Focus of the Issue
Oil Service Businesses Struggle for Budgets
Amina DzhalilovaOil service companies in Kazakhstan are seriously concerned by the significant drop in world oil prices. According to the International Energy Agency, only in 2015, investment in the oil and gas industry on a worldwide scale reduces by minimum 15%. It appears that in Kazakhstan, the figure will be even greater. The National Company KazMunayGas has officially announced the updating the investment program. Other players in the industry also cut the budgets and reduce the volume of orders. Oil service companies have not reduced staff yet, but they are postponing the equipment purchases. In this situation, the Kazakh market players hope only for the future growth project at the Tengiz field.
It is hardly possible to say exactly how many companies operate in the oil service market in Kazakhstan. Because many business entities, considering themselves as oilfield service companies, provide services to customers in other industries, and others who win contracts exclusively in the oil industry, at the same time can be registered under neutral definitions of business activities. Along with this, they will not try to assert themselves as a part of any industrial group.
However, we have some figures at our disposal. By today, the Association of service companies of Kazakhstan established in 2011 comprises more than 100 companies. Last year, the experts estimated the market volume at about one trillion Tenge per year.
The main sectors of the oil service market are drilling and development, current and overhaul maintenance of wells, routine and maintenance overhaul of oilfield equipment, oil recovery improvement services, facilities construction, manufacture of steelworks, as well as various supplies of a broad range of goods. In addition, oil service include a range of services on well testing and geophysical exploration, transportation of produced oil and oil products, maintenance of pipelines and many other services, including catering and servicing of shift camps at the fields.
Among the major players in this market, both foreign companies: Schlumberger, Halliburton, Backer Huges, Weatherford, Parker Drilling, and domestic ones – Yersay Caspian Contractor, Neftstroyservis, Tengizneftestroy, Caspian Offshore Construction can be noted.According to the Kazakhstan’s Ministry of Energy, share of foreign companies in the service business was 55% as of the end of 2014. However,“some Kazakh service companies made a big step forward, and today they can easily compete in subcontracting projects with foreign companies – says Daurzhan Augambay, the Director of the Association of service companies. – Even though 5-10 years ago, local companies could not compete with foreigners, it is now possible to note some champions of the industry, which in recent years have become quite strong and serious players of the service market.
Trends in oil service can be tracked on the figures characterizing the share of local content in oil and gas projects. As is known, the concept of “Kazakhstani content” appeared in the national legislation in 2004. Yet, the regulations adopted at that time, have not actually worked. However, at the end of 2009, Kazakhstani content has been legislatively defined, which fundamentally changed the situation. Furthermore, in 2010, the state program for the development of Kazakhstani content was approved. Since then, there has been a steady growth of local content in Kazakhstan. Total purchases of goods and services in the oil and gas sector has increased by 80% in the period from 2010 to 2013 (from 1.5 trillion to 2.7 trillion KZT) and Kazakhstani content has increased by 135% (from 680 billion to 1.6 trillion KZT). In addition, the share of local content in total purchases has increased from 45.2% to 57.3%.
The figures are fairly good. However, they do not provide an answer: is it a major breakthrough or only growth in volumes? Kazakhstani producers of goods and services continue to complain that local content consists of the supply of sand and some basic construction work, while more or less substantial orders are still awarded to foreigner companies. One reason is that some of the subsoil use contracts were concluded long ago, and they provide for a customs exemption. While a domestic producer delivering feedstock, parts or equipment to the country pays these fees. It is clear that its products, even at equal quality, appear to be non-competitive on price.
Kazakhstani entrepreneurs lay claims to major mining companies that those are trying by any means to purchase services or equipment from affiliated companies. Alternatively, from long-time partners, with who they cooperate in other projects in different parts of the world. Moreover, it is widely stated that - if a project design is entrusted to a foreign engineering company, it is very difficult for Kazakhstani companies to break into the number of suppliers. The project developer initially provides data on suppliers of goods, works and services, which in most cases are of “non-Kazakh origin”.
In turn, customers notice that the level of competence of domestic suppliers is not yet sufficient. Therefore, according to experts, very few Kazakhstani manufacturers are able to manufacture products for use in aggressive environments (high pressure, high concentration of hydrogen sulphide, etc.) Despite the tensions, the parties seek ways towards a rapprochement - “Aktau declaration on joint actions” is a case in point. It is to be recalled that in September 2012, the largest mining companies of the country - KazMunayGas, KPO, TCO and NCOC - signed a declaration on the joint elaboration of effective mechanisms to increase the share of Kazakhstani content in the oil and gas industry.
Meanwhile, we already have impressive success stories of Kazakhstani suppliers. For example, a private Kazakhstani engineering company Kazgiproneftetrans became one of four full-fledged shareholders of the Joint Venture KPJV, which was the designer of facilities of the project for future expansion at the Tengiz field - the very same the industry places great hopes on today.
