Kadyr Baykenov headed the Ministry of Energy and Fuel Resources of the Republic of Kazakhstan in the early 1990s. In his interview to KAZSERVICE magazine, the honorary industry veteran shares what challenges his agency faced and what difficulties arose in attracting our first significant investors.
- Mr. Baykenov, you are the first specialized minister of Kazakhstan for the oil and gas industry. What were the most significant decisions, in your opinion, taken in the first years of our independence?
We consider 1992 to be a cutoff point for Kazakhstan in its independent voyage across the big sea of international politics and trade. Therefore, taking into account the conditions of the world around us and the changes that have occurred after the demise of the Soviet Union, the Government had to focus on supporting projects with the highest priority for the national economy, where the fuel and energy sector certainly played an important role.
The Ministry of Energy and Fuel Resources established that year made it possible to ensure the comprehensive development of the country’s fuel and energy complex within the state policy framework. Oil and gas extraction as well as coal and uranium mining enterprises, electric power plants, oil refineries and pipeline companies were controlled by the Ministry.
The oil and gas industry was tasked with attracting foreign investments into the development of hydrocarbon deposits. This challenge was not easy, and the country, with no financial resources available, could offer its foreign partners only tangible assets owned by our enterprises. This was done during the implementation of the major projects. The preparation and signing of contracts with Chevron for the development of the Tengiz field, establishment of the international consortia CPC (Caspian Pipeline Consortium) and KazakhstanCaspianShelf for geological exploration of Kazakhstan’s area of the Caspian Sea, as well as the protocol with British Gas и Agip on the principles of the production sharing contract within the development of the Karachaganak field can be admittedly attributed to flagship projects.
These were large and successful projects for the oil and gas industry, thanks to which the Kazakhstan budget has a good balance today. The government has signed many other subsoil use contracts with foreign companies, which are also being successfully developed.
All the above-mentioned projects allowed Kazakhstan to become distinctive in the world oil community and demonstrate its interest in attracting new investments and availability of appropriate conditions for this.
- Can you tell that the aims set at that time were reached or anything was not fulfilled?
I am pleased to note that the objectives set before the Ministry in the first years of Kazakhstan’s independence to develop hydrocarbon deposits with the involvement of foreign investment were fully implemented; these projects are successfully operating today. Thanks to investments, we have been able to increase oil production since 1995 as compared to 1990. The launch of the Tengiz — Novorossiysk oil pipeline construction made it possible to solve the issue of export of Kazakhstan’s oil to foreign markets, which certainly affected the volume of oil production in Kazakhstan. The successful international consortium for exploration of Kazakhstan’s area of the Caspian Sea opened the way to prepare for the signing of the contract for the development of the Kashagan field.
What plans were left behind? To advance the date of signing of the contracts for the development of the Karachaganak (signed in 1997) and Kashagan (in 1997) fields, for the construction of the CPC oil pipeline (the construction started in 1999). There was a desire to speed up the signing of the contracts for these projects, but their negotiation process was so difficult that we failed to do it.
- Such major projects as Tengiz and Karachaganak could be implemented only thanks to international cooperation. How difficult was it to attract the first major investors to Kazakhstan?
As for the history of the Tengiz field, the contract signed between the Kazakhstan Government and Chevron for the development of the Tengiz field is truly called the “contract of the century”. Tengiz is known to be one of the world’s largest fields; it is very attractive in terms of its large recoverable oil reserves and is quite difficult to develop. As you know, this field was discovered by Kazakhstan geologists in 1979. This field was developed by the Tengizneftegaz Association subordinated to the USSR’s ministry. They financed the construction as well as attracted Russian and foreign contractors to the design and construction of KTL production lines and well drilling. In 1991, the first oil from this field was sent via the pipeline to Samara. Almost by the time the contract with Chevron was signed, about 3 million tons of oil had already been produced at the field.
After the demise of the Soviet Union and passing of the field into the ownership of Kazakhstan, we were left without any funding from the USSR’s ministry. Therefore, the development of this field slowed down. The country’s President, Mr. Nazarbayev, understood perfectly well that we would hardly implement this project without a real investor. Prior to the demise of the USSR, Chevron Corporation had been negotiating with the USSR Government on signing of a contract for the Tengiz field development. With Kazakhstan’s gaining independence, Chevron furthered the negotiation process with the Government of the independent Kazakhstan, that is, made a risky step “into the unknown”.
Chevron came to Kazakhstan almost only because of Mr. Nazarbayev. They believed in him. As early as during the Soviet era, our President met with the leadership of Chevron Corporation, both during the talks in Moscow and during his visit to the US. Since 1989, K. Abdullayev, then Deputy Prime Minister, and I (since 1991) have headed the working negotiating group to prepare the “contract of the century” for signing.
The negotiation process, especially on such a field as Tengiz, was very challenging. For almost five years, Kazakhstan negotiated with Chevron Corporation on this contract. As for some concessions for Kazakhstan’s part, in practice it was Chevron that made concessions to us from the original draft contract elaborated during the Soviet era. Kazakhstan significantly reduced the contract area and cut the number of facilities that Chevron wanted to include into the joint venture assets. Before we came up with the Agreement on the Joint Venture Cooperation Principles, there were many other, purely financial issues, regarding the model of investments return, taxation, etc.
Despite the fact that the basic contract principles were laid down in the abovementioned Agreement, it took us almost 11 months of active negotiation process to submit the contract for signing. As you know, the contract was signed on April 6, 1993.
As for the Karachaganak field, the negotiations with British Gas and Agip were also difficult due to reasons related to the technologies of field development, economic indicators and the issues of oil and gas transportation to the external market. In 1992, the Protocol of Intent for the Karachaganak field development was signed; it was not until 1997 that the Kazakhstan Government concluded the FPSA (Final Product Sharing Agreement) with Agip, British Gas as well as Chevron and Lukoil, which received a share in the Karachaganak project in 1997.
As for the challenging attraction of investors to the development of oil and gas fields, the difficulties arose in the process of the specific negotiations. As for companies willing to negotiate, there were no problems. They were interested in the deposits offered by us. For example, more than 20 well-known oil companies took part in negotiations with us in London during the establishment of the consortium for geological exploration of the Caspian Sea shelf with the subsequent development of the Kashagan field. It was up to us to choose companies that were experienced in developing offshore fields and, of course, enjoyed investment opportunities. Therefore, we had to carefully study the companies that were supposed to be engaged.
- How would you assess the current situation within the industry? Would you like to advise anything to next-generation managers?
Currently, the oil industry faces no less complex tasks in terms of control over compliance with contractual conditions for the field development with the participation of foreign investors, compliance with environmental requirements, production safety, as well as enhancement of local content in projects. Some fields already experience falling production of hydrocarbons; with their watercut increasing, technologies and equipment will be required to maintain the production level. This is not an easy task, and these problems require constant attention from management companies and state agencies. Moreover, geological exploration should be intensified, thereby ensuring an increase in our hydrocarbon reserves.
- And finally, an unofficial question: do you have any hobby? What are you currently into?
Currently, I continue to work in my consulting company Investment Consulting LLP, which will celebrate its 20th anniversary in 2020. Work takes up most of my time. My hobbies are cars and reading books, mostly about the outstanding people in politics and economics.
In conclusion, I would like to congratulate the workers and veterans of the oil and gas industry on their professional holiday and the 120th anniversary of Kazakhstan’s first day of oil production. I wish you all good health and further success.