International Trade: Kazakhstan Unlikely to Be Major Source of Oil for
the United States (Letter Report, 03/04/94, GAO/GGD-94-74).
Covering a territory of more than 1 million square miles, or about
one-third of the continental United States, Kazakhstan, part of the
former Soviet Union, is rich in oil, gas, and mineral deposits. The risk
of disruption to Middle East oil production and the rising U.S. demand
for foreign oil have spurred American interest in oil sources outside
the Persian Gulf. This report provides information on Kazakhstan's
potential as (1) a source of oil for the United States and (2) an
investment opportunity for the U.S. petroleum industry and an export
market for U.S. oil and gas equipment supplies. GAO also discusses
Kazakhstan's oil and gas production, reserves, exports, and consumption;
the possible pipeline routes for bringing Kazakhstan's oil to export
markets; the factors encouraging and discouraging investment in
Kazakhstan's petroleum sector; and the efforts of the U.S. government to
support exports to and investment in Kazakhstan's petroleum sector and
U.S. oil companies' responses to those efforts.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-94-74
TITLE: International Trade: Kazakhstan Unlikely to Be Major Source
of Oil for the United States
DATE: 03/04/94
SUBJECT: International trade
Oil importing
Oil resources
Exporting
International economic relations
Investments abroad
Developing countries
Foreign governments
Domestic crude oil
Crude oil pipeline operations
IDENTIFIER: Kazakhstan
Middle East
Persian Gulf
Russia
Turkmenistan
Uzbekistan
Ukraine
Europe
Soviet Union
Caspian Sea
Prudhoe Bay (AK)
Qatar
Black Sea
Oman
Mediterranean Sea
Azerbaijan
Armenia
Turkey
Indian Ocean
Iran
Afghanistan
Pakistan
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Cover
================================================================ COVER
Report to Congressional Requesters
March 1994
INTERNATIONAL TRADE - KAZAKHSTAN
UNLIKELY TO BE MAJOR SOURCE OF OIL
FOR THE UNITED STATES
GAO/GGD-94-74
International Trade
Abbreviations
=============================================================== ABBREV
DOE - Department of Energy
Eximbank - U.S. Export-Import Bank
GAO - General Accounting Office
KAZNIGRI - Kazakhstani Scientific Research Geological Exploration
Institute
OPEC - Organization of Petroleum Exporting Countries
OPIC - Overseas Private Investment Corporation
TDA - Trade and Development Agency
Letter
=============================================================== LETTER
B-255440
March 4, 1994
The Honorable John Glenn
Chairman, Committee on Governmental Affairs
United States Senate
The Honorable Joseph I. Lieberman
United States Senate
As you requested, in this report we describe Kazakhstan's petroleum
industry and identify issues affecting U.S. investment in
Kazakhstan's petroleum sector. Our report focuses on these topics
because the risk of disruption to Middle East oil production and the
rising U.S. demand for foreign oil have increased national interest
in sources of oil outside the Persian Gulf.
Specifically, this report provides information on Kazakhstan's
potential as (1) a source of oil for the United States and (2) an
investment opportunity for the U.S. petroleum industry and an export
market for U.S. oil and gas equipment suppliers. We also give
information on Kazakhstan's oil and gas production, reserves,
exports, and consumption; the possible pipeline routes for bringing
Kazakhstan's oil to export markets; the factors encouraging and
discouraging investment in Kazakhstan's petroleum sector; and the
efforts of the U.S. government to support exports to and investment
in Kazakhstan's petroleum sector and U.S. oil companies' responses
to those efforts.
BACKGROUND
------------------------------------------------------------ Letter :1
Covering a territory of over 1 million square miles, or about
one-third of the continental United States, Kazakhstan is rich in
oil, gas, and mineral deposits. Kazakhstan is the second largest
producer of oil in the former Soviet Union after Russia, and is fifth
in the production of natural gas (after Russia, Turkmenistan,
Uzbekistan, and Ukraine). PlanEcon, a Washington, D.C.-based
economic consulting firm that specializes in reviewing the countries
of Eastern Europe and the former Soviet Union, published statistics
showing that in 1992, Russia produced 88 percent of the former Soviet
Union's crude oil. Kazakhstan accounted for just over half of the
remaining 12 percent, or 6.2 percent of the total. During the same
year, Kazakhstan produced 1 percent of the region's natural gas.\1
According to data compiled by an oil industry specialist with the
Congressional Research Service and by the Department of Energy (DOE),
Kazakhstan contains about 6 percent of the former Soviet Union's
proved oil reserves and 9 percent of its total oil resources.\2
Since declaring its independence on December 16, 1991, Kazakhstan has
signed a trade agreement with the United States in May 1992, and upon
the exchange of diplomatic notes, was granted most-favored-nation\3
status in February 1993 under the agreement's provisions. U.S.
exports to Kazakhstan totaled $14.6 million in 1992, and U.S.
imports for the year came to $20.8 million. Kazakhstan and the
United States have also negotiated bilateral investment and tax
treaties. The bilateral investment treaty entered into force in
December 1993 with the exchange of the instruments of ratification.
The treaty to avoid double taxation is near approval. Kazakhstan has
observer status at the General Agreement on Tariffs and Trade\4 and
is a member of the International Monetary Fund and the World Bank.\5
Kazakhstan is also a member of the European Bank for Reconstruction
and Development and the Asian Development Bank.
Bordering areas of ethnic unrest and situated in a region where
Turkey and Iran are vying for influence, Kazakhstan has a population
of 17 million people, of which about 40 percent are Russian and 40
percent are Kazakh; the remainder are Ukrainian, Byelorussian,
German, Korean, and others. Over 80 percent of the population speak
Russian, and about 40 percent speak Kazakh, a language related to
Turkish.
--------------------
\1 PlanEcon's 1992 production figures for Kazakhstan are slightly
higher than the corresponding figures from other sources. We have
cited PlanEcon data here because PlanEcon has 1992 production figures
for the former Soviet Union as a whole and for each individual former
Soviet republic.
\2 "Proved oil reserves" refers to crude oil that geological and
engineering data have shown with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. "Total oil resources" includes
proved reserves and reserves that may be recoverable in the future.
\3 Most-favored-nation treatment generally refers to the practice of
extending to a country the best trade privileges granted to any other
nation in the form of the lowest tariff rates and other charges
imposed on imported products. Normally, most-favored-nation
treatment is granted on a reciprocal basis.
\4 The General Agreement on Tariffs and Trade is an organization
which currently has more than 100 participating nations. Its goal,
as set forth in the preamble to the 1948 General Agreement, is "the
substantial reduction of tariffs and other barriers to trade."
\5 Kazakhstan has received a $180 million rehabilitation loan from
the World Bank that includes $30 million for oil extraction
machinery.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Kazakhstan is not likely to become a major source of oil for the
United States, although Kazakhstani oil production could affect world
oil prices in the future. The Central Asian nation in 1992 produced
slightly more than half-a-million barrels of oil per day, or about
0.75 percent of world oil production capacity (estimated at 68.3
million barrels per day in 1992). If Kazakhstan reaches its target
of 1.65 million barrels per day for the year 2005, it would account
for about 2 percent of DOE forecasts of world production capacity for
the first decade of the next century.\6 If the supply of oil from the
Organization of Petroleum Exporting Countries (OPEC) and the other
oil exporting nations is already tight, as was the case during the
oil shock of the early 1970s, this level of output, which is more
than the current production from Alaska's Prudhoe Bay, could exert
downward pressure on world oil prices. If, on the other hand, there
is a relative oil glut, leading to softness in oil prices and
rendering OPEC relatively ineffective, as is the case today,
Kazakhstan's oil would have less of a potential impact.
Kazakhstan's potential status as a more important supplier of oil is
weakened by the fact that any pipeline bringing Kazakhstani oil to
export markets would have to pass through politically unstable areas.
Other factors that could influence Kazakhstan's potential as a more
important oil supplier include unknown variables, such as its future
oil consumption, about 336,000 barrels per day in 1992, according to
data compiled by PlanEcon, and the amount of oil that can be produced
from its portion of the Caspian Sea, which has not yet been explored.
Nevertheless, Kazakhstan does represent a valuable opportunity for
U.S. investment and for U.S. exports of oil equipment and services.
