Yaromir Rabay: «New opportunities are opening up for Kazakhstan»
Yaromir Rabay, Executive Director of KAZENERGY Association, answers Petroleum's questions
– Yaromir, this year has been truly dramatic for the oil and gas industry around the world. Kazakhstan is no exception. The COVID-19 pandemic was one of the factors that brought down global quotes in the spring, which caused global problems in the industry in a chain reaction. If you focus on Kazakhstan, how in your opinion the global pandemic has changed the country's oil and gas production industry? What lessons should be learned from this situation?
– I would like to note several key points in the current situation.
First of all, the pandemic has led to a reduction in global oil consumption, which is the main driver of the development of the oil and gas industry. According to June data from the International Energy Agency, global consumption fell from 99.8 million barrels per day in 2019 to 93.3 million barrels in the first quarter of 2020, with a forecast of 91.7 million overall in 2020 (the second quarter of 2020 accounts for the largest drop). As a result, the production and consumption of petroleum products decreased.
Secondly, in order to maintain the global oil price, a new OPEC+ agreement was signed in April of this year, under which it is planned to reduce world production by 9.7 million barrels per day in the period of May-June 2020, with subsequent weakening. At the same time, Kazakhstan at the first stage committed to reducing production by 23 percent by means of the largest oil and gas projects – to 9.7 million barrels per day.
Production cuts and increased demand, including from India and China, allowed Brent prices to recover to an average level of 43.5 USD per barrel from May to July. At the same time, in addition to increasing refining volumes, China is pursuing a policy of increasing storage volumes, which, according to some estimates, exceeded 800 million barrels in June this year.
The third negative factor is lockdowns in most countries, Kazakhstan is no exception. As a result, there are restrictions on production activities in related sectors of the economy (oil services, engineering, manufacturing), including a reduction in the volume of construction, installation, and drilling operations.
Once again, the crisis showed the sensitivity of the oil and gas industry in Kazakhstan to the global price environment, which was also reinforced by the pandemic.
Several sensitivity factors can be noted. This is a relatively high cost of oil. A number of sources give figures from 10 to 12 USD per barrel. But given that in Kazakhstan three giants – Tengiz, Karachaganak, and Kashagan (according to 2019 data, 61 percent of the country's total production) give the predominant volume of production, they form the overall picture.
Other projects in most cases have significantly high costs, and there are also fields that are unprofitable at a price of 30 dollars per barrel. Keep in mind that a significant part of the produced oil is supplied to the domestic market at a lower price (20-25 dollars per barrel).
The second factor is the insufficient level of oil and gas separation with the production of products with higher added value. This includes not only the production of petroleum products but also derivatives of the petrochemical and gas chemical sectors.
Third is the high level of social and tax burden. In a number of companies, including the quasi-public sector, the total operating expenses of the budget are more than 70 percent of the total wage fund. In terms of taxes, according to Kazakhstan experts, by 2030, the burden for the largest oil companies in Kazakhstan will grow to an average of 73 percent of total income.
Thus, in the crisis, the extractive industry is forced to reduce investment in exploration in order to replenish the extracted reserves of hydrocarbons, with an emphasis on maintaining a minimum volume of production. And in the current conditions, the investment attractiveness of new and existing oil and gas projects has decreased.
In my opinion, there are several tasks that the state needs to solve together with the oil and gas industry.
First of all, this is an extension of the flexible system of tax incentives (MET, CIT, etc.) on the example of export customs duties on oil, since companies can save the volume of production work at the expense of the funds made available, which will create a multiplier effect due to tax receipts from related sectors of the economy.
The revision of the terms of the new Environmental Code is also an important task. Yes, I understand that the new Code is a necessary measure, but we need to consider the fundamental norms in view of their impact on the country's economy.
For example, the introduction of best available technologies (BAT) requires economic incentives from the state. Earlier, the KAZENERGY Association assessed 26 large enterprises for financing the introduction of BAT, the volume of which can range from 4 to 16 trillion tenge. At the same time, it should be taken into account that these funds will be withdrawn from the country's economy by purchasing appropriate equipment abroad, since in most cases there is no domestic equipment available required for BAT.
From the above, the following task follows – the development of domestic production: mechanical engineering, electronics, metallurgy, chemical industry, various equipment for the oil and gas industry. At present, there is no unified approach to this task on the part of state bodies. This is especially important in the context of Kazakhstan's membership in the WTO with some suspensive conditions until 2022.
Therefore, I can say that the state needs to take active measures together with the oil and gas industry to solve these issues with a medium-term perspective.