Special Energy Issue on Kazakhstan |October 2018

Table of Contents GENERAL ...... 1 OIL & GAS PRODUCTION ...... 7 OIL & GAS EXPORT & TRANSPORTATION ...... 10 PROCESSING & ENERGY ...... 13 CONTACTS...... 14

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, October 2018 Embassy of the Kingdom of the Netherlands GENERAL Minister recommends investing in Kazakhstan's oil and gas New codes regarding the subsoil use and taxes will stimulate investments in the oil and gas industry of Kazakhstan, effectively regulate the level of tax burden on subsoil users and intensify the development of new fields on the Caspian Sea shelf. This was stated by Kazakh Energy Kanat Bozumbayev who talked about the image of Kazakhstan's energy sector in view of current and future changes at the plenary session of the conference within the meeting of the World Petroleum Council. 'In order to be competitive and attractive for investments, we intend to move forward, analyze the practice of developed countries in attracting capital, improve our own legislative base in the field of subsoil use, and offer more favorable conditions to investors. We must ensure the effective use of our competitive advantages, which lie in the geographical location of Kazakhstan in the heart of Eurasia, the high level of education of our specialists, the broad opportunities for the development of high-tech projects, finally, openness and desire to improve, taking into account the rich experience of the leading countries, he said. The Code 'On Subsoil and Subsoil Use and the Code 'On Taxes and Other Mandatory Payments to the Budget will stimulate an increase in investments in the oil and gas industry of Kazakhstan, effectively regulate the level of tax burden on subsoil users, and also intensify the development of new fields on the Caspian Sea shelf, according to Bozumbayev. The Minister noted that after the Code on Subsoil entered into legal force this summer, all existing contracts for subsoil use continue to be valid. At the same time, the Code greatly simplifies the procedure and terms for obtaining the right to subsoil use and the terms for concluding a contract. Subsoil use right is granted by auction (with the exception of the state companies, which have right to direct negotiations). The term of the contract is reduced to 1.5 months (previously it took from 1.5 to 2 years). Meanwhile, in the tax sphere, the commercial discovery bonus has been canceled, an alternative subsoil use tax has been introduced for offshore and deep oil and gas fields. In the field of managing emissions and waste associated with energy, the concept of 'technologically inevitable burning has been introduced. All these innovations are progressive, capable of ensuring the competitiveness of the work of subsoil users in Kazakhstan compared to other countries. 'We are already seeing investors react to these changes. Evidence of this is the initiative of such companies as ENI, Lukoil, which concludes agreements with KazMunaiGaz on exploration on the blocks of the Caspian shelf. There is also activity of other investors who are willing to invest in the exploration of oil and gas fields, the minister concluded. Oil and gas sector is the major and most rapidly growingindustry inKazakhstan which brings the countrya lion's share of its incomes. The importance of Kazakhstan in the global energy security is growing. This is due to the increase in supplies of Kazakhstan's energy resources to the world market. Kazakhstan is among the top 15 countries in the world for proven oil reserves, with three percent of the world's reserves of ‘black gold'. Oil and gas bearing areas occupy 62 percent of the country's area and have 172 oil fields, of which more than 80 are under development. More than 90 percent of the oil reserves are concentrated in the 15 largest fields. Tengiz, Karachaganak and Kashagan are the largest oil fields in Kazakhstan. Three oil giants will be able to bring Kazakhstan's oil production to a new level in the coming years even if new oil fields are not discovered, according to AzerNews.

Caspian consensus opens new perspectives for oil industries, investors Over the years, a single oil venture in the Caspian Sea owned by ExxonMobil and other majors stumbled through so many cost overruns and technical problems it gained an unfortunate nickname: the “Cash-all-gone” field.