Although total Kazakhstani oil production may be only a small
percentage of world production, Kazakhstan has several large oil and
gas fields that could generate substantial returns for investors,
according to U.S. petroleum industry sources. Representatives of
U.S. oil companies and equipment suppliers have stated that the U.S.
embassy in Kazakhstan has been particularly helpful in assisting
them. Other U.S. government agencies helping potential exporters to
and investors in Kazakhstan's petroleum sector include DOE, the
Department of Commerce, the U.S. Export-Import Bank (Eximbank), the
Overseas Private Investment Corporation (OPIC), and the Trade and
Development Agency (TDA).
--------------------
\6 This level of production would rank it among the top 12 to 15 oil
producers estimated by DOE for the years 2000 and 2010, with a crude
oil output similar to that estimated for Libya or Nigeria.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3
To gain information on Kazakhstan's potential as a source of oil for
the United States, we obtained documents from and interviewed U.S.
government officials from the Departments of Commerce, Energy, State,
the Central Intelligence Agency, and other agencies. We also
obtained information from and interviewed visiting Kazakhstani
government officials as well as representatives of the World Bank and
private consulting firms. Kazakhstan's oil and gas production for
1992, the first full year after the breakup of the former Soviet
Union, and Kazakhstan's oil and gas reserves were particularly
difficult to ascertain, since many sources reported different
estimates. We have therefore provided a range of estimates for these
items, together with the source from which we obtained each estimate.
To discuss Kazakhstan's potential as an investment opportunity for
the U.S. petroleum industry and an export market for U.S. oil and
gas equipment suppliers, we obtained the names of 20 companies in the
U.S. petroleum sector that are doing business or considering doing
business in Kazakhstan. We obtained the company names through
officials at DOE and the Commerce Department's Business Information
Center for the Newly Independent States. Ten of the companies
responded to our request for a telephone interview. Of these 10
companies, 7 are involved in exploration and production (including 4
major oil companies and 3 smaller independent firms), and 3 contract
with exploration and production companies to provide equipment or
services. We also obtained information from and interviewed
officials from U.S. government agencies, including the Departments
of Commerce and Energy, Eximbank, OPIC, and TDA. In addition, we
spoke with representatives of private U.S. law firms and attended
conferences on Kazakhstan's efforts to develop taxation policies and
a legal infrastructure.
Information in this report on the laws and regulations of Kazakhstan
does not reflect original analysis on our part but rather interviews
with foreign government officials, corporate officials, and other
secondary sources.
We did our work between March and December 1993 in accordance with
generally accepted government auditing standards.
LITTLE CHANCE THAT KAZAKHSTAN
WILL BE MAJOR SOURCE OF OIL FOR
UNITED STATES
------------------------------------------------------------ Letter :4
KAZAKHSTAN'S OIL AND GAS
RESOURCES
---------------------------------------------------------- Letter :4.1
Estimates of Kazakhstan's oil production in 1992 ranged from 503,000
to 553,000 barrels of oil a day, and estimates of its gas production
ranged from 286 billion to 311 billion cubic feet of natural gas (see
app. I, table I.1). According to the lower oil production figure,
which is an average barrels-per-day estimate compiled by DOE,
Kazakhstan was the 26th-ranking oil producer in the world in 1992;
the higher figure, which was obtained from data compiled by PlanEcon,
would put it at about 22nd place (see table I.2).\7 Using either
figure, Kazakhstan accounted for about 0.75 percent of world oil
production capacity (68.3 million barrels per day) estimated by DOE
for 1992.
Kazakhstan's President hopes to increase production to 1.65 million
barrels per day by 2005. This volume of production is more than the
1.1 million barrels per day currently produced by the U.S.' largest
oil field in Alaska's Prudhoe Bay and represents about 2 percent of
DOE forecasts of world production capacity for the first decade of
the next century. However, the potential impact of an additional
1.65 million barrels per day on world oil prices depends on the
condition of the market. Kazakhstan's oil is likely to exert greater
downward pressure on prices if it enters a market like that of the
early 1970s, in which supply was tight and small OPEC production cuts
led to large price increases, than if it enters a market like today's
of excess supply and falling prices.
Estimates of Kazakhstan's proved oil reserves range from just over 3
billion barrels (according to the Congressional Research Service) to
about 16 billion barrels (according to Kazakhstan's Ministry of
Energy and Fuel Resources). The more conservative figure, estimated
at 3.3 billion barrels, would place Kazakhstan 20th in the world.
This figure represents 0.5 percent of the proved reserves in the
Persian Gulf and is less than the 3.7 billion barrels estimated for
Qatar, the Gulf state with the smallest amount of proved reserves
(see fig. I.1).\8 These estimates do not include the offshore
deposits in the northern Caspian Sea, which are slated to be explored
over the next several years.
Kazakhstan began exporting oil to markets outside the former Soviet
Union in 1992 at a rate of about 97,500-129,000 barrels per day.
According to PlanEcon, the country's apparent consumption of crude
oil has fluctuated over the past 8 years from a low of about 277,000
barrels per day in 1985 to about 367,000 barrels per day in 1989 (see
table I.3).\9 Kazakhstan consumed about 336,000 barrels per day in
1992. On the other hand, Kazakhstan does not export gas outside the
former Soviet Union. Its gas consumption, which is roughly double
its gas production, has risen steadily from about 388 billion cubic
feet in 1985 to about 636 billion cubic feet in 1992. To meet this
shortfall, Kazakhstan imports gas from Turkmenistan and other
countries in the former Soviet Union.
--------------------
\7 Many sources, including PlanEcon, give production figures in
metric tons. PlanEcon reports that Kazakhstan produced 27.831
million metric tons of oil (553,000 barrels per day) in 1992. Other
sources, including the Central Intelligence Agency and the World
Bank, report 1992 production figures of 25.7 million metric tons
(510,000 barrels per day) and 25.6 million metric tons (509,000
barrels per day), respectively. The World Bank obtained its figure
from the Kazakhstani Ministry of Energy and Fuel Resources. PlanEcon
calculated its figure using data from the ministry, oil-producing
entities not under the ministry's control, and other sources.
We converted the metric ton figures to barrels per day using the
DOE-approved rate of 7.27 barrels per metric ton of (former) Soviet
crude and dividing the result by 366 days for 1992. We did the same
for oil export and consumption figures, discussed later, since most
sources also report this information in metric tons.
Reports of Kazakhstan's gas production range from 8.1 billion to 8.8
billion cubic meters. We converted the metric values to cubic feet
using the DOE-approved rate of 35.315 cubic feet per cubic meter.
\8 The tiny state of Bahrain, which has a negligible amount of oil
reserves, is excluded.
\9 "Apparent consumption" is defined as production plus imports minus
exports. "Imports" and "exports" in this instance refer to inflows
from and outflows to Russia and the other republics of the former
Soviet Union.
PROBLEMS IN GETTING THE OIL
TO MARKET
---------------------------------------------------------- Letter :4.2
Kazakhstan is a landlocked country, which makes exporting oil
difficult (see fig. 1).\10 A number of pipeline routes have been
discussed, the most likely being one that will carry oil from western
Kazakhstan through southern Russia to a port on the Black Sea (see
app. II). The governments of Kazakhstan, Russia, and Oman have
formed a consortium to build a pipeline along this route. However,
questions concerning the distribution of income from the pipeline
within the Russian Federation may affect Russia's ability to
participate in the consortium.
Figure 1: Map of Eurasia
(See figure in printed
edition.)
Alternate pipeline routes to the Black Sea or the Mediterranean would
have to pass through areas of ethnic strife, including Azerbaijan and
Armenia, and Kurdish regions in Turkey. Pipelines to the Persian
Gulf or the Indian Ocean would have to go through countries such as
Iran, Turkmenistan, Afghanistan, and Pakistan.
--------------------
\10 The Caspian Sea, which borders Kazakhstan to the west, offers no
outlet to major international waterways through which oil could be
shipped to world markets.
KAZAKHSTAN OFFERS COMMERCIAL
OPPORTUNITY
------------------------------------------------------------ Letter :5
ATTRACTIONS AND
DISINCENTIVES IN
KAZAKHSTAN'S BUSINESS
CLIMATE
---------------------------------------------------------- Letter :5.1
According to representatives of seven U.S. oil companies and oil
equipment and service suppliers whom we interviewed, Kazakhstan is
attractive to exporters and investors because it has good-sized oil
and gas deposits. Many of the exporters and investors we spoke with
also perceive its government to be more stable than the governments
of Russia or many of the developing countries where these companies
operate (see app. III). For example, Chevron has signed a contract
to develop the country's largest oil field (in Tengiz), and a major
gas field (in Karachaganak) is being developed by British Gas and
Agip, an Italian company (see fig. 2 for an illustration of major
oil and gas fields in Kazakhstan).
