Black Gold of IndependenceOleg Chervinskiy, Editor-in-chief of Petroleum Magazine
Petroleum Magazine and Ratel analytical internet website on the eve of the 25 anniversary of Independence produced a special series of publications under the general heading Black Gold of Independence. We offer our readers remember how and in what circumstances arose and found feet of the oil and gas industry of independent Kazakhstan. Full cycle can be read on the website www.ratel.kz
The Soviet Union crushed. What's next? Year 1992
Parade of Sovereignties
The Soviet Union, sometime inspiring fear to half of the world is more like a colossus with clay feet. On the territory of the former empire steps parade of sovereignties: prior to the establishment of the State Committee on the State of Emergency, independence was already announced by Latvia, Estonia, Armenia and Georgia. After the failure of the August Coup it became finally clear: the Union dead and cannot be resuscitated. That had been formalized de jure by the Supreme Soviet of the USSR, adopted December 26 Declaration of Dissolution of the Union of Soviet Socialist Republics.
10 days before that, 16 December, in Alma-Aty by the Republican Supreme Soviet had been adopted the Constitutional Law on the Independence of the Republic of Kazakhstan. Yet 31 August, according to the Presidential Decree # 410, all enterprises and organizations of the Union subordination of all branches of a national economy on the territory of Kazakh SSR, are turned over to state management bodies of KazSSR, and their property becomes the property of the Republic.
12 July in Guryev on the Caspian Sea shore had been held the constituent assembly on the establishment of a state corporation for oil, gas and petroleum products exploration, production, transportation, refining and marketing. It is attended by representatives of industry and heads of regional councils: Aktyubinsk, Guryev, Kyzylorda, Mangistau, Uralsk, as well as officials of the republican and federal departments. After a short discussion, the participants decide to establish Kazahstanneftegaz Public Corporation, petroleum engineer Bulat ELEMANOV is elected as a president, who directed Tengisneftgas Production Association, and at that time he was the first secretary of the Embinsk Committee of the Communist Party of Kazakhstan. The location of the first organization was Guryev.
Although the oil and gas corporation was established on paper, at the time of the Soviet Union collapse, the industry is fragmented and totally unrelated industrial, mining associations, three refineries, enterprises for oil and gas transportation. All of them are coordinated by different union departments and agencies. For example, the oil produced in the Aktobe fields in full pumped to Russia, but the Pavlodar oil refinery is 100% dependent on the supply of raw materials from the West Siberian fields. Overnight caught abroad.
In conditions of independence, all issues, starting with financing, design, logistics, supply of spare parts, technical and scientific developments, introduction of new technologies, ending sales, will have to decide self-governing. It is necessary to conclude equal agreements with independent States appeared in place of the USSR, as well as with countries of further abroad. It is necessary to create a new regulatory framework which would ensure the functioning of the industry and the arrival of foreign investments.
Investments in law
One of the first laws to be adopted by the country in 1991, is law On foreign investments. It is vital, especially since Kazakhstan is now on its own, without the involvement of the union center is in talks with Chevron American Corporation to establish a joint venture to develop the giant Tengiz field in Guryev Region. Other fields demand investments too, being on the verge of a shutdown due to rupture of economic ties within a single national economic organism of the USSR: Karachaganak, Uzen, Zhanazhol.
Describing the Republic's economy during the period, President Nursultan Nazarbayev would later say that economy was in "coma state". To save patient’s life, the country needed a currency. The only competitive and in demand product on the world market produced in Kazakhstan was oil. It was decided to make a bet on oil.
Oil: blessing or curse?
Then nobody assumed that oil will become not only a blessing but also a curse: at that time Kazakhstan has not yet hit the pathological dependence on "black gold". In 1991, the share of crude oil and condensate production was only 2.5% of the total volume of industrial production in the Republic. 20 years later, in 2011, it will be already 53.8%. For all the years of Independence, the authorities have not managed to reallocate a huge flow of foreign direct investment so as to ensure the diversification of the economy, get rid of painful depending on changes in the cost and demand for hydrocarbons in the world.
According to the results of 1991, the volume of oil production in Kazakhstan amounted to 26.6 million tons, while the total production level throughout the former Soviet Union to 515.8 million tons. The country is entering to a new, 1992.
