Special Energy Issue on |December 2018

GENERAL ...... 2 OIL & GAS PRODUCTION ...... 3 OIL & GAS EXPORT & TRANSPORTATION ...... 6 PROCESSING & ENERGY ...... 7 CONTACTS...... 8 EXHIBITIONS IN KAZAKHSTAN ( Oil & Gas 2019) ...... 9

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, December 2018 Embassy of the Kingdom of the Netherlands GENERAL Kazakhstan to remain loyal to OPEC+ deal: minister Kazakhstan will continue fulfilling its obligations to OPEC in regards to the oil production level cuts, said Minister of Energy Kanat Bozumbayev at a briefing in Astana. Bozumbayev reminded of the OPEC and non-OPEC ministerial meeting held December 7 for discussing oil production cuts. He said the OPEC and non-OPEC countries are supposed to cut daily output in 2019 up to 1,2mn barrels. "Meanwhile, OPEC countries will cut oil production by 800,000bpd and non-OPEC states - by 400,000bpd," he added. He emphasized that Kazakhstan will strictly commit to its obligations in 2019, i.e. the country will cut its oil production by 40,000bpd. "We expect that oil production in March, April and May 2019 will be much lower than the indicators set which can be explained by some factors such as shutdown of the country's largest deposits - Tengiz, Karachaganak and Kashagan - for overhaul. We also expect output decline at mature deposits of Kyzylorda and Aktobe regions. For this reason, we hope that we will fulfill our obligations to the OPEC," said Bozumbayev, as reported by Kazinform.

Kazakhstan oil output to hit record in 2018, says Energy Minister In 2018, Kazakhstan will produce 90.3 million tons of crude oil, Kazakh Minister of Energy Kanat Bozumbayev told a briefing at the Central Communications Service, summing up the work done in the outgoing year, Kazinform correspondent reports. "This year Kazakhstan will hit record by producing 90.3 million tons, which is 104.7 percent higher than in 2017," said Kanat Bozumbayev. In 2017, crude oil output amounted to 86.2 million tons. "Oil production within three major projects will be equal to 53.9 million tons, including 13.2 million tons (120 pct of the 2018 target) at the , 28.6 million tons (103.3 pct of the 2018 target) at Tengiz, and 12.1 million tons (100.8 pct of the 2018 target) at Karachaganak," said Kanat Bozumbayev. According to the head of the Ministry of Energy, oil exports will reach 71.5 million tons, or 102.4 percent higher in contrast to 2017. Crude oil refined in 2018 will amount to 16.1 million tons, increasing by 8 percent over the previous year, according to KazInform.

Company extracting a third of Kazakh oil is headed by a woman for the first time Imer Bonner was appointed the new CEO of the TCO after the previous head of Tengizchevroil Ted Atchison retired. "Indeed, it is a fact that only men have always occupied this post. But I do not expect any difficulties related to gender. All five years of work in Kazakhstan, both company executives and people in the government treated me with a very high level of respect, only my experience and the way I do my work was important," the CEO said. TCO produces about a third of Kazakhstan’s oil at one of the world's largest deposits, Tengiz. For three quarters of the current year, the company produced 21.5 million tonnes of oil, Kazakhstan produced 67.3 million tonnes as a whole. Last year, its share was 34%, and the amount of taxes paid and other obligatory payments exceeded 1 trillion tenge. The company is the largest taxpayer in Kazakhstan. In 9 months, goods and services of local suppliers were purchased for $2.5 billion. Prior to her current appointment, Imer Bonner worked for three years as the General Manager of TCO for Production, and in 2012–2013 she held the position of Deputy Managing Director of the Eurasian Division of in Almaty. TCO's General Director earned a bachelor's degree in chemical engineering at the University of Queens in Belfast and two master's degrees at Imperial College in London with the specialties of chemical industry technology and oil and gas production. Prior to arriving in Kazakhstan, she held technical and management positions at Chevron Corporation offices in the UK, USA and Thailand. Tengizchevroil was established in 1993 as a joint venture of the government of Kazakhstan and Chevron Corporation on a parity basis. Now Chevron owns 50% of TCO, ExxonMobil - 25%, KazMunayGaz - 20%, Russian LukArko - 5%, according to Forbes Kazakhstan.

