructure. At the end of 2016, the share of the oil and gas industry in the country's GDP amounted to 10.4 %, an increase of slightly 0.1 % compared to the previous year in accordance with Figure 5.

Research shows that there are opportunities for diversification of the industry in the direction of creating competitive export petrochemical products with high added value.

Therefore, to create a full technological cycle for the deep processing of hydrocarbon raw materials and the development of high-tech industries, saturation of the domestic market with basic petrochemical products, as well as export of competitive Kazakh products, it is planned to implement the developed investment projects for the creation of petrochemical industries and investment projects for the modernization of all refineries.

Considering the existing global imbalance between the level of oil production and consumption, Kazakhstan has good potential to annually increase the volume of its oil production and, accordingly, the export of UVS to world markets. This assumption is confirmed by the fact that during the years of independence of the Republic the share of exported oil from the total volume of its production increased from 61 % in 1998 to 92 % in the first half of 2017.

At the same time, the growth of exports should not cause a decrease in domestic consumption of fuel resources, as domestic refineries (for example, Pavlodar refinery and partially Shymkent refinery), which today work with West Siberian oil from Russia, can process our own raw materials. At the same time, it is necessary to constantly improve the system of administrative regulation of the national market of petroleum products. This will be facilitated by the recently adopted Code «On subsoil and subsoil use», which protects the interests of the state as the owner of the subsoil, and the interests of subsoil users.

Thus, considering the above, it can be stated that the role and place of the oil complex of Kazakhstan in the world oil market is gaining importance, despite the increasing difficulties in oil production not only in Kazakhstan but also in the world.

Currently, one of the most important tasks of the development of the economy of Kazakhstan is the diversification of industry and the development of competitive domestic products of the manufacturing industry. Monitoring of procurement of goods, works and services of the subjects of monitoring allows to determine the state of the manufacturing industry and to obtain operational information on the share of local content in the procurement of goods, works and services (Table 3).

Table 3

List of the most purchased by subsoil users of the oil and gas sector in the Atyrau region of works and services with a zero indicator of the share of local content

In accordance with the reporting data of subsoil users of the oil and gas sector for 12 months of 2018, the volume of purchases of this industry from the total volume of purchases of goods, works and services (more than 16 trillion tenge) amounted to 31,2 %.

Measures to assist domestic producers in promoting their products to the service market of subsoil use are carried out by the government of the Republic of Kazakhstan on a systematic basis. But, it should be noted that in the procurement of subsoil users of the oil and gas sector, the share of local content in goods is still low (13.6 %).

After analyzing the reports of subsoil users oil and gas sector on procurement of goods, works and services, it is revealed that at the end of 12 months 2018 the total volume of procurement of goods, works and services subsoil users oil and gas sector amounted to 5 215,8 billion tenge, the share of local content was

1. % in the amount of 1958,5 billion tenge.

From them:

• the volume of purchase of goods — 399.8 billion tenge, local content — 13,6 % in the amount of

1. billion tenge;

• the volume of work performed — amounted to 3 486,0 billion tenge, local content — 37,9 % in the amount of 1321,8 billion tenge,
• the volume of services rendered — amounted to 1330.0 billion tenge, local content — 43.8 % in the amount of 582,2 billion tenge.

Information on the shares of local content in the procurement of subsoil users of the oil and gas sector by region is shown in Figure 6.

At the same time, these types of services and works are provided by Kazakh suppliers (Table 4).

Table 4 A list of the most purchased by subsoil users of the oil and gas sector in the Atyrau region of goods with a zero indicator of the share of local content

The second place in the volume of purchases of goods, works and services in the amount of

1. billion tenge was taken by subsoil users of the oil and gas sector in the West Kazakhstan region. The leading positions among the subsoil users of the oil and gas sector in the region are held by such companies as «Karachaganak petroleum operating BV» with a total volume of purchases of goods, works and services 272.4 billion tenge, the share of local content in which 59.9 % in the amount of 163.1 billion τ, and LLP «Zhaikmunai» with a total volume of purchases of goods, works and services 74.7 billion tenge and the share of local content 40.1 %. The total share of local content in the West Kazakhstan region amounted to
2. % in the amount of 196.7 billion tenge, while the region went down by 7 (seven) place in the ranking of regions.

The third place in the volume of purchases of goods, works and services in the amount of 167.1 billion tenge was taken by subsoil users of the oil and gas sector in Aktobe region. Leading positions among subsoil users in this region are held by such companies as JSC «CNPC AMG» and JSC «KMK Munai». The total share of local content in Aktobe region amounted to 58.8 % in the amount of 98.2 billion tenge, while the region occupies 6 (sixth) place in the ranking of regions. The least purchase of goods, works and services among the nine regions was carried out by subsoil users of Kostanay and Turkestan regions, totaling

million tenge and 3.1 million tenge, respectively. At the same time, the volume of local content in the procurement of goods, works and services among all regions ranks first Kostanay region with a share of local contend 98.0 % (the amount of LC was 31.3 million tenge). Mining companies in the region is LLP «Teniz Petroleum» and LLP «Energy». The main purchase of these enterprises fell on various types of services, such as legal, consulting, translation, garbage collection, etc., which served to increase the share of local content.

Thus, based on the above, we can conclude that the main reason for the low rate of local content in the procurement of subsoil users of the oil and gas sector in most areas was the following factor:

– subsoil users purchase only a small part of goods, works and services from domestic producers. In addition, the purchase of Kazakh goods is still dominated by non-high-tech products, the purchase of high-tech products from domestic producers is insignificant.