As Olzhas Suleimenov produced oil with Harald Biedermann. Year 1991
The birth of the Mintopenergo
The first year of the country's independence oil industry works even on inertia: pumping units produced "black gold", and powerful pumps pumped it to the only export artery - Atyrau-Samara oil pipeline. However, any field required new wells, spares, reagents, and all this needs money. Which the young country does not have. And there are no opportunities to freely sell produced oil on the world market. It is not surprising that from the first days of 1992 the volume of oil production begins to fall, and by the end of the year production was 25.8 million tons of oil and condensate. It will fall until 1996, when the state production enterprises will actively be sold into private hands.
Nursultan Nazarbayev energetically takes on building system of the industry management. By the Decree of the President in the country created the Ministry of Energy and Fuel Resources, the head of which is appointed Kadir BAYKENOV. He's a machinist on basic education, who worked for many years at the Almaty plant of heavy machinery. In 1987, the Chairman of the Council of Ministers of Soviet Kazakhstan Nursultan Nazarbayev, invited him into the Government as his Deputy. The responsibility of the Deputy Prime Minister included industry, including heavy machinery, oil industry.
Two years later, the Ministry would be reorganized, Baykenov withdrew from the position in the press his was chargds that he knowingly signed disadvantageous for the country the intergovernmental agreement on gas procurement in Uzbekistan. The gas was then purchased for 84 US dollars per 1,000 cubic meters when the world price was 70 US dollars and an average price in CIS countries was 50 US dollars, bringing the country's public debt for the neighbours amounted to impossibly high for those days 145 million US dollars. And December 20, 1994, in Kazakhstanskaya Pravda governmental newspaper imprinted the information under the heading "Clarification after checking", which stated: "As demonstrated by the verification, these documents do not have a personal signature of the former Minister of energy and fuel resources.
At the same time was given in the order of oil transportation system. On the basis of pipeline controls, previously subordinate to Moscow, in Kazakhstan created Yuzhnefteprovod Production Company (its head was "red director" Anatoly KASHYRSKIY, who worked in the Southern department of main oil pipelines since 1977, in 1993 he was replaced by legendary Taras Mazhitovich KASYMOV) and Trunk Oil Pipelines of Kazakhstan and Central Asia Production Company, created on the basis of Guryev Management of Main Oil Pipelines (the position reserved for Baikadam DZHUMAGALIYEV).
How to turn oil flows
It was necessary to urgently solve the problem download refineries: they used to receive raw materials from the West Siberian fields. Now the crude oil from Russia should be bought. Factories are on the verge of a shutdown. And in May, the Government adopted the decision on the start of design work and feasibility study of the West Kazakhstan-Kumkol Oilpipeline. With its help, oil from Mangyshlak and Guryev oil fields should come to Pavlodar and Shymkent oil refinery. The Ministry of Energy and Fuel Resources to ensure completion of pipeline construction and commissioning, at an accelerated tempo by 1995. True, it is unclear where to get the money for it.
Northern neighbor not only stops the supply of raw materials to the Kazakhstan's Oil Refineries, but also introduces quotas for our only oil export artery - Atyrau-Samara. By producing annually more than 20 million tons of oil, we can put into the Russian pipe and, consequently, to sell on the world market, not more than 6 million tons. Every year the Ministry officials forced to fly to Moscow with flight bags full of money and there to negotiate the possibility of pump the extra couple of hundred thousands of tons of oil. Because each ton is the currency much needed to the young state.
Meanwhile, negotiations for Tengizchevroil (TCO) joint venture are underway, which should be in a few years dramatically increase production at Tengiz and Korolevskoye. However, to get oil - is too small, it is required to decide how to sell it? How to transport to a buyer?
John Dois promises to Kazakhstan a window to the world
His support offers John DOIS, a businessman with an American passport, presented himself as the Director of Oman Oil Company registered in offshore and at the same time the authorized representative of the Sultanate of Oman. Previously, he was famous for the fact that sold Soviet crude oil in South Africa, which is under U.S. sanctions because of the apartheid regime. Apparently, the attitude in Washington toward him was ambiguous. With a mandate counselor of the Kazakh government, Dois managed to participate in the negotiations on the TCO foundation, as well as organized for Kazakhstan vital credit from the Sultanate of Oman on the 100 million US dollard that was spent on the purchase of food and saved the country from famine.
Dois presented to high-ranking officials in Alma-Ata the construction project of export oil pipeline from Tengiz to Novorossiysk, and in July, Kazakhstan and Oman set up the Caspian pipeline consortium, a little later to the project joins Russia. Share divided as follows: Kazakhstan and Russia - 25%, 50% - Oman, since he, under the Treaty, provides 100 percent financing of the project costing 1.2 billion US dollars. Later Prince of Oman, promised to give money to the pipeline construction, dies in unrevealed circumstances.