As was pointed out by Fuad Serikov, the head of Kazgiproneftetrans, in an interview with Petroleum, “this is the first time in the history of engineering activity in Kazakhstan, when a domestic company in such a large international engineering project was not a subcontractor of the world’s largest engineering companies, but one of the shareholders of the joint project company established for the implementation of such large-scale and technologically complex engineering problems”.
Another prime example of the success of Kazakh business in the competition is the telecommunication company Astel. As KGNT, Astel is a 100% Kazakh company. On July 1, 2014, it signed an agreement with NC Production Operations Company B.V. (NCPOC) for the technical support for the telecom systems at the Kashagan field. Today, Astel is responsible for technical support and services for the telephone system, data transmission devices, PA systems, video surveillance around the perimeter, access control systems, fiber-optic lines, and other systems, both on onshore and on offshore facilities of North Caspian project. Representatives of the company told the correspondent of Petroleum that the agreement has been concluded until 2017. For the first time, a Kazakhstani telecommunication company obtained the general contractor status in such an important international project.
Nevertheless, the events of the end of 2014 - beginning of 2015 do not give cause for optimism for the participants in the oil service market. Almas Kudaybergen, Chairman of the Association of Service Companies of Kazakhstan told the correspondent of Petroleum: “The basic problem that our service companies are concerned about is the decline in oil prices. It has been observed since the latter half of 2014, and it has not given immediately negative effect on current and development budgets of oil and gas companies. Now, however, we notice that towards the end of the year, Kazakh oil and gas companies have started to cut budgets, not only in small companies, but also in majors. Accordingly, our companies will perform less work and services this year. We have not seen yet a significant staff reduction in service companies, but clearly there is a postponement of purchases of equipment and machinery”.
Now all the expectations of market participants are focused on the Project of future expansion at the Tengiz field. As we wrote earlier, at the declared value of the project of 38-40 billion dollars, Kazakh service companies can apply for contracts worth at least 8 billion dollars (see “Kazakhstan chance in the project of century”, Petroleum, No.1-2014). Thus, asapartofFGPthreejointventureshavebeenestablished: on a rotational village engineering and construction (Isker and Bonatti), and on drilling services (Teniz Burgylau and Nabors Drilling). Also, negotiations continue on establishing joint ventures for repair and maintenance of high tech oil and gas equipment (turbine maintenance joint venture with General Electric, electrical equipment – with Siemens and Schneider Electric, various oil and gas equipment – with Cameron).
As for other subsoil users, Almas Kudaybergen says, it is expected that there will be a reduction in volumes of works and services.
It is questionable whether Kazakh companies would take part in the replacement of pipelines and compressors in the North Caspian project. According to unofficial information, after the gas leakage from the pipeline in the fall of 2013, the installation of which involved Kazakhstani subcontractors, the management of NCOC tends to prefer that now works have to be performed only by foreign companies.
The Karachaganak expansion project, which the oilfield companies also pinned high hopes on, amid a collapse in world prices of hydrocarbons, also obviously will not be forced in the near future. Although, itwasKarachaganak, wherenewmechanism developed by the Ministry of EnergyforKazakhstan’s producers was to be trialed. This referres to the so called ‘early tender’, which includes distant (for a period of not above two years) delivery of goods/services. I.e. a potential producer, which plans to set up production/service in Kazakhstan, would have a contract and time for establishing goods production/services in the country. Therefore, a potential producer would have its first long-term guaranteed order. The work group of the Ministry of Energy specified the list of goods and services that were planned to be purchased in Kazakhstan’s producers through early tenders. If the practice proofs to be efficient, than the Ministry of Energy is going to translate this experience to other large progects as well.
However todaythe Association of Service Companies is recommending all domestic servicers to employ the following tactics: first, personnel development through the study of international best practices, advance training abroad, if necessary - employment of expats. In addition, the company’s development and reaching a new level through various support programs both by the state and with the help of major oil and gas companies using such instruments as obtaining international certificates for goods and services.
The Ministry of Enegry, in turn, is going to involve the administrative reserves. “It is obvious that we will be able to rapidly overcome the lack in technology through establishing joint ventures with foreign leaders of the oil and gas industry, - said Uzakbay Karabalin, the first Vice Minister. – That is why as one of the mechanisms we together with operators consider a standard, according to which in tenders carried out by large subsoil users those foreign contractors would be preferred that shall establish joint ventures with Kazakhstan’s enterprises in order to conduct science-driven and high-tech works. We believe that this approach will allow increasing participation of Kazakhstan’s companies as partners of foreign contractors, and will ensure transfert of the required knowledge and technology.”
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