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An international consortium financing the field, called Kashagan, has invested more than $50 billion to overcome challenges typical of the Caspian Sea region, such as deep oil that is under tremendous pressure. As the Western majors moved into the new Caspian oil frontier in the 1990s, every step seemed harder than anticipated, even as the region was seen as vital for diversifying global oil supplies away from the Middle East. But a semblance of order finally seems to have arrived along the Caspian. The Convention on the Legal Status of the Caspian Sea, signed on Aug. 12, potentially cleared the way for new pipelines to ease export bottlenecks, a problem that, like high costs, has been hanging over Caspian petroleum ventures for decades. Until the Soviet collapse nearly 30 years ago, the Caspian, the world’s largest inland body of water, was regarded by Iran and the Soviet Union as a lake, with a border neatly dividing their maritime territories. The agreement treats the surface of the Caspian as international water and divides the seabed into territorial zones. Importantly from the point of view of Eurasian energy politics, it allows undersea pipelines. “It is correct to view the recent summit and convention as an unprecedented milestone for the region that has been decades in the making,” Ashley Sherman, principal research analyst for the Caspian and Europe at Wood Mackenzie, a company advising the oil industry, said in a telephone interview. Russia had for most of the post-Soviet period objected to east-west energy trade through new subsea pipelines, hoping to keep in place the north-south trade routes of the Soviet Union’s existing rail and pipeline system. The European Union and the United States, in contrast, support what they call a southern corridor for energy. This strategy seeks to keep open a window in the south Caucasus region, between Russia and Iran, for energy exports. The Bush administration had sought to add military muscle to the strategy by accepting Georgia into NATO. Russia pushed back initially with a commercial strategy to undermine the financial rationale for a southern gas pipeline. Gazprom, the Russian gas monopoly, bought up potential supplies of natural gas in the Caspian region. In this contest, Russia also dragged out talks on the status of the sea and east-west trans-Caspian pipelines for 22 years, the length of time the convention was under negotiation before the signing in August. In an indication of the seriousness of Russia’s intentions, in 2008 this conflict over energy trade routes in the Caspian region became the backdrop to the war in Georgia. Russia and the West have also been in a tug of war over influence in Ukraine, which, like Georgia, is an important transit country for energy. “Russia remains very, very keenly focused on market share in its critical export market today in Europe,” Jonathan Elkind, a fellow at the Center on Global Energy Policy at Columbia University and a former United States assistant secretary of energy, said in a telephone interview. “I do not think the signing of the agreement last month represents any kind of cardinal shift in Russia’s views on that matter.” Russia may have resolved the Caspian’s status, after three decades of objections, not because of continued Western pressure, but rather because of rising trade competition from China’s One Belt, One Road policy, analysts said. Central Asia trade had been diverted not to Russia, but to Iran, with Chinese backing. And some Central Asian energy exports have not gone to Russia, but instead east to China because of difficulties exporting west over the Caspian Sea. Eurasian pipeline politics, not unlike the web of pipes themselves, is an interconnected game. Russia also offered the Caspian agreement as a concession, said Ilya Ponomarev, a former member of the Russian Parliament, to ease acceptance of something the Russians value more: the Nord Stream 2 pipeline to Germany. The United States government said Nord Stream 2 deepens Europe’s dependence on Russian gas. The Caspian agreement, in contrast, could help diversify European energy supplies away from Russia. To explore the new energy possibilities, Angela Merkel, the German chancellor, traveled to Azerbaijan on Aug. 25 to discuss the southern energy corridor, two weeks after the signing. 3

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But Russia has not wholly surrendered its ability to veto future pipeline development. The agreement allows trans-Caspian pipelines. But an agreement signed simultaneously, the Protocol on Cross-border Environmental Impacts, requires that states “consult” on ecological risks. Igor Bratchikov, a Russian foreign ministry special envoy, clarified in an interview with the Kommersant newspaper that the consulting can “go on however long it takes,” hinting at endless talks, a tried Russian strategy in the region and elsewhere. Still, Mr. Sherman of Wood Mackenzie said settling the sea’s status could free up additional Caspian investment, though not on the scale of what has already moved into ventures like Kashagan, which produces about 300,000 barrels of oil per day. ExxonMobil is developing the field with Shell, Total, the Italian company ENI, the China National Petroleum Corporation, KazMunayGas and Inpex. Rebecca Arnold, a spokeswoman for Exxon, declined to comment on the treaty’s significance for the oil business as the rules for dividing up the sea are “matters for governments to address.” Also in the Caspian basin, a Chevron-led consortium is expanding its giant Tengiz oil field in Kazakhstan, at an estimated cost of $37 billion, to increase production by 260,000 barrels per day. Companies have already invested about $40 billion into the southern corridor for natural gas, to ship fuel from the BP-operated Shah Deniz field in Azerbaijan’s territorial water to Italy. “We’re not starting from scratch here,” Mr. Sherman said. The treaty allows Western energy companies, in theory, to push the southern gas corridor farther east, across the sea to tap Turkmenistan’s vast gas reserves and alleviate dependence on Russian gas. Analysts see most of the benefit for oil companies in areas that might be freed from Iranian claims under the treaty, and where the United States Geological Survey estimates most of the undiscovered oil and natural gas lies. The agreement does not settle bilateral territorial disputes among Iran, Azerbaijan and Turkmenistan in the sea’s south, but lays out a formula for doing so. Iranian nationalists have already been objecting to the treaty, threatening to renege. Oil and natural gas production from the Caspian is estimated at two million barrels of oil equivalent per day, depending on how the region is defined. This flow has helped cushion global oil markets from disruptions in the Middle East, the role advocates of Western investment in the region had long envisioned. The Caspian’s output, for example, is about equal to what disappeared from global markets during the Libyan civil war. “For global supply,” said Mr. Elkind of Columbia University, “it has been a good thing.” According to Andrew Kramer for the New York Times.

