Special Energy Issue on |January 2019

Contents GENERAL ...... 2 OIL & GAS PRODUCTION ...... 2 OIL & GAS EXPORT & TRANSPORTATION ...... 3 PROCESSING & ENERGY ...... 5 CONTACTS...... 6 EXHIBITIONS IN KAZAKHSTAN ( Oil & Gas 2019) ...... 7

The Economic Section of the Embassy of the Kingdom of the Netherlands in Kazakhstan intends to distribute this newsletter as widely as possible among Dutch institutions, companies and persons from the Netherlands. The newsletter summarises economic news from various Kazakhstani and foreign publications and aims to provide accurate information. However, the Embassy cannot be held responsible for any mistakes or omissions in the bulletin.

SPECIAL ENERGY ISSUE, January 2019 Embassy of the Kingdom of the Netherlands

GENERAL ADB grant to support increased cross-border energy trading in Central Asia The Asian Development Bank (ADB) has approved a $4.5 million cluster regional technical assistance grant to support an increase in regional power trade in Central Asia Power System (CAPS) and explore potential reconnection of Turkmenistan to CAPS and its further expansion to Afghanistan. “With increased regional power trade, countries will be able to meet local demand for power and supply surpluses to their neighbors,” said Director of Energy Division at ADB’s Central and West Asia Department Mr. Ashok Bhargava. He further added that this will improve regional energy security and reduce carbon footprints of meeting the regional power demand. The technical assistance cost is $4.5 million, $1.5 million of which will be financed by ADB on a grant basis; $1 million by the Regional Cooperation and Integration Fund; $1 million by the Asian Clean Energy Fund; and $1 million by the High-Level Technology Fund. The governments will provide counterpart support in the form of staff, office space, and supplies and other in-kind contributions. ADB has committed $7.1 billion in loans and $85.9 million in technical assistance grants to Uzbekistan since it joined the bank in 1995. In 2018, ADB committed four loans totaling $993 million to improve power generation efficiency, improve primary healthcare services, support horticulture-related farmers and businesses for fixed asset investments, and support ongoing reforms through better economic management in the country, as posted by Uzreport.

OIL & GAS PRODUCTION Oil extraction up 6.3% in Kazakhstan in 2018 Oil output in 2018 in Kazakhstan made 77,491mn tonnes i.e. 6.3% higher against 2017, Kazinform correspondent reports. As the Statistics Committee of the National Economy Ministry informed, gas condensate volume in the reporting period made 12,863mn tonnes (-3.1%). The volume of the was 55,486bn cubic meters (+4.8%) and - 117,789mn tonnes (+4.9%). Iron ore mining rose to 41,721mn tonnes (7.7%), copper ore volume made 103,173mn tonnes (+8.6%). Gold ore and chromium concentrate production reached 20,831mn tonnes (+2.9%) and 4,949mn tonnes (+7.6%), respectively, according to KazInform.

Kazakhstan doubles number of subsoil exploration permits The Kazakh Ministry of Industry and Infrastructural Development has issued 26 licenses for geological exploration since mid-September in accordance with the new Code for Natural Resources and Subsoil Use. The number of accepted applications increased two-fold. According to the code introduced in December 2017, applications are reviewed within 10 working days. Each application and its results are published on the ministry website. “Taking into account the new legislation in the sphere of subsoil use, which was implemented recently, 26 issued licenses in four months is a good result, given that during the same period, under the old legislation, no more than 10-15 contracts were concluded. Previously, 18 months were required to conclude a contract for exploration and now, an exploration license is issued within 10 working days,” said the ministry’s subsoil use department, as reported by abctv.kz. Since Sept. 15, 155 applications have been submitted for licenses to explore solid minerals; 26 were approved, 119 refused and 10 are under consideration. Applications prevail for land blocks in the eastern, central and northern parts of the country. The department is currently working on expanding the exploration territories. “The programme of management of the state subsoil fund (PMSSF) determines the territory for issuing a license for exploration of solid minerals according to the first come, first served principle. The competent institution made changes to the programme twice to expand the territory for exploration of solid minerals. Currently, more than 100,000 blocks are exposed,” said the department. Most applicants are denied because they indicate blocks not included in the PMSSF, said the 2

SPECIAL ENERGY ISSUE, January 2019 Embassy of the Kingdom of the Netherlands

department. In addition, many do not comply with the requirements of the Code for Natural Resources and Subsoil Use, in particular, as far as the applicant’s financial and professional capabilities are concerned. Other applications are not in Kazakh or Russian, which is also a requirement for acceptance. The department is working on clarifying the code and programme to reduce the number of rejections. A presentation on the ministry website explains the requirements to obtain a license, including a Committee of Geology and Subsoil Use interactive map to illustrate the exploration territories. The website also has by-laws and sample statements. Beginning this month, the department is organising meetings with investors to explain code requirements, according to the Astana Times.