Figure 2: Map of Kazakhstan
Showing Oil and Gas Deposits
(See figure in printed
edition.)
(See figure in printed
edition.)
Source: Petroleum Economist ,
in association with Price
Waterhouse World Petroleum
Industry Group.
(See figure in printed
edition.)
The drawbacks to doing business in Kazakhstan include the logistics
of exporting the oil; the lack of clear-cut Kazakhstani laws
governing investment, taxation, and other business matters; and the
fact that, as in many developing countries, deals and decisions are
often dependent on a few key individuals as opposed to established
laws, regulations, and institutions.
The Kazakhstani government is in the process of drafting an oil and
gas law and a tax law and modifying taxes applicable to oil companies
and equipment and service suppliers, according to U.S. oil industry
representatives investing in Kazakhstan or seeking to do business
there. However, the December 1993 dissolution of Kazakhstan's
parliament may delay this process; new elections are scheduled for
March 1994. U.S. oil industry representatives also suggested that
Kazakhstan improve its export permit system and make its laws and
regulations more transparent (understandable and open to scrutiny).
HELP FROM U.S. GOVERNMENT
AGENCIES
---------------------------------------------------------- Letter :5.2
The U.S. embassy in the Kazakhstani capital of Almaty and the
Departments of Commerce and Energy have provided information to U.S.
oil industry representatives and helped them contact Kazakhstani
officials (see app. IV). Assistance for U.S. investors in and
exporters to Kazakhstan is also available from several other U.S.
government agencies, including Eximbank, which offers short-term
export credit insurance and a type of project financing; OPIC, which
provides political risk insurance, project financing, and
investment-related services; and TDA, which funds feasibility
studies.
PRAISE AND CRITICISM FROM
U.S. OIL COMPANIES
---------------------------------------------------------- Letter :5.3
Oil industry officials praised the U.S. ambassador to Kazakhstan and
his staff, but some company officials were critical of other U.S.
government efforts, saying that they had experienced difficulties
with Eximbank's borrowing criteria and OPIC's application process.
Several officials noted that there are other obstacles to U.S.
investment in Kazakhstan, including U.S. tax policies, export
restrictions, and administrative difficulties for Kazakhstanis
traveling to the United States, and intervention by European
governments on behalf of European oil companies (see app. IV).
AGENCY COMMENTS
------------------------------------------------------------ Letter :6
We discussed the information presented in this report with U.S.
government and industry officials. The government officials included
analysts from DOE's Energy Information Administration, its Office of
Energy Markets and End Use/International Statistics Branch, and its
Office of Oil and Natural Gas Policy; the State Department's
Economics Officer for the Office of Independent States and
Commonwealth Affairs; the Congressional Research Service's Specialist
in Earth Sciences at its Science Policy Research Division; Eximbank's
Acting General Counsel and its loan officer responsible for the newly
independent states of the former Soviet Union; an OPIC insurance
officer responsible for Kazakhstan; and TDA's Regional Manager for
the Commonwealth of Independent States. The industry officials
included the Manager for Planning and Budget of the CIS Business Unit
for Chevron Overseas Petroleum; and oil and legal experts at
consulting firms and law firms that do business in Kazakhstan and
other parts of the former Soviet Union.
The comments we received were primarily minor factual clarifications,
which we have included where appropriate throughout the report. In
addition, the officials at Eximbank and OPIC disputed some claims
made by several of the company representatives we interviewed that
assistance at these agencies is difficult to obtain. We have
included the company representatives' claims and the Eximbank and
OPIC comments in appendix IV. Finally, a private attorney who has
worked extensively with the United Nations and represented many
developing countries, including Kazakhstan, objected to our apparent
singling out of Kazakhstan as a country operating more under a rule
of men than a rule of law where power is concentrated in just a few
key individuals. He said this problem exists in many developing
countries. We have modified the appropriate paragraph to reflect
this point.
---------------------------------------------------------- Letter :6.1
We are sending copies of this report to the Secretaries of Commerce,
Energy, and State; the President and Chair of the Board of Directors
of Eximbank; the President and Chief Executive Officer of OPIC; the
Director of TDA; and other interested parties. Copies will also be
made available to others upon request.
Please contact me on (202) 512-4812 if you have questions concerning
this report. Other major contributors to this report are listed in
appendix V.
Allan I. Mendelowitz, Managing Director
International Trade, Finance,
and Competitiveness
KAZAKHSTAN'S OIL AND GAS
PRODUCTION, RESERVES, EXPORTS, AND
CONSUMPTION
=========================================================== Appendix I
OIL AND GAS PRODUCTION
According to data maintained by the former Soviet Union's State
Committee for Statistics (Goskomstat), Kazakhstan's oil production
increased from about 455,000 barrels per day in 1985 to about 530,000
barrels per day in 1991 (see table I.1). Natural gas production in
Kazakhstan also rose, from about 193 billion cubic feet in 1985 to
about 278 billion cubic feet in 1991. Oil and gas production figures
for 1992, the first full year after the breakup of the Soviet Union,
vary depending on the source quoted. Oil production estimates ranged
from 503,000 to 553,000 barrels per day, and gas production estimates
from 286 billion to 311 billion cubic feet. Depending on the figure
used, Kazakhstan's oil production in 1992 represented between 0.74
and 0.81 percent of 68.3 million barrels per day, which is the world
oil production capacity estimated by the Department of Energy (DOE)
for 1992. At the end of 1992, over 10 percent of Kazakhstan's more
than 11,000 oil and gas wells were exhausted, and over 100 more wells
were idle due to lack of equipment, according to an oil industry
publication.
Table I.1
Oil and Gas Production in Kazakhstan,
1985-92
Product 1985 1986 1987 1988 1989 1990 1991 1992
--------- ---- ---- ---- ---- ---- ---- ---- -------
Oil\a 455 472 487 507 506 514 530 503-
553
Gas\b 193 206 223 252 237 251 278 286-
311
------------------------------------------------------------
\a Barrels in thousands per day.
\b Cubic feet in billions.
Sources for 1985-1991 data: PlanEcon and Goskomstat. For 1992 oil
data: DOE Office of Energy Markets and End Use, International
Statistics Branch (lower figure) and PlanEcon (higher figure). For
1992 gas data: DOE Office of Energy Markets and End Use,
International Statistics Branch (lower figure) and PlanEcon (higher
figure).
Kazakhstan, at 26th place, ranked well below the world's top oil
producers in 1992 (see table I.2).
Table I.2
World Oil Production, 1992
Rank Country Production\a
-------- ---------------------------------- --------------
1 Saudi Arabia 8,438
2 Russia 7,465
3 United States 7,171
4 Iran 3,429
5 China 2,838
6 Mexico 2,668
7 Venezuela 2,334
8 United Arab Emirates 2,325
9 Norway 2,122
10 Nigeria 1,982
11 United Kingdom 1,825
12 Canada 1,598
13 Indonesia 1,566
14 Libya 1,483
15 Algeria 1,217
16 Kuwait 1,029
17 Egypt 881
18 Oman 738
19 Malaysia 653
20 Brazil 626
21 India 558
22 Argentina 553
23 Australia 538
24 Angola 532
25 Syria 531
26 Kazakhstan 503
27 Iraq 450\b
28 Colombia 438
29 Qatar 396
30 Ecuador 318
------------------------------------------------------------
\a Barrels in thousands per day of crude oil and lease condensate
(natural gas liquid recovered at "lease" facilities in the field,
which separate gas from liquid).
\b Low production due to Gulf War.
Source: DOE Office of Energy Markets and End Use, International
Statistics Branch.
In April 1993 Chevron concluded a deal with Kazakhstan to develop the
Tengiz oil field, which is located on the northeast shore of the
Caspian Sea. (For more on the Chevron contract, see app. III.)
