Exclusive
The Experience Needs to be Gained on the Complex Projects
Nurlan Zhumagulov, Director General of the Union of Oilfield Service Companies of Kazakhstan, in an exclusive interview to the Petroleum: about when will the expansion projects at Tengiz and Karachaganak begin, whether there is a preponderance of the Russian companies in the industry and how can domestic oilfield services develop under the conditions of low oil prices.
- Nurlan Atymbekovich, last year, when oil prices rapidly rolled down and almost all oil companies cut investment budgets, the experts have made predictions about the fall in the level of orders in the oilfield service industry, which will lead to stagnation and reduction in the number of employees. Whether these predictions came true? How the service industry feels today, with the current oil prices?
- Due to the prevailing market situation with oil prices most of subsoil users conducted the cost optimization, revised budgets of contract works towards the decline. According to the results of 2015 volumes of oilfield service work decreased by an average of 25 percent, from 1.4 trillion tenge in 2014 to 1.1 trillion tenge in 2015. And this is taking into account the costs of replacing the pipes on the Kashagan project and preparatory works for the future expansion of the Tengiz. The largest decline of oilfield service work in monetary terms is observed in drilling operations - 40 percent, geophysical services - 30 percent.
Due to the reduced volume of works many oilfield service companies are forced to send the staff on the leave without pay. According to the Ministry of Health and Social Development of the Republic of Kazakhstan, based on results of 2015 in five oil and gas producing regions of the country 1474 people were discharged, and 2957 people were sent on the leave without pay or to part-time work schedule. Since the beginning of 2016 same indicators were 557 and 4081 people respectively. Thus, during the years 2015-16 over 9 thousand people were discharged on different basis. This is only the official statistics.
If the situation with oil prices and volumes of oilfield service works will not stabilise towards the growth in 2016, many service companies will be forced to reduce the staff. The number of potentially discharged employees may be not less than 40000 people.
- As you know, the next year the adoption of a new Code “On subsoil and subsoil use” is expected, which already was criticised by the Union of Oilfield Service Companies. Could you explain where this criticism comes from, because the code developers say it will contribute to the liberalisation of the market?
- The draft of subsoil Code, which should replace the existing Law “On subsoil and subsoil use”, excludes the support measures of the Kazakhstan business, which do not contradict the requirements of the WTO and EEU, in particular the lack of:
- monitoring of the subsoil contracts execution, including the local content obligations in the procurement of the goods, works and services, and the local content of the staff, as well as in the field of education and science;
- minimal obligations (50%) of the local content in the works/services in the contracts for subsoil use;
- conceptual framework (defining the status of local manufacturers, the methodology for calculating the local content, etc.);
- liability for failure to comply with contractual obligations;
- publishing the obligations of procurement plans of subsoil users;
- order of the acquisition of the goods, works and services by the subsoil users.
In case of refusal from above listed Kazakhstani business support measures, set in the existing Law on subsoil, there is a good chance of reduction of the entrepreneurial activity of the Kazakhstan business and aggravated social tension in oil-producing regions.
The most sensitive issue is the abandonment of the procurement rules, when the subsoil user at his discretion may procure the goods and services for its operational needs. Lack of competition and transparency will hit not only the domestic business, but the country's budget as well: competitive bidding always reduces the fixed price of a tender, and in the absence of competition, the customer can increase the price of the tender, thus paying less of the corporate income tax and the excess profits duty.
Currently, the proposals and comments of the Union were heard and supported by the public authorities: work is under way to adapt the procurement activities of subsoil users and their contractors under conditions of the domestic business by simplifying the procurement procedures.
- How do you see the strategic path of development of the domestic oilfield services industry in the face of increasing competition?