Foreigners disadvantaged in the oilfield services market Foreign players in the contractual services market in the oil and gas sector are gradually being crowded out by local companies. For the sake of maintaining their presence in Kazakhstan, they are willing to create partnerships with Kazakhstani contractors. This opinion was voiced by Nurlan Zhumagulov, general director of the Union of oilfield services companies of Kazakhstan, on the sidelines of a briefing in the Central Communications Service on October 11. The union includes about 160 companies; in total, about 70 thousand Kazakhstanis are employed in the industry. The annual turnover of oilfield services in the country is 2.5 trillion tenge, while the total purchases of oil companies reach 4.5 trillion tenge per year. The giant projects like Tengiz, Karachaganak and Kashagan account for three quarters of supplies, where foreign organisations earn the biggest share, according to the oilfield services association. Of the 100 largest companies in the world, 20 are already operating in Kazakhstan and about 10 are planning to enter the local market. Most foreign contractors are looking for Kazakhstani partners for themselves, as individual field operators require the creation of joint ventures and consortia for large capital projects. Although in most cases foreign companies registers in Kazakhstan and receive local status. Thus, the conditional discount applied to residents is already valid in tenders for all companies that have up to 95% of Kazakhstani employees, and therefore is not an advantage of local content. Therefore, real Kazakhstani companies are asking to reconsider the definition of the status of soil on a clearer with an eye on the founding capital, where the share of local business must contain at least 50% of the participation. 4