Discovered in 1979, this field is the largest oil deposit found
worldwide since Mexico's Cantarell field in 1976. The Tengiz field
has been producing oil for a little over 3 years. Development at
Tengiz has been hindered by outmoded Soviet drilling and production
equipment and the field's highly corrosive crude oil and difficult
geologic conditions. According to Chevron, current production
capacity at the field is about 65,000 barrels per day, although
actual production averages about 25,000.\1 Production is expected to
peak at about 700,000 barrels per day by 2010. The U.S. Central
Intelligence Agency estimates that production from Tengiz could more
than double Kazakhstani oil output to 1.25 million barrels per day
within the next decade, placing Kazakhstan almost on a par with
Libya, Nigeria, and Indonesia. Kazakhstan's President would like the
country to reach a target of 1.65 million barrels per day by 2005.\2
Kazakhstan also contains one of the former Soviet Union's largest
natural gas deposits. The Karachaganak gas field, situated in the
northwestern corner of the country, is being developed by British Gas
and Agip, an Italian company (see app. III for details). The field
currently yields about 250 billion cubic feet of gas a year.
According to several international energy analysts at DOE, it is
expected to produce over 700 billion cubic feet of gas
annually--about equal to Iran's present gas production.
OIL AND GAS RESERVES
Although Kazakhstan does contain large amounts of crude oil and
natural gas, the most conservative estimate of its total proved oil
reserves is only 0.5 percent of the proved reserves in the Persian
Gulf. As figure I.1 shows, Kazakhstan, with 3.3 billion barrels in
proved oil reserves, according to data compiled by the Congressional
Research Service, has fewer proved reserves than 19 other
countries.\3 Kazakhstan's oil reserves are about 1 percent of those
in Saudi Arabia, or just over 13 percent of those in the United
States.
Figure I.1: World Proved Crude
Oil Reserves, 1992
(See figure in printed
edition.)
(See figure in printed
edition.)
Source for Kazakhstan: Congressional Research Service (1992). For
other countries: DOE Energy Information Administration,
International Energy Outlook, 1993.
Higher estimates of Kazakhstani oil reserves recoverable with
existing technology range from 14 billion to 16 billion barrels. For
example, Kazakhstan's Minister of Energy and Fuel Resources stated
that Kazakhstan contains 2.2 billion metric tons, or about 16 billion
barrels, of proved reserves. An oil industry expert at PlanEcon
noted, however, that Kazakhstani estimates of proved reserves tend to
be higher because the Kazakhstanis generally do not take into account
the economic feasibility of extracting the oil.
For example, estimates of the oil resources in the Tengiz field are
sometimes greater than those for the country as a whole. These
estimates, which are not limited to proved reserves, range from 3
billion to 25 billion barrels. Chevron estimates that the field
contains 24 billion barrels of oil "in the ground," of which it
presently considers 5.84 billion barrels to be recoverable.
As with oil, estimates of Kazakhstan's gas reserves vary. DOE
estimates that the country contains 26 trillion cubic feet of proved
gas reserves, while an energy consultant cited by DOE analysts gives
a figure of 56.9 trillion cubic feet. The Congressional Research
Service estimates that Kazakhstan has 18 trillion cubic feet of
proved gas reserves, with the possibility that an additional 68
trillion cubic feet may be recoverable in the future. According to
the Kazakhstani Scientific Research Geological Exploration Institute
(KAZNIGRI), Kazakhstan has 62.9 trillion cubic feet of total gas
reserves and 6.01 billion barrels of condensate (natural gas liquid
recovered from gas wells and processing plants). KAZNIGRI estimates
potential reserves to be 280 trillion cubic feet of gas and 15
billion barrels of condensate. Estimates of gas reserves in the
Karachaganak field come close to 20 trillion cubic feet.
OFFSHORE AREA TO BE EXPLORED
The above estimates of Kazakhstan's oil and gas reserves do not
include the northern portion of the Caspian Sea off the Kazakhstani
coast. This area, encompassing about 103,000 square kilometers, or
about 40,000 square miles, may contain more oil than the Tengiz field
and the rest of Kazakhstan. KAZNIGRI estimates potential oil
reserves in the area near the Caspian Sea to be about 50 billion
barrels, including about 15 billion barrels offshore.
A consortium of seven major oil companies was formed to conduct an
initial exploration of the area over the next 3 years. On December
3, 1993, the consortium and the Kazakhstanis reached a formal
agreement to proceed with the exploration plan. According to
Kazakhstan's Deputy Minister of Energy, the extraction of the oil
found there could begin around the turn of the century. The
consortium participants include one U.S. company, Mobil, and six
others: Italy's Agip, British Gas, Holland's Shell, France's Total,
and a joint entry by British Petroleum and Norway's Statoil.
There are several complications involved in exploring and developing
this area, however. These complications include unresolved boundary
issues between Kazakhstan and neighboring states, and environmental
concerns. For example, this part of the Caspian Sea is a major
fishing area, an industry of vital importance to Russia and
Kazakhstan, providing 90 percent of the world's caviar and other
sturgeon products. In addition, the region has special ecological
value, and a large part of it is in a nature preserve.
OIL AND GAS EXPORTS AND
CONSUMPTION
Kazakhstan began exporting crude oil outside the former Soviet Union
in 1992 through a swap arrangement with Russia. Depending on the
source quoted, the rate at which Kazakhstan's oil was exported ranged
from about 97,500 to about 129,000 barrels per day. (For details,
see app. II.) With regard to the destination of the exports,
Kazakhstan signed agreements with Poland and Cuba for 1992 and
renewed its agreement with Poland for 1993. Kazakhstan does not
export natural gas outside the former Soviet Union.
According to PlanEcon, in 1992 Kazakhstan consumed about 16.9 million
metric tons, or about 336,000 barrels of crude oil per day, in its
refineries, down from a high of about 18.4 million metric tons, or
about 367,000 barrels per day, in 1989 (see table I.3). The country
consumes about twice as much natural gas as it produces.\4 Gas
consumption has risen steadily, from about 388 billion cubic feet in
1985 to about 636 billion cubic feet in 1992.
Table I.3
Oil and Gas Consumption in Kazakhstan,
1985-92
Product 1985 1986 1987 1988 1989 1990 1991 1992
------------ ---- ---- ---- ---- ---- ---- ---- ----
Oil\a 277 350 361 350 367 356 359 336
Gas\b 388 417 434 445 470 509 547 636
------------------------------------------------------------
\a Barrels in thousands per day.
\b Cubic feet in billions.
Source: PlanEcon. Oil data converted from metric tons and gas data
converted from cubic meters by GAO (see fn. 7, p. 5).
The oil consumption figures, which represent the crude oil processed
through the country's three refineries,\5 were calculated by adding
production to imports and subtracting exports. Imports and exports
in this case consist primarily of inflows from and outflows to Russia
and the other republics of the former Soviet Union. The gas
consumption figures include Kazakhstani production and inflows from
Russia and other former republics.
--------------------
\1 The existing treatment facilities at Tengiz, which remove hydrogen
sulfide and separate natural gas and other materials from the crude
oil, have a capacity of 65,000 barrels per day. (Hydrogen sulfide
must be removed before the oil can be shipped to refineries or
exported. The oil at Tengiz has a particularly high hydrogen sulfide
content. If left untreated, it would damage pipelines and
contaminate the other oil flowing through the pipeline system.)
In addition, the Russians, who have a major say in the pipeline
network through which oil flows out of Kazakhstan, have required the
Kazakhstan-Chevron joint venture to install treatment facilities to
remove other sulfur compounds, known as "mercaptans," which produce
an extremely foul odor. This requirement was made in the spring of
1993, when the Chevron deal was signed. As a result, Chevron has
only been able to produce an average of about 25,000 barrels of oil a
day since then. Because this lower volume of oil has fewer
mercaptans, it can be blended with the rest of the oil in the
pipelines.
\2 This figure represents about 2 percent of DOE forecasts of world
oil production capacity for the first decade of the next century. An
additional 1.65 million barrels of oil a day supplied by Kazakhstan
to the world market could cause prices to fall or to rise at a slower
rate. (This amount is 1.5 times greater than the 1.1 million barrels
per day now pumped from Prudhoe Bay, Alaska, the largest oil field in
the United States.) The degree to which this target output could
potentially affect world oil prices depends on the balance between
demand for and supply of oil on the world market. The potential
effect is likely to be greater when there is no excess supply of oil,
such as in 1973-4, when the Organization of Petroleum Exporting
Countries (OPEC) was able to cut production by a relatively small
amount and bring about large price increases, than under today's
conditions of excess supply.
\3 The data show Kazakhstan with an additional 12 billion barrels in
"probable reserve additions" (reserves that may be recoverable in the
future).
\4 Most of Kazakhstan's gas production is concentrated in the
sparsely populated western part of the country, far from the capital
and other major cities in the east. Because Kazakhstan has no
east-west gas pipelines, it imports gas via existing north-south
pipelines from Turkmenistan and to a lesser extent, Uzbekistan and
Russia. Some of the gas produced by the Karachaganak field in the
northwestern tip of Kazakhstan is shipped northward via pipeline to a
processing plant on the Russian side of the border and consumed in
Russia.