During the analysis of the procurement of subsoil users revealed that the purchase of goods with local content is dominated by non-high-tech and not typical for the oil and gas industry products. However, it should be noted that some types of specialized pipe products, wellhead equipment, tanks, chemical reagents, spare parts for pumps, fuels and lubricants, workwear, concrete products, metal structures and other types of goods were purchased from Kazakh manufacturers in a smaller volume than from foreign manufacturers. Due to the fact that the main criterion for subsoil users for the purchase of goods is quality, such goods as equipment with special technical characteristics necessary for the exploration and production of oil and gas are of foreign origin.

According to the results of 12 months of 2018 compared to the same period of 12 months of 2017, there was an increase in the total amount of goods, works and services by 666.9 billion tenge and a decrease in the share of local content by 3.7 %.

The increase in the total purchase of goods, works and services was due to an increase in the purchase of such companies as: LLP «Tengizchevroil», JSC «SNPS-Aktobemunaigas», «Karachaganak petroleum operating BV», «NCOC».

Based on the analysis of the procurement of goods, works and services of subsoil users of the oil and gas sector, the following reasons can be identified that affect the reduction of local content:

• subsoil users purchase only a small part of goods, works and services from domestic producers, preference is given to foreign suppliers;
• lack of high-quality goods, works and services that meet all qualification requirements for use in large-scale projects of large subsoil users;
• non-compliance of goods, works and services to the project needs, lack of certificates such as ISO, API, ASME, ASTM;
• lack of experience in the oil and gas industry, as well as the availability of outdated equipment;
• no feedback from the supplier after receiving bids from him, lack of knowledge and competence of the supplier when working with the tender process and documents;
• providing unsubstantiated and uncompetitive price offers and not fully provided information when completing questionnaires;
• lack of certificates of origin of goods of the form «ST-KZ» at the majority of the Kazakhstan suppliers caused by unwillingness in registration and representation of these certificates on own production in connection with small term of its action and high cost;
• the absence of sanctions for failure to comply with local content obligations in previously concluded subsoil use contracts.

In addition, one of the reasons for the low rates of local content in the goods was the dependence of Kazakh companies on the presence or absence of advanced technologies in their Arsenal. Unfortunately, the desire for technological leadership among domestic service contractors, focused more on operational earning money, is much weaker than that of foreign competitors. The purchase of Kazakh goods is still dominated by non-high-tech products, the purchase of high-tech products from domestic manufacturers is insignificant (many domestic manufacturers do not have certificates, such as ISO, API, ASME, ASTM).

From the presented analysis it is clear that the main share of purchases of goods, works and services of the oil and gas industry is formed by the largest oil and gas companies LLP «Tengizchevroil», «Nord Caspian operating company N.V». and «Karachaganak petroleum operating B.V».

According to the results of 2018, the main share of purchases of goods, works and services of the largest subsoil users falls on the company LLP «Tengizchevroil». The reason for such huge costs is related to the implementation of the company's Future expansion project/Wellhead pressure management project (hereinafter — FEP/WPMP). Given the high requirements for the quality of goods, works and services provided under the FEP/WPMP, most of the purchases are imported, of which more than half of the volume of work (53 %) was purchased from the Korean company Daewoo Shipbuilding & Marine Engineering.

As shown by the analysis of purchases of subsoil users of the oil and gas sector, pipe, pump, cable products, chemical reagents and other products, subsoil users buy from foreign suppliers or from domestic suppliers engaged in dealer activities of goods of foreign origin.

At the same time, it is necessary to take into account that in Kazakhstan there is a production of part of necessary goods, such enterprises as LLP «Kazakhstan Plant of Oil Equipment», LLP «KSP Steel», LLP «Kaztsentroelektroprovod», JSC «Kazenergokabel», LLP «Kazkompressormash», JSC «Ust- Kamenogorsk plant of industrial valves» are domestic companies that produce a list of similar imported commercial products of domestic production with a certificate of origin of the form «CT-KZ».

It follows that the domestic market allows to provide subsoil users with goods similar to imported ones.

At the same time, the purpose of Kazakh companies is to obtain a large tender and the opportunity to participate in subcontracting work in the framework of large projects, such as LLP «Tengizchevroil», «Kara- chaganak petroleum operating BV» and «Nord Caspian operating company N. In». But it should be noted that large lots of large subsoil users require the presence of potential suppliers not only the requirements for the quality of the delivered goods (or work/services), the existence of strict conditions of liability (fines for non-compliance with the terms of the contract by the supplier), but also the availability of sufficient funds. These conditions are not feasible for most domestic companies.

To date, the following problematic issues remain relevant for domestic enterprises:

• - lack of highly qualified personnel in the oil and gas industry;
• closed tender procedures of large operators — non-transparent selection of potential bidders;
• large oil and gas operators play a complex of works, including several types of operations. The consolidation of lots does not allow the Kazakh business to participate in the procurement of operators.

In order to increase local content in the procurement of goods, works and services of major oil and gas operators, the following is proposed:

• when implementing large oil and gas projects, it is necessary to set requirements for large customers to attract Kazakh design and engineering companies as partners;
• to consider the possibility of making changes to the tender procedures of large oil and gas operators in terms of increasing transparency (announcement of the tender, reasons for rejection and Protocol of the results of the award);
• to recommend subsoil users of the oil and gas sector to consider splitting lots into more medium/small volumes of work. Splitting large contracts into smaller lots will allow small and medium-sized businesses to develop better.

References

1. Sultanov, B.K. Statistical review of world energy in 2017. bloomberg.com. Retrieved from http://www.bloomberg.com/, free
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3. Tokmurziev, M. (2011). Tsenoobrazovanie v neftedobyvaiushchei otrasli Respubliki Kazakhstan: vliianie i osobennosti [Pricing in the oil industry of the Republic of Kazakhstan: impact and features]. Molodoi uchenyi — Young scientist, 8, 173–177 [in Russian].