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SPECIAL ENERGY ISSUE, December 2018 Embassy of the Kingdom of the Netherlands OIL & GAS PRODUCTION Kazakhstan names most profitable state-owned companies According to the results of 9 months of 2018 among state-owned companies of Kazakhstan, KMG received the largest amount of profit at the amount of 648.2 billion tenge or 1.7 billion US dollar, which is 43% more than in 2017. The net profit of KazTransGas gas transmission company increased by 135% to 156.2 billion tenge or 415 million US dollar. Kazatomprom nuclear company increased its profit by 67% to 92.9 billion tenge or 247 million US dollar. The Kazakh Telecom telecommunications company posted a profit of 40.4 billion tenge (107 million US dollar) and Tau-Ken Samruk mining company with 39.1 billion tenge (104 million US dollar) also entered the TOP 5 in terms of net profit. A significant amount of KMG profits is associated with an increase of world oil prices. Revenue for the first 9 months of 2018 amounted to 5.2 trillion tenge (15.5 billion US dollar), which is 62% higher than the same period in 2017. The production of oil and gas condensate of KMG for 9 months of 2018 amounted to 17.6 million tonnes of oil, which is only 1% higher than the figure for the same period in 2017. KazMunaiGaz is a Kazakhstani operator for the exploration, production, processing and transportation of hydrocarbons, representing the interests of the state in the oil and gas industry of Kazakhstan. Founded in 2002, KMG has more than 190 subsidiaries. The founder of KMG is the government of Kazakhstan represented by the State Property and Privatisation Committee of the Ministry of Finance of Kazakhstan. The shareholders of KMG are Samruk-Kazyna National Welfare Fund (90%) and the National Bank of Kazakhstan (10% + 1 share). Kazakhstan ranks 12th in the world in proven reserves of oil and gas condensate, 22nd in terms of reserves and 17th in terms of oil and gas production. KMG produces 28% of the total oil and gas condensate production in Kazakhstan and 16% of natural and associated gas, provides 65% of oil transportation by trunk pipelines, 77% of oil transportation by tankers from Aktau port, and 95% of transportation gas through trunk pipelines, processes 82% of Kazakhstan’s oil, with a 17% share of the retail market for oil products. The company is among the largest employers in Kazakhstan with a staff of more than 89 thousand people, as reported by Neftegaz (Russia).

Kazakhstan to reduce oil production by 30-40 thousand barrels per day Kazakhstan will reduce oil production under the OPEC + agreement by 30-40 thousand barrels per day, the Minister of Energy of Kazakhstan, Kanat Bozumbayev, said. According to the minister, the extension of the OPEC + agreement to reduce oil production is possible if the market for oil does not come to a balance. "This agreement is for 6 months. Its extension is possible if the market is not balanced. If it is balanced, there will be no sense," he added. On December 7, the parties to the OPEC + agreement (all OPEC member countries and 11 independent states, including Kazakhstan) agreed to extend the deal for 2019. According to its conditions, the overall level of oil production will be reduced by 1.2 million barrels per day, according to RIA News.

Oilfield services in Kazakhstan: modernise or perish Oilfield services is a sphere without which the existence of the oil and gas industry, which is key for the , is impossible. Oilfield service companies conduct geological exploration, design, drill, build roads and shift camps, lay pipes, repair equipment and supply oilmen with everything they need. In other words, full-fledged work of the oil and gas sector is possible only with the active participation of oilfield service companies. The annual turnover in the oil service industry of Kazakhstan is steadily growing. If in 2015 it amounted to 1.3 trillion, then in 2016 this amount exceeded 2 trillion, and by the end of 2017, the turnover of the oilfield services industry amounted to more than 2.3 trillion tenge. The share of