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In his speech, Zhumagulov cited the example of Karachaganak Petroleum Operating, which in September held meetings with all contractors and called for a joint venture with Kazakhstani companies with at least 50% local content. At the same time, KPO holds special tenders where only domestic players or a joint venture with their presence are invited to participate, he said in a report. According to him, now the Karachaganak project has reached a return on investment, and according to certain norms of profit, the state’s share in it is increasing. Previously, it was up to 20%, now it can reach 80%, depending on the level of profitability of the project in the form of economic indicators. The Karachaganak expansion project has a budget of $5 billion, Zhumagulov noted. Speaking about the Future Expansion Project of Tengizchevroil, whose budget “weighs” 37 billion tenge, he recalled that the Kazakh content in it is 11-12 billion dollar. The engineering of the project was mostly made abroad, amounting to approximately $3–3.5 billion, by the joint venture Worley Parsons Fluor, the Kazakhstan Institute of Oil and Gas and Kazgiproneftetrans, registered in Europe. Taxes on this component were also paid there, the Union of Oilfield Services Companies said. FEP logistics also weighs about $3 billion; so much is needed to transport more than 100 thousand tonnes of steel structures produced at the Korean Daewoo plant. Transportation of modules is delayed, so the main work will begin next year. The largest project under the FEP wellhead pressure management project at Tengizchevroil was won by the Russian company Velesstroy. The second largest tender for the construction of a refining plant, the so-called 3GP was divided into two parts. The Italian company CCC received one share of construction in it, and the second Kazakh subsidiary of the American-Turkish company Bechtel Enka was Senimdi Kurylys, which was widely known for its problems in Tengiz. The latter has been working at the giant field for over 20 years and constantly receives large orders and contracts. The third major project is associated with the construction of pipelines at various fields, it was won by the Italian company Bonatti. The fourth tender was allocated for general construction work at industrial facilities of the field - construction, site preparation and electrification, and was acquired by the Asar consortium with the participation of the Turkish company GATE Insaat, which identified and nominated Kazakhstani subcontractors. In the framework of the fifth tender, equipment will be supplied, and the sixth will be drilled by the joint venture KMG Drilling Services and Nabors Drilling. The project to drill 66 new wells in Tengiz is called the NERP (North Ring) and is estimated at up to $5 billion. Commissioning works are laid in the seventh component of the project, now there is a struggle for it, Zhumagulov shared. Previously it was expected that this direction would be taken by one company, but after a series of TCO meetings, it was decided that this tender lot would be divided into several parts, this is where the potential for contracting Kazakhstani companies was laid. The requirements of the Subsoil Code, which entered into force at the end of June, will apply to new players whose contracts have been signed since the beginning of 2015, there are not so many of them in the industry. For old ones, the previous modus vivendi and previous maintenance obligations are preserved. They are performed by purchasing fuel, electricity, common minerals, thus reaching 20-30% of the content, said the representative of the union. There are not so many engineering industries in the orders of oilmen; representatives of Ukraine and Belarus traditionally dominate the IT sector. The norms of the code regulate that the contractors of oil producing companies must purchase in accordance with the rules of the customers. Private subsoil users purchase through the state register portal within the framework of established obligations, if the contract amount exceeds 245 million tenge. According to Zhumagulov, TCO, KPO and the North Caspian Operating Company have closed tender procedures that are broadcast to the level of contractors. A meeting is soon planned with the participation of large operators, where Kazakh oilfield service companies hope to achieve relative consensus in the form of a certain level of contract value, above which contractors will have to purchase goods, works and services in accordance with the operators' internal rules. In general, the market is divided into three categories. The first is the stabilised contracts at KPO, Tengizchevroil, NCOC, Maersk with the Dunga project - certain six to eight companies are invited to their tenders. The second group is affiliated structures of KazMunayGaz. They work according to the procurement rules of the Samruk-Kazyna, their work and services are mainly supplied by Kazakhstani companies. The third category of private subsoil 5

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users is dominated by Chinese companies like CNPC, PetroKazakhstan and others. In their contracts a conditional discount is still fixed and there are obligations on Kazakhstan content. The Union of oilfield services companies generally have complaints about the purchases of CNPC. This company drills a lot and buys casing, tubing for wells. Previously, some of the pipes were purchased from Kazakhstan’s manufacturer KSP Steel, which operates according to API (American Petroleum Institute) standards, but now the Chinese have switched to APEX requirements. Pipes according to such regulations can be supplied by manufacturers from China, and Kazakhstani producers, such as KSP Steel, Tenaris, TMP Kazvtorprom, do not have such certification, although Tenaris, for example, supplies pipes to TCO, KPO, NCOC. The CNPC contract has recently been extended for 20 years on the background of low prices, so they will drill a lot, but before that they were mainly working on the Chinese contractors Great Wall, Vostokneft and Service. Speaking about the future construction of the Saryarka gas pipeline, representatives of oilfield service companies expressed the opinion that KazStroyService could take part in it. The director of the project company AstanaGaz KMG, in a meeting with them, said that Kazakhstani companies would participate in the construction of the pipeline, the union reported. At the same time, they indicated in the conversation that the ArcelorMittal Aktau pipe plant would not participate in the supply of its products for the gas pipeline. In March, a representative of the plant Nurlan Seitov wrote that the company can participate in the tender. In addition, Nurlan Zhumagulov said that in order to participate in large tenders, Kazakhstani oilfield service companies are often required to have bank guarantees from financial institutions with A/A- rating. But there are no banks with such a rating level in Kazakhstan, so problems usually arise with obtaining guarantees. At the same time, local contractors recently had the opportunity not to issue costly long-term guarantees, in case a small project can be completed in a short time, which made life easier for domestic enterprises. Moreover, delays in payments to subcontractors from the contractor by agreement with TCO, KPO and NCOC, which guaranteed payment for services or work in dollar or with indexation in case of devaluation, significantly decreased. In addition to the local market, Kazakhstani oilfield services companies have access to the Russian market, where there is an opportunity to receive contracts. “FracJet is working in the field of geophysical work and drilling, a competitor of Shlumberger in Russia. Logic Services Kazakhstan is involved in construction and installation work, they provide electrical installation services in Yamal and Sakhalin. MunaiGasEngineering also periodically takes volumes to perform design work. In principle, the Russian market is available for Kazakhstani companies, but, unfortunately, mainly Kazakhstan citizens are employed as labour, but you can work there at the level of subcontracting. In particular, on the Sakhalin and Artic 2 projects (the LNG project on Yamal. - Ed.), where it is cold, the Russians do not particularly want to work,” Nurlan Zhumagulov stated according to ABC TV (Kazakhstan).