\5 One of the refineries is located in Atyrau, not far from the
Tengiz oil field. The other two are located in the eastern part of
the country, near the cities of Pavlodar and Shimkent (see fig. 2,
p. 10). As with gas, Kazakhstan has no east-west oil pipeline to
connect its oil fields in the west--which ship their crude oil to
Russia--with its refineries in the east, which process Russian crude
from Siberia. To reduce its dependence on Russia, the Government of
Kazakhstan plans to create a joint stock society to build a pipeline
from Tengiz to the Pavlodar-Shimkent pipeline.
GETTING THE OIL TO MARKET
========================================================== Appendix II
PIPELINE OPTIONS
According to U.S. oil industry sources, the capacity of the existing
pipeline system through Russia and the other former republics is
already 80-90 percent full with flows from current production.\1 It
will not be able to handle the expected flow from the new exploration
and production that will be taking place in Kazakhstan.
One U.S. oil industry consultant characterized the options for
getting oil out of landlocked Kazakhstan as "a feast of bad choices."
Any pipeline route would have to pass through portions of the Russian
Federation and other regions that are politically unstable,
increasing the risk that a pipeline could be blown up, become subject
to excessive fees, or be otherwise sabotaged.
Routes to the Black Sea would have to cross Russia, Azerbaijan,
Armenia, or Georgia. Routes to the Mediterranean would be channeled
through many of these same areas, as well as the northern tip of Iran
or Kurdish territories in eastern Turkey.
Oil could also be sent south, to ports on the Indian Ocean, but this
route would involve pumping the oil through the newly independent
Islamic states of Uzbekistan and Turkmenistan or Kyrgyzstan and
Tajikistan. Tajikistan is currently experiencing ethnic unrest. A
southern route would also have to go through Iran or Afghanistan and
Pakistan.
Kazakhstan currently "exports" oil to markets outside the former
Soviet Union through a swap arrangement via the Russian-controlled
pipeline network. Under the arrangement, Kazakhstan disbursed about
129,000 barrels of oil per day into Russia for this purpose in 1992,
according to PlanEcon.\2 The Kazakhstanis' customers were then
allowed to pick up an equal amount of Russian oil for export from a
Russian port. Roughly half this amount, or about 65,000 barrels per
day, was produced by the Tengiz oil field, which is now being
developed by Chevron.\3 Russia has agreed to increase the swap amount
when the Kazakhstan-Chevron joint venture completes additional
treatment facilities,\4 which will allow the joint venture to
disburse up to 130,000 barrels per day. According to Chevron, the
new facilities should be in operation by the beginning of 1995.
THE CASPIAN PIPELINE CONSORTIUM
A U.S. oil industry executive pointed out that two major oil
deposits will drive pipeline construction: the Tengiz field in
northwestern Kazakhstan, and the Azeri, Chirag, and Guneshli fields
in the Caspian Sea, which are just off shore from Azerbaijan's
capital of Baku. According to the executive, each deposit is large
enough to justify a separate pipeline.
The oil executive noted that the Black Sea port of Novorossiysk is
the most logical port for the Tengiz oil. As figure 1 shows (see p.
7), the route from Tengiz to Novorossiysk, which passes from western
Kazakhstan through southern Russia, is shorter and more direct than
routes to other ports on the Black Sea, the Mediterranean, or the
Indian Ocean.\5 In June 1992, a consortium was formed by Kazakhstan
and Oman to construct a pipeline along this route. Russia
subsequently joined the consortium. Azerbaijan took part in initial
discussions regarding the consortium, but declined to formally join
it. Azerbaijan is now reevaluating that decision.
According to an oil industry consultant, the Tengiz-Novorossiysk
pipeline will cost about $1.25 billion to build. Initially, the
pipeline would have a capacity of 300,000 barrels per day, with a
peak capacity eventually expected to reach 1.5 million barrels per
day, or about three times the volume of Kazakhstan's current oil
production. The World Bank estimates that by the year 2000, the
pipeline will carry 490,000 to 1 million barrels of oil per day.
The pipeline consortium was ratified by Russia's parliament in July.
However, the question of how profits and other returns from the
pipeline will be distributed within the Russian Federation has not
yet been settled. Although this issue is an internal Russian matter,
if it is not resolved it could affect Russia's cooperation with the
consortium. The oil industry consultant said that, barring any
problems, construction of the pipeline is expected to start in early
1995.
To diminish Russian leverage on transport, Kazakhstan is considering
four alternatives for a subsequent pipeline that would be built in
conjunction with the development of offshore fields in the Caspian
Sea: (1) extending the Tengiz pipeline south from Russia through
Azerbaijan to a Turkish port on the Mediterranean; (2) building a
sub-sea pipeline from the offshore fields to Azerbaijan and from
there through Iran to the Persian Gulf; (3) piggybacking onto
Turkmenistan's plans to build a gas pipeline that will hook into the
Chinese pipeline system, terminating at ports on the East and South
China seas; and (4) building a pipeline to Turkmenistan's existing
refinery and then piggybacking on that country's plans to expand the
Central Asian gas pipeline system to Pakistani ports on the Persian
Gulf.
The oil industry consultant commented that Kazakhstan could send oil
to Ukraine at a reduced cost by pumping it overland through the
existing pipeline network or shipping it via a short sea shuttle from
Novorossiysk across the Black Sea to the Ukrainian port of Odessa.
(Ukraine has substantial refining capacity but few crude oil deposits
on its territory.) By sending oil to Ukraine, Kazakhstan would have
little or no marine shipping costs, and any oil tankers bound for
Odessa would not have to pass through the bottlenecks of the Straits
of Bosporus and the Dardanelles, which form the gateway from the
Black Sea to the Mediterranean.
Another option for Kazakhstan, according to the consultant, is a
three-way swap with Ukraine and Saudi Arabia. In this scenario,
Kazakhstan would ship oil to Ukraine. Ukraine would then ship goods
(e.g., agricultural produce, such as sugar beets) to Saudi Arabia.
The Saudis would then pay Kazakhstan foreign currency for the oil it
had shipped to Ukraine.
--------------------
\1 An oil industry expert clarified this statement by saying that
parts of the existing pipeline network from Kazakhstan's Atyrau
refinery on the north coast of the Caspian Sea to the port of
Novorossiysk on the Black Sea are already at capacity, while other
portions along this route are at 60 percent of capacity.
\2 PlanEcon obtained an export swap volume of 6.484 million metric
tons of oil from Transneft, the entity that operates the existing
pipeline system in the former Soviet Union. Using the DOE-approved
conversion rate given in footnote 7 on page 5, we arrived at a figure
of 128,794 barrels per day. Other sources have come up with export
estimates ranging from about 97,500 to 120,000 barrels per day.
\3 The 65,000 barrels-per-day production figure was for 1992, before
the Chevron deal was signed and Russia began requiring that the oil
flowing from Tengiz be treated to remove mercaptans (see app. I, fn.
1, on p. 20). Due to this requirement, production at Tengiz now
averages about 25,000 barrels per day.
Chevron officials note that not all the 65,000 barrels per day
produced in 1992 was swapped for export.
\4 These facilities include equipment to remove mercaptans and a
second treatment plant to remove hydrogen sulfide from the crude oil.
(For a definition of mercaptans and an explanation of why mercaptans
and hydrogen sulfide must be removed, see app. I, fn. 1, on p.
20.)
\5 Novorossiysk would not be the most logical port for Azeri oil. A
pipeline for Azeri oil would have to cross Armenia, Iran, or
southeastern Turkey. Oil companies are not comfortable with such a
route because of the political risk involved.
THE BUSINESS CLIMATE IN KAZAKHSTAN
========================================================= Appendix III
FACTORS ENCOURAGING TRADE WITH AND
INVESTMENT IN KAZAKHSTAN
The issue of Kazakhstan's contribution to the U.S. oil supply is
separate from the issue of Kazakhstan's commercial viability as an
investment market for the U.S. petroleum industry and an export
market for U.S. oil and gas equipment suppliers. Although
Kazakhstan is not among the top 10 oil and gas producers or proved
reserve holders, it does have several very large oil and gas
deposits, including the Tengiz oil field and Karachaganak gas field
(see app. I). In addition, the promise of sizable offshore
resources that are soon to be explored (see app. I), together with
the country's favorable attitude toward the West and its perceived
stable political environment relative to other developing countries,
is attractive to many of the investors and exporters we spoke with.