Kashagan to remain dry for 1.5 month Oil production at the Kashagan oil and gas field will completely stop for 45 days. This was announced by the North Caspian Operating Company (NCOC). In accordance with regulatory requirements, in 2019 NCOC plans to overhaul the Bolashak onshore complex and the offshore complex D of the on the shelf of the . It will include the scheduled preventive maintenance of process equipment on Island D and the Bolashak oil treatment installation at full production shutdown. The planned stop time is 45 days. The work will be carried out with the involvement of a significant number of contractor personnel. For the period of overhaul, all equipment will be stopped and the production of oil, gas and sulphur will stop completely. The oil extracted until the shutdown will be fully exported, it will not be stored. Mining on Kashagan has recently stabilised. In 2018, the NCOC, which develops Kashagan, produced 13.2 million tonnes of oil. In early February 2018 it was planned that production at Kashagan will be only 10 million tonnes. In 2017, 8.35 million tonnes of oil was produced at Kashagan. Thus, in 2018, mining increased by 58%. Kashagan is the largest field in Kazakhstan, which brought quite a lot of problems. Large reserves and huge investments do not allow Kazakhstan to abandon its development, but at the same time, periodic failures and technical problems for a long time did not allow to bring production to the design level. Geological reserves of Kashagan are estimated at 4.8 billion tonnes of oil. Total oil reserves amount to 38 billion barrels, of which about 10 billion barrels are recoverable, natural gas reserves amount to more than 1 trillion cubic metres. NCOC has not been disclosing investment data for project development for a long time. According to official data, by the time the industrial production began, over 50 billion US dollar had been invested in the project. However, according to expert estimates for 2018, the amount can reach $116 billion. The Ministry of Energy of Kazakhstan planned to increase production at the Kashagan field in 2024 to 16 million tonnes from 8.3 million tonnes in 2017. The total production is planned to increase to 104 million tonnes by 2025, as reported by Neftegaz (Russia).

OIL & GAS EXPORT & TRANSPORTATION Karachaganak Operating extends maintenance contract for Karachaganak – oil pipeline with KazTransOil KazTransOil (KTO) and Karachaganak Petroleum Operating (KPO), which is developing the Karachaganak field, signed a new contract for the provision of services for the operation and maintenance of the Karachaganak-Atyrau oil pipeline in the amount of 6.682 billion tenge, the press service of KazTransOil reported.

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SPECIAL ENERGY ISSUE, January 2019 Embassy of the Kingdom of the Netherlands

"The budget of the contract is for a period of three years with a possible extension of two periods of 12 months each. The contract is calculated using the inflation rate for 2019-2021 years and taking into account the annual increase in the payroll of staff, the rates for the vehicles provided," the message said. KazTransOil has been providing services to Karachaganak Petroleum Operating for 16 years in the operation and maintenance of the Karachaganak-Atyrau oil pipeline. The budget of the previous five-year contract from 2013 to 2018 amounted to 6.679 billion tenge, the press service clarified. The Karachaganak - Atyrau pipeline was commissioned in 2003 and is used to transport hydrocarbon raw materials from the Karachaganak field to the terminal in Atyrau, followed by transhipment into the system of main oil pipelines of the Caspian Pipeline Consortium for export. KazTransOil is a subject of a natural monopoly in the market for oil pipeline transportation services, included in the KazMunayGas National Company. Karachaganak field is one of the largest in the world. The reserves are 1.2 billion tonnes of oil, 1.35 trillion cubic metres of gas. The development of Karachaganak, according to the FPSA, signed in 1997 and designed for 40 years, is carried out by a consortium of foreign companies represented by Shell (29.25%) (through 100% affiliated company BG Karachaganak Limited), (29.25%), Chevron (18%), (13.5%) and the KazMunaiGas National Company (10%), as reported by ABC TV (Kazakhstan).