Shell decides not to buy stake in Kazmunaygas The Anglo-Dutch oil and gas concern Royal Dutch Shell will not buy a stake in Kazakhstan’s Kazmunaygas national company. This is reported by Bloomberg, citing unnamed sources. “Royal Dutch Shell no longer has plans to acquire a stake in Kazmunaygas after the due diligence procedure,” sources told Bloomberg. Also, the agency, citing two sources, reports that instead of buying a stake in the Kazakh enterprise, Shell decided to help it improve corporate governance. Earlier, some media outlets wrote that Samruk-Kazyna, the national welfare fund of Kazakhstan, offered Royal Dutch Shell to buy a 10-20% stake in Kazmunaygas before holding its IPO to attract other foreign investors. Shell has been working in Kazakhstan for a long time, having a stake, for example, in the Kashagan and Karachaganak projects. The Kashagan field was discovered in 2000. Its geological reserves are estimated at 4.8 billion tonnes of oil, total oil reserves reach 38 billion barrels, of which recoverable are about 10 billion barrels. Natural gas reserves are at more than 1 trillion cubic metres.

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Megaproject jointly implemented Kazmunaygas, Eni, ExxonMobil, Royal Dutch Shell, Total, Inpex and CNPC. Its implementation has already cost $53 billion. According to experts, annual production at Kashagan will reach the level of 370,000 barrels per day. Karachaganak oil and gas condensate field is located in the West Kazakhstan region. This is one of the world's largest deposits, with reserves of over 1.2 billion tonnes of liquid hydrocarbons and more than 1.3 trillion cubic metres of gas. Karachaganak is being developed by the Karachaganak Petroleum Operating international consortium. Its shares are distributed as follows: BG Group and Eni - by 29.25%, Chevron - 18%, LUKOIL - 13.5%. The local company KazMunayGas owns 10% in the project, reported by Tekno Blog (Russia).

OIL & GAS PRODUCTION Kazakhstan to restore oil production to 1.8 million b/d in October from 1.65 million b/d in September According to the head of the Ministry of Energy, Kazakhstan is capable of producing 1.85 million b/d. Kazakhstan plans to restore oil production to 1.8 million b/d in October compared to 1.65 million b/d in September, Energy Minister Kanat Bozumbayev told reporters. The minister noted that in August-September, the country extracted 1.65 million b/d, which is 170-200 thousand b/d less than in summer, which is associated with repairs. According to K. Bozumbayev, Kazakhstan is capable of producing 1.85 million b / d, reported by ABC TV (Kazakhstan).

Kazakhstan gas export earnings up 25% on-year In the first 8 months, gas production in the country reached 37.3 billion cubic metres, 5.8% more than a year earlier. Three key gas producing regions accounted for more than 90%: Atyrau region - 15.6 billion cubic metres, plus 14.6% year-on-year, WKO - 13.8 billion cubic metres, as in the previous year, Aktobe region - 4.6. billion cubic metres, plus 2.3% year-on-year. In 7 months, exports of blue fuel amounted to 15 billion cubic metres, 1.7% more than in the same period a year earlier. In cash, exports reached $1.03 billion, 25.3% more than a year ago. The largest volumes were sent to China for $363.7 million or 35.4%, more than 8 times more than a year earlier, and Ukraine for $293.5 million or 28.6%, which is less by 25.3% less than a year ago. For the Kazakhstani population, prices for gas transported through distribution networks increased during the year by 8.6%, for liquefied gas - by 5.7%. For comparison, by the end of 2017, the gas transported through the networks went up by 7.6% compared to last year, liquefied gas - by 14.4%, reported by Energyprom (Kazakhstan).