Representatives of the U.S. oil and gas companies and equipment
suppliers we interviewed made a number of specific comments regarding
Kazakhstan's potential as an investment and export market. One
representative said that the size of the oil projects in Kazakhstan
is bigger than similar projects in other countries, many of which are
less stable and less friendly to the United States. Another
representative noted that the business climate in Kazakhstan was more
straightforward than in Russia because there is less conflict between
central and regional authorities. Other representatives commented
that the Kazakhstanis are eager to conclude deals with foreign
investors and exporters and that, unlike Russia, they have opened one
of their largest oil fields (Tengiz) to foreign investors. An
equipment supplier stated that the Kazakhstanis have a high demand
for the products and services his company provides, due in part to
the drop in supplies from neighboring Azerbaijan. Azerbaijan, whose
economy has been ravaged by ethnic strife, used to supply 80 percent
of the former Soviet Union's oil and gas equipment.
DRAWBACKS TO DOING BUSINESS IN
KAZAKHSTAN
One of the main drawbacks to doing business in Kazakhstan mentioned
by the industry representatives we interviewed is that the country's
legal infrastructure is not yet fully developed. At present, there
is no comprehensive law that directly addresses the oil and gas
industry in Kazakhstan. The Code on Subsurface Resources and Crude
Mineral Processing, which was passed on May 30, 1992, addresses all
mineral operations, not just oil and gas, and therefore does not
provide specific guidance for oil and gas projects. This code has
been described as umbrella legislation that will provide a framework
for more detailed oil and gas legislation.
Numerous other laws affect foreign investors in the oil and gas
sector. These laws include legislation on foreign investment,
property, free enterprise, and the development of economic
activities, such as free economic zones and currency regulations.
Industry representatives complained that these statutes, many of
which were passed before Kazakhstan became independent, frequently
conflict, so that their practical application is uncertain. For
example, Kazakhstan currently has two laws predating independence
that are still in force to govern foreign investments: the Law on
Foreign Investments, adopted on December 7, 1990, and the Law on
Investment Activities, adopted on June 10, 1991. One analyst notes
that these laws are not harmonized, and therefore in some situations
it would be difficult for a foreign investor to determine which would
apply.
Further, the rapid pace of reform and the frequent changes in
legislation also pose problems for investors in Kazakhstan. In 1993
alone, amendments to legislation had been passed in the areas of
privatization, economic partnership, stock companies, foreign
investments, insurance, ownership, the circulation of securities and
stock exchanges, banks, and taxes. Many of these areas had already
seen legislative changes in 1991 and 1992. Such frequent policy
changes raise concerns among investors who would have to constantly
renegotiate agreements.
Another problem is that business in Kazakhstan, as in many developing
countries, is based more on individuals than legal institutions.
Several of the company representatives we interviewed stated that
power is concentrated in just a few people, which creates
bottlenecks. In addition, although Kazakhstan is perceived by many
of the exporters and investors we spoke with as relatively stable
now, and those in power, including the President and key Energy
Ministry officials, appear secure, it is hard to predict what may
happen in the future. This is not an idle concern for oil and gas
companies, which often enter into contracts spanning 20-40 years.
(Chevron, for example, signed a 40-year contract to develop the
Tengiz oil field.)
Finally, Kazakhstan's lack of a viable international port from which
to export its oil for hard currency and the resulting pipeline
dilemma (discussed in app. II) have made some investors hesitant
about making purchasing commitments from equipment suppliers.\1
WHAT THE GOVERNMENT OF KAZAKHSTAN
HAS DONE TO HELP
The Government of Kazakhstan is working with multilateral aid
agencies and western legal and petroleum industry experts to
formulate an oil and gas law and tax legislation. According to
Kazakhstan's Prime Minister, the country is pursuing legislation that
would permit the repatriation of profits, guarantee the sanctity of
contracts, regulate the insurance industry, and encourage foreign
participation in the privatization process. The Chairman of the
Kazakhstani parliament's Committee on Economic Reform stated that the
parliament would consider amendments to a law on foreign investment,
a draft oil and gas law, and customs and tax reform. However, with
the dissolution of parliament in December 1993, it is uncertain if
and when these measures will be passed. Parliamentary elections are
scheduled for March 1994. In the meantime, Kazakhstan's President
may choose to enact legislation by decree.
In another development, Kazakhstan withdrew rubles from circulation
and introduced its own currency, the tenge, in November 1993.
Representatives of western companies attending an October 1993 oil
and gas exhibition in Kazakhstan cautioned that Kazakhstan's demands
for infrastructure improvement, heavy taxes, and other requirements
are scaring off western investors. They suggested that the
Kazakhstanis let some initial projects generate sizable cash flows in
order to attract further investment.
With regard to other actions the Kazakhstanis could take to encourage
U.S. investment and trade, one of the U.S. company representatives
we interviewed said that Kazakhstan could streamline its export
permit process, a problem in many countries. Such streamlining could
be achieved by issuing blanket permits that cover several million or
several thousand tons of oil instead of issuing permits on a
cargo-by-cargo basis. An equipment supplier noted that the
Kazakhstanis could make their laws and regulations more clear,
particularly those concerning tax deferrals or exemptions. He added,
however, that Kazakhstan appears to be making progress.
U.S. AND FOREIGN ENERGY VENTURES
IN KAZAKHSTAN
As of December 1, 1993, there were 14 business ventures in
Kazakhstan's oil and gas sector that involved U.S. oil and gas
companies or providers of oil and gas-related equipment or services
(see table III.1).
Table III.1
U.S. Energy Ventures and Related
Activities in Kazakhstan
Company name Project description
------------------ ----------------------------------------
AMP International, Signed protocol covering possible oil
Inc. and gas field development and
construction of non-oil infrastructure.
Anglo-Dutch A joint venture to develop the Tenge
Petroleum field in southwestern Kazakhstan. Total
International, capital investment is estimated at $370
with million.
Mangistaumunaygaz
Bechtel Petroleum, Bechtel was awarded a 3-year contract by
Chemical, and Chevron Overseas Petroleum and Tengiz
Industrial Co., Neftegas to participate in a management
with Tengiz team that will oversee initial capital
Neftegas construction in the Tengiz and nearby
Korolev oil fields.
Biedermann Joint venture to develop the third
(Interkaspy), with largest oil field in Kazakhstan,
Munai situated northeast of the port city of
Atyrau.
Caspian Pipeline Construct pipeline from Tengiz to
Consortium Novorossiysk, a port on the Black Sea.
(Bechtel, Estimated project cost is $850 million
Willbros, with the to $1.25 billion.
governments of
Kazakhstan, Oman,
and Russia)
Chevron Overseas Chevron signed an agreement with the
Petroleum, with Government of Kazakhstan on April 6,
the Kazakhstani 1993, establishing Tengizchevroil as a
government 40-year, 50/50 joint venture to develop
the Tengiz and Korolev oil fields.
Chevron to invest over $1.5 billion over
the next 3 years, including $50 million
for local infrastructure improvements in
the region surrounding Tengiz.
Clinical Data, An affiliate of Clinical Data, Inc.,
Inc., with Gazprom will supply Gazprom with technology for
use in a natural gas processing
facility.
Enterra Oil Field Two-year contract to supply rental tools
Services and services to support Chevron's
activities in Tengiz.
Exxon Ventures Exxon is establishing an office in
(CIS) Inc. Almaty to pursue business opportunities
in Kazakhstan.
Gandalf Explorers Exploration and development near the
International and town of Uralsk in the northwest tip of
Easternoil Kazakhstan.
Services, Ltd.,
with Uralskgeo
Halliburton From its office in Atyrau in western
Kazakhstan Kazakhstan, Halliburton will service oil
Oilfield Services, fields throughout the country by
with importing and operating pumps and
Kazakhstanmunaygaz performing drilling operations and other
tasks.
K. Hill Joint stock company to assist in
International, improving production at the Karazhanbas
with oil field, located south of Tengiz on
Karazhanbastermnef the Caspian coast.
t
Mobil, with Participating in a consortium to explore
KAZCASPISHELF and Kazakhstan's portion of the Caspian Sea
6 European oil (see app. I, p. 24).
companies
Parker Drilling To provide drilling personnel to develop
Co., with the Tengiz field.