Transit discord dominates the oil and gas space of the EAEU/CIS Kazakhstan introduced new tariffs for the transit of Russian oil to China. There is a tendency to rise in price in this area, which may be related to the plans of Astana to increase the supply of its own oil to China. In this regard, the competition between Kazakhstan and Russia for the Chinese black gold market grows. Moreover, China remains the largest importer of the latter. However, in the near abroad, oil transit prices are also rising for political purposes. But in general, there is still no unified system for introducing and adjusting tariffs for the transit of gas, oil and petroleum products either in the EAEU or in the ex-USSR. For the period 2000-2018 the share of transit through the ex-USSR republics in exports of Russian oil decreased by about a third, to 40%. But geographical factors contribute to the preservation of Russian oil transit. First of all, this is the configuration of the network of oil, oil product pipelines and their bundles with ports and foreign pipelines, formed back in the 1970s and mid-1980s. Although in the 2000s port-pipeline capacities were put into operation in the Russian territory (Baltic Pipeline System - BTS-1 and -2; in the Tuapse-Novorossiysk region; in Primorye and the Khabarovsk Territory), they will not be able to take over most of the remaining oil transit for geographical reasons. Thus, the government of Kazakhstan has recently approved a relatively high tariff for Russian oil transit to China. For 2019-2023 it will be $15 per tonne excluding VAT. In 2015-2017, the average tariff was about $12.5 per tonne excluding VAT. Characteristically, from January 1, 2018, the tariffs for oil transportation through Kazakhstan to China through the Russian part of this pipe, Priirtyshk - Atasu, were reduced by 16.7%, while Astana, from April 1 of the same year, increased its tariff in the same direction, Atasu - Alashankou, 2.5 times. A similar trend is also evident in the transit of Russian oil through Kazakhstan to Uzbekistan. In September 2017, Moscow and Tashkent tentatively agreed on oil supplies from Russia in the amount of 3-5 million tonnes per year for the period up to 2023 inclusive via the Omsk pipeline route (RF) - Pavlodar - Shymkent (Kazakhstan) - Shagyr (border with Uzbekistan). The final volumes are updated at the boundaries of the past/next years. KazTransOil set the cost of transit of Russian oil through the territory of Kazakhstan to Uzbekistan until December 31, 2017, inclusive, at about $23 per tonne excluding VAT. But in January 2018, the tariff was raised to almost $26. It is possible that tariff growth on this route will continue, if only because Kazakhstan has long been interested in increasing its oil supplies to Uzbekistan, which can be facilitated by the rise in prices for Russian oil transit. The same processes are usual for oil transit through Belarus, which is also due to the fact that the Belarusian side has been increasingly connecting this issue to the prices of Russian gas for the Belarusian side and/or to the volumes of duty-free Russian oil supplies. Moreover, in an indirect form, Minsk often adjusts these tariffs in favour of pumping Russian oil through Belarus to the 4

SPECIAL ENERGY ISSUE, January 2019 Embassy of the Kingdom of the Netherlands

ports of Latvia and Lithuania. Even if rates in these areas increase, it is minimal. Although Russia has already reduced the transit of oil and oil products through the Baltic countries to a minimum. The same thing happened in 2018, when trans-Belarus oil transit tariffs increased by 6.7% in the direction of Poland, i.e. to the Adamov Zastava transfer point, the transit of black gold has become the most expensive at 307.2 rouble per tonne. While the growth of transit rates in the direction of the ports of Latvia and Lithuania was, as before, the smallest. With regard to the transit of oil through Ukraine, Kiev seems to adhere to political market practices, increasingly alternating the decline in pipeline transit rates with their increase and vice versa. In any case, up to 60-65% of the volume of this transit falls on Russian oil, but these shipments have been falling for the fifth year. According to Ukrtransnafta, the transit of oil through the territory of the country by pipeline transport to Europe in 2018 decreased by more than 4% to about 13.3 million tonnes. Almost half of this reduction was in Russian oil. The political factor is increasingly interfering in the geography and volume of oil transit, as well as in oil transit prices. But it, without exaggeration, has the properties of a boomerang. First of all, because it is impossible to radically and even more so in a short time to change the configuration of pipelines and associated ports. In addition, the oil and gas pipelines of the former USSR have long been connected to the same infrastructure in Asia and especially in European countries, therefore the majority of gas and especially oil export contracts provide for the use of existing pipeline and port corridors. But these factors, in turn, often stimulate neighbours to try to achieve any concessions on the part of Russia. What is even more stimulated by the absence of a single oil and gas transit policy both in the EAEU and in the CIS as a whole, as reported by the Rhythm of Eurasia (Russia).

PROCESSING & ENERGY Kazakhstan's gasoline production increased by nearly 30% in 2018 In January-December 2018, the gasoline production in Kazakhstan reached 3,969.2 thousand tons, increasing by 29.8 percent year on year, Kazinform cites the Statistics Committee of the Kazakh Ministry of National Economy. 388.3 thousand tons of kerosene (a 29.4-percent increase YOY), 2,487.5 thousand tons of liquefied propane and butane (+7.4%), 4,671.7 thousand tons of gas oil (+7.4%), and 2,929 thousand tons of fuel oil (-12.9%) were produced in the period under consideration. Also, the country produced 2,088.1 thousand tons of ferroalloys (+7.9%), 2,547.9 thousand tons of flat-rolled steel products (- 10.5%), 148.5 thousand tons of refined lead (+0.9%), 328.7 thousand tons of zinc (-0.7%), and 438.2 thousand tons of refined copper (+2.8%), as reported by KazInform.

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SPECIAL ENERGY ISSUE, January 2019 Embassy of the Kingdom of the Netherlands

CONTACTS

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SPECIAL ENERGY ISSUE, January 2019 Embassy of the Kingdom of the Netherlands

EXHIBITIONS IN KAZAKHSTAN ( Oil & Gas 2019)

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