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Kazakhstani companies in it is 52%, that is, about 7 billion dollar a year. It would seem that the numbers are impressive, but if you dig deeper, the picture doesn't seem so joyful. One of the leading experts in the oil and gas industry of the country, the chief researcher of the Institute of Economics of the Scientific Committee of the MES, doctor of economic sciences Oleg Yegorov, told the real problems that exist today in the oilfield services market in Kazakhstan. - Oleg Ivanovich, how efficiently are Kazakhstan service companies operating in the oil and gas industry of Kazakhstan? - Their effectiveness can be illustrated with examples of the development of the Kashagan oil and gas field and the construction of a gas chemical complex in the village of Karabatan in region. The Kashagan field, 80 km south-west of Atyrau, is one of the largest oil and gas fields in Kazakhstan. Occupying a territory of more than 3,300 square km, it has geological reserves in the amount of 38 billion barrels, of which 13 billion belong to the category of recoverable in the case of the use of technology of gas re-injection. Therefore, the field belongs to the category of particularly complex structures, productive horizons of which occur at a depth of 4000-4500 metres and are under the influence of abnormally high pressure and temperature. The Kashagan field development project, being one of the largest and most complex in the world, provides for the interconnected management of both marine and land operations. In September 2013, hydrocarbon leaks were detected in the pipeline system along which oil and associated gas flowed, which led to the postponement of the date for putting the field into commercial development until 2016. There have been several serious accidents. In the process of transporting an exceptionally aggressive product to a distance of 80 km along the bottom of the , the metal, due to various reasons (mainly due to the high content of hydrogen sulphide and other sulphur compounds), could not withstand the negative impact of the pumped hydrocarbon feedstock. The re-commissioning of the field took place only in 2016, after more than 100 km of pipes of the sea and land parts of the pipeline were replaced, and in 2017 more than 8 million tonnes of oil were extracted. I would like to emphasise that the budget of the project, which amounted to 1,415 billion dollar, initially rose to 57 billion at the first stage of development, and then to 136 billion dollar in 2007. This significant increase in the cost of the project was explained by the need to strengthen environmental protection measures and protect personnel from exposure to hydrogen sulphide, the concentration of which in the associated gas is very high. A natural question arises: why the project for the development of the field did not provide for the necessary measures to solve this problem, especially since the aggressive properties of the oil and gas mixture were known from the very beginning? As a result, service companies made serious mistakes when purchasing pipes for laying oil and gas pipelines across the bottom of the Caspian Sea and on land. Moreover, there are positive examples, such as the , which has been operating for 25 years, and the , that has been operating since 1986. The quality of the oil produced there corresponds to the quality of the raw materials produced at Kashagan. So, these deposits have been operating without fail for dozens of years, and there have never been any misunderstandings with pipes, while at Kashagan they just start the field and the pipes start to tear. Then, more than 200 leaks were found. As a result, billions of dollar were lost. Can you imagine what it means when hydrogen sulphide comes out of the pipe, especially into the sea? This is a terrible situation, with dire consequences for the environment. For example, at Kashagan, where the pipeline runs along the seabed from island to shore, there is a place of sturgeon spawning and feeding grounds. The specialists immediately had questions where these pipes came from. After all, there were precedents for other fields, when the pipes, which had already served their useful lifetime, were dug, cleaned up and sold. - What niche in the oilfield services market are Kazakhstani companies occupying today? - When it is a question of advanced technologies, when works require large investments, foreign companies, unfortunately, are out of competition. It includes design, engineering, geodesy and geophysical services, laying of pipelines. The Kazakh share there is minimal and does not exceed 10-15%. In the complex and high-tech work, such as deep-sea and horizontal drilling, design and construction of drilling platforms, our companies are practically not represented at all due to the lack of competitiveness of Kazakhstan service companies because of lack of necessary personnel, 4

SPECIAL ENERGY ISSUE, December 2018 Embassy of the Kingdom of the Netherlands

skills and experience. Giants such as Halliburton, Schlumberger, and others dominate here. Local companies make up the majority only in construction and installation works, in this segment they take up to 80%. The share of Kazakhstanis in the drilling works is also large, it exceeds 60%. - What other problems would you highlight? - The third main problem, after lack of personnel and proper control is that foreign oilfield service companies coming to Kazakhstan with their equipment and technologies, do not hurry to share them. As a result, this aggravates our technological dependence on foreign companies. I think no one will argue that competitive oilfield services is a source of innovation in the oil and gas sector. Given the role that the oil and gas complex plays in the economy of Kazakhstan, oilfield services could be one of the drivers for the country's innovative development. At least, I see here a great potential for the domestic economy. But it is necessary to increase the competitiveness of domestic oilfield service companies by improving the quality and technological level of the services provided. Accordingly, you need to have qualified personnel at all levels and modern equipment. Hence, the task is to focus on systemic technological development, investing in it considerable funds derived from profits. I think it's time to do it, if we don’t want domestic companies to remain on the sidelines forever, reported by Komsomolskaya Pravda in Kazakhstan.