Kazakhstan offers “alternative taxation” to subsoil users The Kazakh government has introduced an alternative tax on subsoil use that gives subsoil users an additional opportunity to fulfil their tax obligations. Tax burden is transferred immediately at the time of income receipt. “In order to stimulate the development of offshore and ultra-deep hydrocarbon deposits, an alternative subsoil use tax has been introduced,” Shafkat Kudabayev, head of specialised division of State Revenues Committee under the Ministry of Finance said at briefing on subsoil users’ taxation. According to him, this tax is not additional, but represents an opportunity for subsoil users to alternatively fulfil own tax obligations to pay: mineral extraction tax, payment on reimbursement of historical costs, excess profit tax and rent tax on oil exports. “The alternative tax on subsoil use is similar to corporate income tax, except for remuneration and exchange difference. Such amounts, in contrast to the corporate income tax, are not put on deductions. That is why by introducing the alternative tax on subsoil use, the emphasis of the tax burden is transferred immediately at the time of income receipt,” Kudabayev explained. 7

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He also said that one of the key conditions for the application of the new tax is that a choice is made by the subsoil user once and before the end of the contract without the right to change. “If a taxpayer makes such choice, it is also obliged to notify the tax authorities,” Kudabayev highlighted. At the same time, the alternative tax on subsoil use works only for each individual contract for subsoil use and only for the volumes of oil produced and sold under such a contract. The calculation of the alternative tax on subsoil use is made using the world price for oil,” he said. A new code on subsoil use was introduced July 1, which simplified the operation of companies investing in the development of the Kazakh fields. Since July 1, the companies have added the opportunity to receive all permitting documents in 15 days. Also, the companies can conduct exploration works at the new sites without going through the auction procedure. Experts called this law revolutionary as it favourably affects the investment environment of the country. The Kazakh government also intends to attract investments to the fields, including extraction of mineral resources and geological exploration, according to Astana Times.

Kazakhstan to start upstream expansion operations A new upstream phase dubbed North East Ring Project (NERP) is expected to be initiated, involving various major ventures in Kazakhstan with a multi-billion dollar budget. In the Tengiz block, 66 new wells will be drilled at the site, according to the chairman of the presidium of the Union of Kazakhstan oilfield service companies, Rashid Zhaksylykov as saying at a press conference in the Central Communications Service. "The Karachaganak expansion project has been launched with a budget of at least five billion dollars. The Khazar and Kalamkas-offshore projects will be jointly implemented in the Caspian. In addition, a five billion dollar NERP project is expected at Tengiz. 66 new wells will be drilled," Zhaksylykov said. In turn, Nurlan Zhumagulov, Director General of the Union of Oilfield Service Companies of Kazakhstan, explained that expanding Karachaganak provides an increase in oil production, and, accordingly, more budget revenues, reported by Zhanat Tukpiev for the Kazakhstanskaya Pravda.

Tengiz consortium spends $5 billion on 66 new gas wells Sixty-six gas wells will be drilled at the Tengiz field as part of the $5 billion North East Ring Project (NERP), said Union of Kazakhstan Oilfield Service Companies Chair Rashid Zhaksylykov at an Oct. 10 press conference. Tengiz is Kazakhstan’s major oil and gas field operated by the Chevron-led joint venture Tengizchevroil. “It is important for participants of the industry to be involved in these projects,” said Zhaksylykov. The country’s oil industry, he said, is rebounding. “The oil and gas industry is active today. Positive changes in oil prices revived the industry. The Karachaganak expansion project was launched with a $5 billion budget. The Future Growth Project is underway with a budget totalling $37 billion. Development projects Khazar and Kalamkas-Sea [two smaller fields nearby Kashagan] field development projects will be launched in the Caspian Sea,” he said. He reiterated the need to recruit more local specialists, similar to what Kazakh President Nursultan Nazarbayev voiced in his recent state-of-the-nation address. “As you know, since the moment we joined the World Trade Organisation, our country could no longer demand from new oil production companies to purchase Kazakh products. Though at the same time we see how WTO founding country, the United States, takes contradictory actions in terms of WTO rules. In his state-of-the-nation address, President set a concrete goal to develop Kazakh content,” said Zhaksylykov. The union is developing a programme with three major oil and gas operators, Tengizchevroil (TCO), Karachaganak Petroleum Operating and North Caspian Operating Company (NCOC), to increase the number of Kazakh specialists. “It has been more than 20 years since Tengiz, Karagachanak, Kashagan projects were launched, where there is a very low share of Kazakh specialists at key positions. Foreigners head departments of procurement, engineering, construction, current projects and technical projects.

