Shell in Kazakhstan: a Strategy for Success
Exclusive interview of Shell Kazakhstan Country Chair, Mr Olivier Lazare, who will leave his position soon, for Petroleum Journal. Mr Lazare kindly shared the results of his work and answered questions from the journal’s publisher, Oleg Chervinskiy.
– Mr Lazare, you will take up the role of NCOC Managing Director on June 1, 2021, and we congratulate you on this! For almost four years, you have led the work of Shell in Kazakhstan. Looking back, are you satisfied with these four years? What were they like? Did you manage to implement everything you had planned for?
– You know, the time has flown by very quickly for me since my appointment in the fall of 2017. During this period, we have marked an important milestone in Shell’s activities in Kazakhstan – the 25th anniversary of its presence in the country. My most significant achievement in this position is that our world-class assets in Kazakhstan were able not only to continue to bring value to all participants and the Republic of Kazakhstan safely and with minimal environmental impact but also significantly increased production volumes while creating the basis for the successful implementation of future projects.
For Shell, Kazakhstan remains a Heartland in terms of existing assets and future investments.
I am pleased to note that in 2020, KPO achieved record levels of liquid hydrocarbon production. In addition, the Gas Debottlenecking Project at Karachaganak was completed safely and within the budget and schedule, which sets forth the implementation of all other plateau extension projects at the field. This was made possible by the resolution of the dispute regarding profit petroleum distribution between the Partners and the Republic of Kazakhstan within the framework of the Final Production Sharing Agreement of the Karachaganak field. This decision was a very positive step to ensure the certainty of the financial terms for the Karachaganak project, which allowed the Partners and the country to continue investing in plateau extension projects.
Kashagan also achieved record levels of daily production (up to 400 thousand barrels per day) following excellent safety and environmental indicators.
The last year and a half have been marked by the COVID-19 pandemic, which has forced us all to re-evaluate the importance of our health and the well-being of our loved ones. I am pleased that Shell Kazakhstan and the joint ventures, where we hold our interest, did not stand aside and provided all possible assistance to the Republic of Kazakhstan in preventing the spread of the virus, especially at our production assets, treatment and control of coronavirus infection.
In addition, a lot of work was done to improve the investment attractiveness of Kazakhstan’s oil and gas industry within the framework of the working sessions of the Foreign Investors’ Council under the President of the Republic of Kazakhstan. We have managed to achieve mutual understanding and agreed on a wide range of issues. Currently, work is continuing to bring the legislative framework and fiscal terms in line with the best international practices. Moreover, the challenges we face are becoming even more urgent, given the ever-changing competitive environment in the global hydrocarbon market and the rapidly increasing competition for investments in the sector.
I want to take this opportunity to thank all the employees of Shell Kazakhstan, KPO, and NCOC for their professionalism and achievement of outstanding results in production activities. I am proud that we have been actively and successfully able to replace a number of technical and managerial positions in the joint venture with local personnel in recent years. For example, today, out of almost four thousand employees of KPO, 97% are Kazakhstani nationals, while 83% of the company’s management staff are local personnel. As per the North Caspian project, these figures are 95% in engineering and technical positions and 85% in managerial positions. At Shell Kazakhstan, the number of Kazakhstani specialists in various fields has increased by 55%. During these years, our work was aimed at developing the potential of local personnel, who, having gained experience in Shell projects in Kazakhstan and abroad, become competitive for replacing foreign employees of our company and operators. A lot of work was done to organize the secondment of local employees to NCOC and KPO and Shell’s international assets. In addition, the number of Kazakhstani members of the Leadership team of Shell Kazakhstan has grown significantly and now stands at 42%. I am deeply confident that Kazakhstan has a huge potential in human capital, so I believe that Shell Kazakhstan will continue to actively and systematically work in this direction.
In general, many things that I had planned to implement in my position were materialised. Of course, as in any other job, there were times when not all the expectations were met. For example, due to objective reasons, we had to withdraw from the Kalamkas-Sea - Khazar project. Nevertheless, there are always opportunities for growth and development, and I am optimistic about the future of Shell in Kazakhstan. I am happy to remain in the country, and I am very excited to apply my experience and knowledge to the benefit of NCOC, its shareholders, and the people of the Republic of Kazakhstan.