Kazakhstan to start to develop the Kalamkas-Sea field in the Caspian Sea The Ministry of Energy of Kazakhstan, the Plenipotentiary Body (PSA), and the companies participating in the Northern Caspian Production Sharing Agreement (NCPSA) as shareholders, signed an agreement on the provision of the Development Plan for the Kalamkas-Sea field located in the NCPSA license area. The agreement provides for the companies to submit the Development Plan for approval by the Steering Committee on the NCPSA until the fourth quarter of 2019. The signing of the Agreement opens up new opportunities for increasing investments in the development of offshore fields in the Kazakhstan sector of the Caspian Sea. As previously announced by the Operator (NCOC), preliminary design work continues according to the chosen concept, i.e. joint development of the Kalamkas-Sea field and the nearby Khazar field (PSA for the Zhemchuzhina block). The geological reserves of the Kalamkas-Sea field are confined to the Middle Jurassic deposits and amount to 149.5 million tonnes of oil, 15.4 billion cubic metres of dissolved gas and 15.36 billion cubic metres of dry gas. Companies that are shareholders in the NCPSA are Agip Caspian Sea BV (16.81%), CNPC Kazakhstan BV (8.33%), ExxonMobil Kazakhstan Inc. (16.81%) , North Caspian Sea Ltd (7.563%), KMG Kashagan BV (16.88%), Shell Kazakhstan Development BV (16.81%) and Total E&P Kazakhstan (16.81%). The North Caspian project is operated by North Caspian Operating Company, according to Komsomolskaya Pravda Kazakhstan.

Reach Energy reports oil find in Kazakhstan Reach Energy Berhad said Dec. 3 that its exploration well, North Kariman-3 located in the North Kariman Field in the onshore Emir Oil Concession Block in Kazakhstan, has yielded positive results during the initial testing phase. NK-3 which was spudded in early February 2018, is the first of six wells committed under the current exploration contract with the Ministry of Energy, Kazakhstan. The well penetrated the Mid-Triassic carbonate reservoirs, with a total true vertical depth subsea of 4,140.66 meters. Moving forward, the company is now proceeding to apply for a test production license to further ascertain the commercial viability of this well. Two shallower intervals will be perforated in the future once the test production of the aforementioned interval is completed. The company expects an increase in value of the well in terms of commerciality and contribution to overall reserves and production if the well yields positive results. “We are happy to announce another discovery after Yessen-3. This development further highlights the vast exploration upsides that the Emir-Oil Concession Block has. Not only that, we have also discovered that reservoir pressure from the NK-3 well was determined to be relatively high as 5

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compared to surrounding wells. This suggests that NK-3 would be a highly productive well once we commence production,” Ir. Shahul Hamid bin Mohd Ismail, CEO of Reach Energy Berhad, said. Currently, Emir-Oil’s 2P reserves stands at 81 million barrels of oil equivalent which is subject to an update early next year by its reserves auditor, Gaffney, Cline and Associates, as reported by E&P.

Chevron announces $20bn Capex budget for 2019 Chevron announced plans for capital expenditures for 2019 in the amount of $20bn, of which $17.3bn will be sent to Upstream, $2.5bn to Downstream and the remaining $200mn to other projects. In the Upstream business, approximately $10.4bn is forecasted to sustain and grow currently producing assets, including $3.6bn for the and $1.6bn for other shale and tight investments. Approximately $5.1bn of the upstream program is planned for major capital projects underway, including $4.3bn associated with the Future Growth Project at the Tengiz field. Global exploration funding is expected to be about $1.3 billion. Remaining upstream spend will be for early stage projects supporting potential future developments. Total capital investments in 2017 amounted to more than $18.8bn (-16% yoy), gradually decreasing from $71bn in 2014. For 9M2018 capital expenditures amounted to $14.3bn (+ 7% yoy), meeting our annual forecast of $17bn and justifying Chevron plans. Thus, in the budget for 2018, the company adhered to a $18.3bn capital expenditure plan, of which it was expected to send about $15.8bn to the Upstream segment. It should be noted that the budget for the Tengiz project in 2018 was $ 3.7bn. Overall, Chevron has previously pursued a more restrained strategy for Capex in the event that oil prices remain low in the future. Capex plans for 2019 slightly exceed our expectations. We expected capital expenditures for 2018-2025. in the range of $16-18bn per year. Concerning this, we put our recommendation on Chevron shares under review, according to Halyk Finance (Kazakhstan).