TengizChevrOil
------------------------------------------------------------
Source: DOE Office of Oil and Natural Gas Policy.
As of December 1, 1993, there were 26 business ventures in
Kazakhstan's oil and gas sector that involved European, Middle
Eastern, and Asian investors or equipment suppliers (see table
III.2). These ventures include six British firms; five Canadian;
four Japanese; three French; two each from Germany, India, and
Turkey; and one each from Dubai, Hungary, Italy, Malaysia, the
Netherlands, Norway, Oman, Spain, Switzerland, and the United Arab
Emirates.
The Government of Oman has been particularly active in Kazakhstan's
oil sector. For example, it brokered the Chevron-Tengiz deal and is
a key participant in the Caspian Pipeline Consortium, which is
building a pipeline from Tengiz to the Black Sea.
Table III.2
Foreign Energy Ventures and Related
Activities in Kazakhstan
Company name Project description
------------------ ----------------------------------------
Adams Pearson Contracted by the World Bank to assess
Associates Inc. an oil field in southwestern Kazakhstan
(Canadian) (to forecast remaining reserves and
detail further development
requirements).
British Gas and To develop the Karachaganak gas field in
Agip (an Italian Kazakhstan's northwestern corner.
company), with Investment may top $6 billion over the
Karachaganakgazpro first 10 years, and $20 billion over the
m 40-year life of the project.
Cana-Kaz Global A $48-million project to overhaul
Oils (Canadian), between 1,200 and 1,500 oil wells in the
with Mangystau region along the Caspian coast
Mangystauneftgaz (south of Tengiz).
Caspian Pipeline Construct pipeline from Tengiz to
Consortium Novorossiysk, a port on the Black Sea.
(Bechtel and Estimated project cost is $850 million
Willbros, with the to $1.25 billion.
governments of
Kazakhstan, Oman,
and Russia)
Daiwa Europe To build a 120,000-barrel-per-day
(Japanese) refinery that will process heavy crude
oil from the Buzachi area of the
Mangystau region. Costs expected to
exceed $1.6 billion.
Easternoil Joint venture to explore for oil and gas
Services Ltd. in the Uralskaya region in northwestern
(British), with corner of Kazakhstan.
Uralskgeo
Elf Aquitaine $400-million production-sharing contract
(French), with covering 7,450 square miles southwest of
Temirunai the town of Aktubinsk in northwestern
Kazakhstan.
ENICO (Swiss) Contract signed with several Kazakhstani
enterprises to build a refinery in the
central Kazakhstani province of
Zhezqazghan with a capacity of about
10,000 barrels per day of crude oil.
Enterra Oil Field Two-year contract to supply rental tools
Services, with and services to support Chevron's
Dubai, the United activities in Tengiz.
Arab Emirates, and
Tengizchevroil
Hurricane Joint venture to develop 3 fields in the
Hydrocarbons Ltd. central Kazakhstani province of
and Wega D. Zhezqazghan. Investment may top $350
Geophysical Ltd. million.
(Canadian)
Hydrocarbon Contract signed to build a 120,000-
Engineering barrel-per-day refinery near the
(French) existing Atyrau refinery at a cost of
about $1.3 billion.
Indian Oil Corp. Contract to modernize 3 refineries in
and Engineers Kazakhstan.
India Ltd.
(Indian)
KAZCASPISHELF: To explore Kazakhstan's portion of the
offshore Caspian Sea. Production would start at
consortium with the turn of the century if significant
Agip oil deposits are found.
(Italian), British
Gas,
British Petroleum,
Mobil
(U.S.), Shell
(Dutch),
Statoil
(Norwegian), and
Total (French)
Mitsui & Co., To build a 120,000-barrel-per-day
Mitsubishi Corp., refinery on the northeast coast of the
and Toyo Caspian Sea south of Tengiz. Plant to
Engineering refine crude oil from Tengiz and other
Corp. (Japanese) nearby fields and is expected to cost
about $1 billion.
Nichiman Corp. and To upgrade capacity of Atyrau refinery
Ronar Services on the northern coast of the Caspian Sea
(British), and from existing 104,000 barrels per day to
Hydrocarbon 120,000 barrels per day by 1998.
Engineering
(French)
Oman Oil Co., with Joint exploration/development agreement
the Government of signed with Oman to fund 8-year search
Kazakhstan for crude oil in the Atyrau region
bordering the Caspian Sea. Concession
covers 6,250 square miles for 40-year
term. Total investment is $2.7 billion,
with $150 million to be spent during the
first 3 years.
Petronas Exploration and development offshore in
(Malaysian), with the Caspian Sea and in southern
Kazakhstanneftgaz Kazakhstan, east of the Aral Sea.
Repsol (Spanish), To survey 4,705 square miles about 125
with Enterprise miles northeast of the Caspian Sea in
Oil (British) western Kazakhstan.
Ronar (a British, Joint venture to modernize Atyrau
French, and German refinery. Products produced to include
banking group), clear gasoline, diesel fuel, and
with Hydrocarbon kerosene. Project to cost over $1
Engineering billion.
Transnational Co.,
the Kazakhstani
Ministry of
Energy, and
Kazakhstanmunaigas
.
Stetlan (German) To explore 3 undeveloped fields in the
Atyrau region bordering the Caspian Sea.
TPAO/PET To operate 5 existing oil fields. The
(Turkish), with Kazakhstanis will have a 50-percent
Kazakhstani State interest in the venture.
Oil Co.
Tropak Systems Agreement signed to build a refinery
(Canadian), with that will provide 330,000 tons of gas,
Kazakhstani Gas diesel fuel, and liquid gas annually.
Company
United Biresmis To operate 4 oil fields and rehabilitate
Muhendisler Burosu oil wells.
(Turkish)
Vego Oel (German), Negotiating for right to develop 3 oil
with Yuzhkazneft fields in southern Kazakhstan, east of
the Aral Sea. Already has participated
in 3 pilot wells.
Vegyepszer 10-year joint venture to develop oil
(Hungarian), field in Atyrau region bordering the
with Embaneft Caspian Sea.
Vegyepszer Joint venture to build facilities to
(Hungarian), support the Tengiz field. One-year
with agreement worth $100 million to build
Tengizchevroil roads and other infrastructure;
agreement can be extended annually.
------------------------------------------------------------
Source: DOE Office of Oil and Natural Gas Policy.
--------------------
\1 However, at an October 1993 international oil and gas exhibition
in Kazakhstan, a number of equipment suppliers expressed an interest
in direct sales to the Kazakhstani oil industry or in creating oil
field equipment ventures to serve the domestic market. Several
representatives reported that their firms were developing mechanisms
to obtain payment and send their profits home to their own countries.
U.S. GOVERNMENT EFFORTS
========================================================== Appendix IV
INDUSTRY SOURCES SAY EMBASSY, DOE
HELPFUL
Representatives of 5 of the 10 companies we interviewed said they had
received some help with their activities in Kazakhstan from the U.S.
government.\1 This help was primarily in the form of meetings with
the U.S. Ambassador in Almaty.
All five companies praised the Ambassador as being actively involved
in trying to assist U.S. companies. According to one company
representative, "We have operations all over the world. Usually we
avoid dealing with U.S. embassies, but our embassy in Almaty has
been extremely helpful." For example, the Ambassador has suggested
names of Kazakhstani officials company representatives might want to
contact. He has also hosted monthly business roundtables where U.S.
businessmen and Kazakhstani officials have a chance to meet, and U.S.
participants receive practical information on how to hire local
nationals and complete other necessary tasks. At a June 1993
roundtable attended by over 50 U.S. company representatives,
Kazakhstan's Deputy Minister of Energy discussed a major oil
exploration initiative.
Several company representatives mentioned that their firms'
activities in Kazakhstan have also been facilitated by DOE, which
organized an oil and gas conference in Almaty in November 1992.
About 100 Kazakhstani officials, 60 U.S. businessmen, and 18 U.S.
government officials participated in the 4-day event. The conference
was led by a Deputy Assistant Secretary for Export Assistance at DOE
who has since returned to work in the oil industry. One company
official suggested that the former Deputy Assistant Secretary be
replaced by another individual from the private sector with similar
experience and capabilities.