Baker from California
John Dois was not the only businessman of dubious reputation to earn their millions in Kazakhstan, in the murky water after the collapse of the Soviet Union. At the same time the owner of several bakeries from California Harold Biederman, on behalf of his company, Biederman International signed agreement with Interkaspy Association, headed by popular poet and a politician, having free admittance to the highest offices of government - Olzhas SULEIMENOV to establish Munai joint venture to develop promising Kenbai field owned to Embaneft production company. JV remained on paper, not a drop of oil was produced from Kenbai field, which did not prevent, however, mr. Biedermann in 1999 to win in the Stockholm arbitration claim against the Republic of Kazakhstan and to recover from the Government a tidy sum compensation for lost profits.
However, there are examples of another plan. In 1992, the Government attracted an investor to develop a unique field - Karachaganak. Opened in 1979, it is one of the largest oil/gas condensate fields in the world. Located in the North-West of Kazakhstan, near the border with Russia, and technological scheme of its development provided that produced raw materials will be fully delivered for processing to the Orenburg Gas Processing Plant. After the collapse of the Soviet Union Gazprom invites the Government of Kazakhstan joint development of fields, but Kazakhstan authorities refused, stating intention to bring in foreign companies as partners. As a result of the international tender procedure, involving alliances Eni/BG Group and BP/Statoi, preference is given to the first. In 1992, the Government begins negotiations with Eni and BG Group companies on conditions of production sharing agreement on Karachaganak.
How Nursultan Nazarbayev outplayed Mikhail Gorbachev. Year 1993
Year of TCO birth
1993 becomes a turning point for the oil and gas industry of the country - then start two projects, which showed investors that Kazakhstan can and must be dealt with.
April 6 at the State House in Alma-Aty with a symbolic name - House of Friendship - President of Kazakhstan Nursultan Nazarbayev and the Managing Director of Chevron corporation Kenneth Derr put their signatures to the Agreement on the incorporation of Tengizchevroil Joint Venture, which over the next 40 years will develop giant Tengiz field in Atyrau Region, as well the next Korolevskoye field. On the same day, President Nazarbayev signs a decree On activities of Tengizchevroil Joint Venture, thereby giving the project the highest guarantee in the legal sense.
Complete triumph of the young republic culminated years of negotiations that Chevron began in the Soviet period, in the late '80s, with the Ministry of Oil and Gas Industry of the USSR. In 1988, a protocol was even signed between the Federal Ministry and Chevron of intent to create a Sovshevroyl joint venture for the development of the Korolevskoye field, as well as a number of joint ventures, which were to saturate the domestic market of the USSR with quality refinery goods. Despite the fact that the field was located in Kazakhstan, a document signed in secret from the official Alma-Ata.
But the parade of sovereignty went on as usual, and in June 1990, when the union center was forced to bring the negotiation process national experts, the new protocol is signed, this time with the Kazakh department of Tengizneftegaz production company. And immediately after this chairman of the soviet ministry Nursultan Nazarbayev for the first time visited the United States, where he spent about three weeks, visiting Washington, New York, as well as in Chevron enterprises in California and Louisiana. Professor of Economics at the University of San Francisco Chan Young BANG (later headed the presidential KIMEP Institute in Almaty) is organizing to the ambitious young leader of Kazakhstan meeting with professionals on the western economics and law, who told how the market under capitalism.
Chevron no remaining choice
Upon his return, Nursultan Nazarbayev manage to convince Gorbachev to provide the authority to negotiate to the Council of Ministers of the Kazakh SSR. The main arguments was that better owning the situation on the ground, the Kazakh Government will achieve better terms from the Americans under contract. There, in Moscow, the Kazakh leader was able to meet with US President George Bush Sr. and gain his support in negotiations with Chevron. July 23, 1991 at the Permanent Mission of the Kazakh SSR in Moscow on Chistiye Prudy, began negotiations on the establishment of the Kazakhstan-American joint venture, and even after three weeks the Union State was gone. And Chevron is simply left to the choice of ...
The first Director of Tengizchevroil JV by Presidential Decree appointed former first Deputy of Akim of Atyrau Region, representative of the influential oil dynasty Ravil CHERDABAYEV, and at Tengiz oilfield began development work.