Kazakhstan ratifies agreement to continue research on the Kurmangazy project together with Russia The ratification and subsequent entry into force of the additional protocol on the Kurmangazy (Kulalinskaya) structure provide for an increase in the contract area provided for by the production sharing agreement of July 6, 2005. The head of state signed the law on ratification of the additional protocol to the protocol to the agreement between Kazakhstan and Russia on delimitation of the bottom of the northern part of the Caspian Sea in order to exercise sovereign mineral rights from July 6, 1998, the presidential press service reported on Tuesday. As reported, the ratification and subsequent entry into force of the additional protocol on the Kurmangazy (Kulalinskaya) structure provide for an increase in the contract territory provided for by the production sharing agreement of July 6, 2005; providing the joint venture with an additional period of exploration for a period of 6 years in the entire contract area with the possibility of subsequent extension for 4 years, according to ABC TV (Kazakhstan).

OIL & GAS EXPORT & TRANSPORTATION Import of Kazakh oil to South Korea increases by 50% In the outgoing year, Kazakhstan became the main trading partner of South Korea in Central Asia, the Korean Trade and Investment Promotion Agency reported. According to the Agency, in 11 months of this year, the volume of Korean exports to Kazakhstan amounted to 7,300,000 dollar. These are mainly cars, auto parts and equipment. From Kazakhstan to Korea goods for 1 billion 270 million dollar were imported. The main imports are oil and minerals. Thus, in the past year, the volume of trade approached two billion dollar, which is a record figure in the entire history of bilateral relations. Experts attribute this to higher oil prices and with the introduction of sanctions by the United States against Iran, which was the main supplier of oil to Korea.

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Pak Ji Won, an expert at the Korean Trade and Investment Promotion Agency: “The increase in trade turnover between Kazakhstan and Korea is associated with an increase in the cost of oil and the start of production at the Kashagan field. Compared to 2017, oil imports from Kazakhstan increased by 50%. The largest and most significant bilateral project in 2018 was the construction of BAKAD. I think if tenders for similar projects are held in Kazakhstan, many Korean companies will want to take part in them.” As reported by 24.kz.

PROCESSING & ENERGY First batch of locally produced metal structures delivered to KPO The Karachaganak Operating company announced the delivery of the first batch of Kazakhstan-made metal structures to the Karachaganak field. They are made in Kazakhstan at the Karasai Machine-Building Plant of PSI, specifically for the project to remove gas production restrictions. Karasai Machine-Building Plant was built and equipped according to international standards, which ensures high quality of products manufactured, including for international projects in the oil and gas industry. The tender for the supply of steel to KPO was held in the summer, the first contract provides for the manufacture of over 2 thousand tonnes of structures. Arman Umbetov, the General Director of the Karasai Machine-Building Plant: “The first large order of the plant was a contract with KPO for the supply of 2,000 tonnes of metal structures for the project of removing gas production restrictions for the Karachaganak refining complex. This order allowed KPO to load the plant for a full year.” It is symbolic that the first batch of metal structures was shipped on December 11, 2018, on the Industrialisation Day, exactly one year after the plant was opened by the President of the country during a national teleconference. For the first time, KPO uses rail transport for delivery, which allows KPO to dramatically reduce the risk of accidents in the organisation of transportation from the manufacturer. Marco Lombardi, KPO project manager for the removal of gas production restrictions: “Today we see the real result of the work of domestic machine builders, whom KPO has entrusted the manufacture of high-quality steel at a modern plant in the Almaty region. Transportation of steel structures will be carried out by rail.” The first delivery of local-made metal structures to Karachaganak is an incentive for domestic companies to develop and produce new goods and services. KPO Company intends to continue to attract domestic producers in the implementation of their projects, as reported by 24.kz.

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SPECIAL ENERGY ISSUE, December 2018 Embassy of the Kingdom of the Netherlands

EXHIBITIONS IN KAZAKHSTAN ( Oil & Gas 2019)

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