ASSISTANCE OFFERED BY COMMERCE
DEPARTMENT, TRADE AND DEVELOPMENT
AGENCY
In August 1993, the Commerce Department sent its first U.S. and
Foreign Commercial Service officer to Almaty. The officer speaks
Russian and is familiar with the oil industry, having previously
worked for a petroleum company. The Commerce Department will also be
opening an American Business Center in Almaty in early 1994. The
center, along with similar offices to be opened in other cities in
the former Soviet Union, will provide U.S. companies with short-term
office and exhibition space, market research and counseling,
interpretation and translation services, telecommunications and
computer equipment, and secretarial services. In addition, the
center is to help U.S. companies cultivate contacts with local
firms.
In Washington, D.C., the Commerce Department runs a Business
Information Service for the Newly Independent States of the former
Soviet Union. This service provides information on Kazakhstan and
the other countries of the former Soviet Union to U.S. individuals
and firms seeking to invest in the region or to export goods and
services there. For example, the service maintains a computer bank
with a capacity of up to 5,000 documents. The documents can be
accessed by phone and received by fax. The information available
includes trade and investment leads, upcoming trade events, market
data, and a breakdown of U.S. trade with Kazakhstan and other
countries. The office is staffed by Commerce Department officials
who can provide customized assistance to U.S. firms.
The Trade and Development Agency (TDA), which funds feasibility
studies, has provided partial funding for a study of a coal-mining
project in eastern Kazakhstan. Funding is currently being considered
for several other projects. One U.S. company, which provides oil
refinery equipment and services, benefited from TDA involvement
without TDA having to pay any money. According to TDA's Regional
Director for the Newly Independent States, a Japanese firm that had
been awarded a contract for an oil refinery project approached the
U.S. company after TDA had offered to fund a feasibility study on
the project. The Government of Kazakhstan was impressed that the
U.S. Ambassador had made a pitch for the U.S. company in
conjunction with the TDA offer when the company was competing with
the Japanese for the contract. As a result, the Kazakhstanis
encouraged the Japanese to include the U.S. company in the project.
ROLE OF OPIC AND EXIMBANK
Both the Overseas Private Investment Corporation (OPIC) and the U.S.
Export-Import Bank (Eximbank) provide assistance for U.S. activities
in Kazakhstan.
On May 19, 1992, former President Bush and the Kazakhstani President
signed an agreement approving OPIC assistance for activities in
Kazakhstan. OPIC provides three basic services: political risk
insurance, project financing, and investment development.\2
In December 1993, OPIC signed two agreements for oil and gas projects
in Kazakhstan. In one, OPIC will provide up to $3 million in
political risk insurance for a company that provides oil drilling
services. In the other, it will provide up to $100 million in
insurance and financing for an independent oil and gas exploration
and development company to begin work in western Kazakhstan south of
the Tengiz field.
In addition, as of December 17, 1993, 37 potential applicants for
OPIC insurance involving projects in Kazakhstan, representing $1.78
billion in potential investment, had "registered" with OPIC.
(Companies are required to "register" by filing an application
indicating their interest in OPIC insurance before they formally
apply for insurance and make an irreversible commitment to invest.)
Just over one-fourth of the registrations, representing 84 percent of
the value of the potential investments, involve oil and gas projects.
Eximbank offers short-term and medium-term export credit insurance,
and medium- and long-term loans and guarantees. Eximbank also offers
a service called "limited recourse project financing." Loans under
this type of financing are secured and repaid from the cash flow of
the project rather than the guarantee of the government or of other
parties. Currently, Eximbank offers only short-term insurance
(180-360 days) and limited recourse project financing for Kazakhstan.
Eximbank has also indicated its willingness to consider an Oil and
Gas Framework Agreement with Kazakhstan similar to the one recently
entered into with Russia. Under such an agreement, Eximbank would
provide guarantees and, under limited circumstances, loans, backed by
the collateral (e.g., hard currency from oil exports) of commercial
entities in Kazakhstan.
As of September 24, 1993, Eximbank had approved seven transactions
representing about $57 million for short-term insurance, and two
other applications were pending. The applications involved
factories, pharmaceuticals, mining, meat-processing, and other
industries, but did not include any oil or gas projects. Three
applications were pending for limited recourse project financing, all
of which involved the petroleum industry. One application concerned
the pipeline to be built from the Tengiz oil field to the Black Sea;
another, a refinery upgrade; and the third, the purchase of U.S. oil
field equipment.
INDUSTRY COMMENTS
When asked how the U.S. government could better facilitate
investment in Kazakhstan, four of the oil industry representatives we
interviewed voiced criticisms and suggestions.
For example, representatives from two companies criticized OPIC's
application process as cumbersome. A representative from one company
stated that "OPIC's forms are so complicated that it's not worth it
to fill them out." A representative from a second company said that,
although OPIC has an agreement with Kazakhstan, it is difficult for
companies to qualify for OPIC assistance in the former Soviet Union
because the agency is very conservative in approving eligible
projects.
In August 1993, OPIC stated that it was ready to provide up to $2.5
billion in new loans, loan guaranties, equity, and insurance within
the coming year to support U.S. private investment projects in the
former Soviet Union. With regard to the comments on its application
process, OPIC referred us to several oil companies that had already
received OPIC assistance for projects in Russia. With a few
exceptions, these companies generally described their dealings with
OPIC in positive terms.\3
The representative from the second company also criticized Eximbank's
borrowing criteria as prohibitive. He complained that in order to
qualify for Eximbank funding, his company would have to borrow much
more than it needed. For example, he stated that Eximbank requires
that a company borrow $50 million to qualify for project financing.
He said his company would actually have to borrow $70 million to $80
million, since Eximbank only funds projects in conjunction with
commercial lenders. The representative asserted that Eximbank should
lower its minimum borrowing levels to $10 million to $20 million,
which he said would be about the right amount for a pilot project,
even for a major oil company.
In response to these comments, Eximbank's Senior Vice President for
International Lending said that Eximbank does not require that a
company be funded by a commercial or any additional lender. What it
requires is that the company have at least 25-percent equity in the
project, i.e., that it can only borrow up to 75 percent of the
project's cost. The Eximbank official explained that the reason for
the equity requirement is that a cushion of cash is needed for common
problems, such as cost overruns and delays.
The company representative emphasized that Eximbank funding is
important, since it provides a measure of political security. He
stated that a country like Kazakhstan is less likely to change its
laws, contracts, or conditions on a company that received U.S.
government assistance, since doing so might jeopardize further U.S.
assistance.
With regard to other issues, a representative from a third company
stated that the U.S. government should streamline the visa
application process for Kazakhstani officials seeking to come to this
country. He and the representative from the first company also
advocated that the government address any remaining export control
restrictions on computer-related equipment and items used to locate
and extract oil.
In addition, the first company representative argued that U.S. tax
policies make it hard to hire U.S. nationals overseas, whereas the
Japanese, Germans, British, and French do not tax their expatriates.
This policy, he said, makes it expensive to hire an American and send
him or her abroad. He pointed out that if a U.S. company hires a
European instead, the European will have a tendency to design systems
for European equipment.
A representative from a fourth company suggested that the U.S.
government tie its aid in Kazakhstan to U.S. projects. He said that
some European governments see strategic reasons for backing European
oil and gas companies in Kazakhstan. For example, he said, the
United States can give $2 million to a Kazakhstani entity, or it can
give $2 million to a Kazakhstani entity working with a U.S. company.
This company spokesman added that the United States should follow the
example of its European competitors by having high-level government
officials meet with their Kazakhstani counterparts to endorse doing
business with U.S. companies.
--------------------
\1 None of the companies we interviewed indicated that they had asked
for help but not received any.
\2 Political risk insurance provides coverage against currency
inconvertibility (unless the currency is not convertible to hard
currencies to begin with), expropriation, war, and revolution.
Project financing involves direct loans of $500,000-$6 million to
small businesses, and a loan guarantee program of up to $100 million
for larger businesses. OPIC will fund up to 50 percent of a new
project and up to 75 percent of an expansion. Investment development
includes advisory services, a computerized databank matching projects
with investors, feasibility study funding, and investment missions to
selected countries.
\3 One of the companies, a small independent firm, characterized
OPIC's application process as "straightforward." Another, much larger
firm, described the agency as "flexible and cooperative," with a
"commercial, businesslike attitude." A third, however, stated that
the application form for insurance was "cumbersome" and repetitious
and that there had been some initial communication problems regarding
financing terms.
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
Virginia C. Hughes, Assistant Director
Kay L. Halpern, Evaluator-in-Charge
Rona H. Mendelsohn, Reports Analyst
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Sheila K. Ratzenberger, Assistant General Counsel
Richard R. Perruso, Attorney-Adviser