Oil instead of black caviar
The same spring, by the government decree was founded Kazahstanskayspiyshelf state company, which are transmitted tried and tested materials of geological studies of Soviet specialists, showing that, in the shallow zone of the Caspian Sea, near the Kazakhstan coast, can be large deposits of hydrocarbons. In Soviet times, any industrial work in this zone were banned because of ecological sensitivity rof reservoir - "caviar factory", which supplied the Union with freely convertible currency, but now all inhibitions are removed. The country needs oil!
To the head of the new state-owned company Baltabek KUANDYKOV was entrusted to find investors willing to invest in exploration of the Kazakhstan sector of Caspian Sea. The team led by Kuandykov flies around the world, conducting presentation of the project, challenging hours of talks with heads of leading oil and gas corporations, and then, finally, on December 3 in Alma-Ata, signed an agreement to create an international Kazakhstancaspishelf consortium for exploration in the Kazakhstan sector of Caspian Sea. Consortium participants become Alliance BP/Statoil, Agip, British Gas, Mobil, Shell, Total and Kazakhstancaspishelf state company, received operatorship in the Consortium. After seven years on the basis of the work of the Consortium on Caspian shelf will be open a unique Kashagan field.
Munaization of economy
By the Decree of the Vice - President of Kazakhstan Erik ASANBAEV, created a working group, which includes leading Kazakhstan lawyers and employees of the Ministry of Geology and the Department of Energy and Fuel Resources. They are instructed to prepare new legislation on oil, adequately meets the industry's emerging market economy. Over the next two years, the Group had prepared more than 30 variants of the law On oil, repeatedly rejected by Parliament.
In March 1993, Kazakhstan decides to reform the economy: locomotives of development should be the following, by example of South Korea, powerful holding companies. One of the first in the country are founded state holdings Munaygas and Kazakhgaz. Munaygas SHC was created on the base of Kazahstanmunajgaz national oil company and united all mining, processing and exploration assets of the industry. Kazahgaz aims to develop production, processing and transportation of natural gas. The fee for the transit of Uzbek and Turkmen gas through the territory of Kazakhstan (a trunk gas pipelines are passed by Kazakhgaz SHC) give great foreign exchange earnings to Republican coffers.
At the same time on the basis of state enterprises, organizations and companies, are part of the Kazakh State concern for gasification, establishes Alaugaz State Holding Company.
So, the contract of the century, as later dubbed the Tengiz agreement was signed, the industry structure was reorganized, but production continued to fall - in 1993 in the country managed to obtain a total of 23 million tons of crude oil and condensate.
Ancient traditions of oilworkers
This year started up another symbol of an emerging industry - in early October in the pavilions of the Kazakh Center of business cooperation Atakent for the first time passed which became the annual exhibition and conference, KIOGE, which paid tribute to his presence even Prime Minister Sergei TERESHCHENKO. In the coming years KIOGE has become a major industry crowd gathering annually at the beginning of autumn in Almaty leaders of the world's leading corporations and local oil generals. In the afternoon they discuss investment opportunities in Kazakhstan and in the evenings and nights become welcome guests in the best restaurants, casinos and karaoke clubs of the Southern Metropolis.
How Yeltsin wanted to pick Tengiz in Kazakhstan. Year 1994
Production is not growing, but falls
Year becomes landmark - the industry reached the bottom - in 1994 in the country produced a total of 20.3 million tons of oil and condensate. This is the worst rate since the collapse of the Soviet Union. Export progress was even worse. In May the Russian quota for Kazakhstan oil pipeline Atyrau-Samara is zero point zero. Industry finished off non-payments. Oil workers are waited payment for oil and oil products for months and get it in the end by sugar, clothing, cars and french perfume. Moreover, twice a year - in spring and autumn - the Government forced Munai Onimdery Corporation on free basis to deliver petrol and diesel fuel in agriculture, sowing and harvesting campaign under the slogan "Bread is sacred!" and with lagged payment for years.
Tengizchevroil Joint Venture per year invests in the field development 500 million US dollars, but-paradox! - Tengiz production is not growing, but falls! The reason is the impossibility to deliver oil to a buyer. Russia refuses to let Tengiz oil into the pipeline, citing the high content of mercaptans, which, according to Russian experts, lead to pipes corrosion. If prior to the creation of the Joint Venture produced 330 thousand tons of oil every month, now total 120 thousand, although technical capabilities allow quickly increase production twice.