– During your work in Kazakhstan, there was such a serious challenge as a pandemic of a previously unseen virus. Shell is a shareholder in projects that employ thousands of workers in Kazakhstan: in the fields, processing plants, and offices. How did you respond to this challenge? What measures were taken to protect employees and at the same time to implement the production program? I know that some of the employees had to be evacuated from Kazakhstan. Are they back yet? What is the situation with the projects now?
– I would describe the pandemic period as an unprecedented time when the disease affected every family, every home to some extent. At the time of the surge in new cases of infection last year, Shell Kazakhstan could not stand aside and, together with some other foreign investors, purchased and donated modern intensive care equipment and personal protective equipment to the Nur-Sultan Multidisciplinary Medical Center to facilitate the treatment of patients with coronavirus infection. The overall cost of the equipment is over 200 mln KZT. I am especially proud that the Shell team played the role of the coordinator of this project on behalf of our partners because it was at the time we faced several problems together – Kazakhstan was in a full-scale lockdown.
The health and safety of our employees have been and remain a top priority for Shell. Our joint ventures (KPO and NCOC) continued to operate safely, taking the necessary measures promptly to minimize the spread of COVID-19 at production facilities and in residential areas. Appropriate procedures have been adopted and applied to ensure the required isolation and social distancing, which has yielded results: until today, we have avoided serious outbreaks at both fields. Currently, the situation at the production facilities is stable, which indicates the timeliness and correctness of the measures and procedures taken. Oleg, I am sure that you have been monitoring the situation on KPO and NCOC, as our operators have been quite open about their actions in the media.
As for the staff of Shell Kazakhstan in Nur-Sultan, since March of last year, our office workers have switched to a remote work format. The office is open only to 20% of the employees, following the decree of the Chief sanitary doctor of the city.
As for the repatriation of employees, yes, it is true that in July last year we decided to send Shell’s noncritical business personnel seconded to NCOC and their family members to their countries of residence, whose borders were opened due to the situation with COVID-19 in Kazakhstan and Atyrau region at the time. These Shell employees continued to perform their duties remotely. As known, this decision did not affect the production activities of NCOC, and to date, most of these employees and their families have already returned to Atyrau and continue to perform their work safely.
– According to media reports, at the last shareholders’ meeting, Shell CEO Ben Van Beurden presented the company’s energy transition strategy, which involves increasing the share of low-emission energy sources from the current 7% to 20% by 2025. With this strategy in mind, will Shell and the companies in which it is a shareholder change their approach to working in Kazakhstan?
– We support and share the goals for the transition to a low-carbon economy, recently announced by President of Kazakhstan KassymJomart Tokayev. Undoubtedly, energy transition is inevitable and is accelerating every day. From global perspective, Shell recognizes the challenge of climate change and strives not to stay on the sidelines during this critical transition period, and is committed to reducing carbon emissions to zero by 2050 in step with society, in line with the expectations and trends of today’s global community. We have shortand medium-term goals in reducing emissions. Of course, this issue is outlined in detail in Shell’s Energy Transition Strategy.
Regarding the existing production facilities and assets, we plan to minimize the number of carbon emissions into the atmosphere by implementing special projects. NCOC has already adopted and implementing the Greenhouse Gases Emissions and Energy Efficiency Management Strategy, which states specific objectives, targets, and deadlines for achieving them. We expect KPO to develop a similar strategy by the end of this year.
In addition, Shell Kazakhstan has been implementing the Solar for Schools project for the past three years. The project’s primary goal is to create a platform for the further development of such projects throughout the country and assist the Government of Kazakhstan in achieving the goals set within the framework of reducing greenhouse gas emissions and targets for generating electricity using renewable energy sources.
The first school to have received a solar power system was the Nazarbayev Intellectual School of Physics and Mathematics in Nur-Sultan. Shell Kazakhstan installed specially equipped covered parking lots for cars on the area of 828 square meters, equipped with photovoltaic modules with 100 kW/h capacity. The installed solar power system will cover part of the school’s energy consumption. The project is designed to provide up to 30% of the annual energy consumption of the school. The excess electricity generated by the system will be exported to the city grid, resulting in additional energy savings We can already say that solar stations installed in schools generate an average of about 150 thousand kW/h a year, while reducing an average of about 60 tons of CO2 and saving about 2.5 mln tenge in electricity bill.
The project also aims to encourage the youth’s interest in sciences, technology, engineering, and mathematics (STEM) and raise awareness of the benefits and opportunities of renewable energy.
In 2019, Shell Kazakhstan installed photovoltaic systems in Nazarbayev Intellectual Schools in Uralsk and Aktau. This year, work has already begun on the installation of photovoltaic systems in the NIS of Atyrau.
– At the end of 2020, the concept of full field development of Kashagan was presented during public hearings held in an online format. Shell is one of the shareholders of the North Caspian Consortium, and you probably have enough information about the future of Kashagan. In your assessment, when can the first phase of the full field development phase begin to be implemented in practice?
– Currently, I cannot provide an approximate date for the start of the practical implementation of the first stage of the full field development phase. Our priority is safe and efficient production. All decisions on the future of Kashagan will be made per the terms of the North Caspian Production Sharing Agreement.
– Due to objective and subjective reasons, the North Caspian project significantly exceeded the initial estimate and became one of the most expensive in the global oil and gas industry. The upcoming stage of full field development will require new investments. If I understand correctly, will these be the non-refundable costs of the project participants?
– As I mentioned earlier, the main task of the shareholders and NCOC is safe and reliable operation of production facilities. Further development of the Kashagan field will be carried out in full compliance with the terms of the North Caspian Production Sharing Agreement. We hope that the gradual increase in production will allow profiting from this unique field as efficiently as possible to benefit the Republic of Kazakhstan and NCOC shareholders.
– Many global experts say that in the context of the transition to a carbon-free economy, the era of high o prices is gone forever. In such conditions, is it profitable to invest new serious money in Kashagan? Will the shareholders have time to return their investments and make a profit before the end of the FPSA period?
– Today, we are working in the conditions of rather low oil prices, which, in our opinion, will continue. This is due to the discovery of shale deposits in the United States and the global pandemic, which has led to a significant decline in economic activity and a drop in oil prices. The resulting market changes have forced international and national oil and gas companies to reduce their capital expenditures by a total of more than $500 bln over the next five years. In 2020, the number of final investment decisions made on major projects worldwide will decrease by 75% compared to the previous three years. If the current situation persists, project deferrals are expected in subsequent years. It should be emphasized once again that low oil prices will be maintained for several years. Thus, there will be continued fierce competition for capital around the world. Despite this, Kazakhstan does not stand aside and actively competes for attracting foreign investment to the country.
It is fair to say that today’s achievements are the result of a great deal of work done over the past thirty years. Since the independence, the Republic of Kazakhstan has made significant progress in the development of the oil and gas industry with the support of foreign investors, which has allowed the country to become an important and respected player in the international oil and gas market. Over the past two decades, an average of $10 bn has been invested annually in the Kazakhstani oil and gas industry. It is expected that in the absence of decisive joint actions to attract capital to major projects and to explore new fields on the part of the Government of the Republic of Kazakhstan and foreign investors, this indicator may significantly decrease.
To date, the potential development of Phase 2 at the Kashagan field is the only major project that can support a high level of capital investment in 2020. Outside this project, the annual investment in the oil and gas sector can fall to $3 bn or even lower by 2025. Ben van Beurden, Chief Executive Officer of Royal Dutch Shell plc, informed the President of the Republic of Kazakhstan about that, speaking on behalf of international oil and gas companies, during a meeting of the Foreign Investors Council, which was held on November 18, 2020.
The second phase of the Kashagan field development has not yet been approved, and there aren’t other major projects of this scale in Kazakhstan. There are no other projects worth $10 billion or more. Considering the specifics of the oil and gas sector, it can take from 10 to 15 years from the moment of issuing a license to producing the first oil. Therefore, it is crucial to make investments as soon as possible to allow for the time to make a return on investments and create value for both investors and the Republic of Kazakhstan.
– Mr Olivier Lazare, thank you for the interview, and we wish you fruitful work in the North Caspian project!
– Thank you for the questions. I am thrilled and proud that I have been lucky to live and work in Kazakhstan. My wife and I get great pleasure and a lot of positive impressions from the country and its hospitable people. I believe in the bright future of Kazakhstan, and I am sure that together with the country we will be able to implement many more interesting and impressive projects to benefit the country and its population. I wish your journal creative success and good health in this challenging time for your readers!
End of May 2021