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They come for three or four years and go back, they do not know local market and therefore work mostly with foreign contractors,” said the union’s Project Manager Niyaz Zhumat. Zhaksylykov believes the Kazakh oilfield service market is profitable for foreign companies. At present, more than 20 out of the 100 largest contracting companies operate in Kazakhstan. The level of local oil field service companies, however, significantly improved. “The new code on subsoil use identifies increasing the share of local content in oil projects among mandatory conditions stipulated in subsoil use contract. Local companies account for an average of 50 percent of the total volume of oil field services that are estimated at $8 billion per year,” he added. To boost investments in the field, Kazakhstan will set up the Fund of Direct Investments, said Zhaksylykov. “Today, we can see that banks are not able to ensure liquidity to oil service companies to replenish working capital. Some tenders amount to tens and hundreds of millions of dollars. It is not a secret that very few domestic companies possess free flowing working asset. And this measure should revive the sector of the economy,” he said. Reported by Astana Times.

Kazakh authorities ease technical restrictions in Karachaganak At the annual Caspian Technical Conference and Exhibition SPE, Deputy Energy Minister of Kazakhstan, Magzum Mirzagaliyev, informed about the launch of investment project that enabled lifting of restrictions on the Karachaganak field. According to Mirzagaliyev, since the signing of the Final Production Sharing Agreement, parent companies have invested about $ 24 billion in the development of the field. At the same time the most advanced industrial technologies are used. "From January to September 2018, more than 7.5 million tons of crude oil was exported to Western markets through the Caspian Pipeline Consortium. Then a large investment project was launched at the Karachaganak field, the so-called project to remove gas production restrictions from the Karachaganak processing complex" Mirzagaliyev said. According to him, thanks to this project, the maximum level of production at the field will be maintained. This largest project, he stressed, with a budget of $1.1bn will provide additional revenues to the national budget in the amount of more than $3.2mn through to the year 2037. "Thanks to this project, additional volume of raw gas will be processed. The gas will also serve as a resource for the subsequent investment projects at the field," the speaker said. In conclusion, he assured that successful implementation of the project will make a significant contribution to the economic growth of the country, according to Kazakhstanskaya Pravda.

Reach Energy spuds first exploration well in Kariman field Reach Energy Bhd has drilled its first exploration well on its Emir-Oil asset in the Kariman field, Kazakhstan on Oct 6. The well is expected to confirm the larger extent of the hydrocarbon resource being exploited in the Kariman structure. "This exploration well will also augment the geological understanding of the prolific trend and support further exploration efforts," said Reach in a filing with Bursa Malaysia today. According to Reach, the expected success of this exploration well would increase the group’s 2P (proved and probable) reserves by "a significant amount". "One specific target is to confirm the maximum depth of the oil accumulation thus reducing uncertainty in resource calculations," it said. The target total depth of the well is 3,937m. The total drilling duration is expected to be 120 days. "Our advanced drilling programme will be undertaken by a mix of local and international reputable service providers such as Sinopec, AsiaPetroService, Drill-Lab Kazakhstan and KazPromGeofizika," said Reach. Reach shares closed five sen or 10.53% lower at 42 sen on Monday, giving it a market capitalisation of RM543.08 million, as reported by Neily Syafiqah Eusoff for The Edge Markets (Malaysia).

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SPECIAL ENERGY ISSUE, October 2018 Embassy of the Kingdom of the Netherlands OIL & GAS EXPORT & TRANSPORTATION Kazakhstan and Russia regulate ownership of oil in pipelines The Senate of Kazakhstan will consider ratifying an inter-country agreement defining the status and ownership of process oil in pipelines. Earlier, the relevant committee of the upper chamber has already discussed this issue and submitted for consideration. Thus, the story that originates from the time of the collapse of the USSR, is approaching its end. After the collapse of the union, where there was a single system of main pipelines, according to the territorial principle, they divided only the infrastructure, but not the “dead remains” of oil. But here, the paradoxical issue was the process oil, which fills the oil pipelines. This is the so-called "dead remains". This oil does not flow through pipes, but maintains pressure and ensures the efficiency of the oil pipeline operation. After the division of oil pipelines, the issue of determining ownership rights for 62,048 tonnes of oil, reflected on the balance of Transneft, which were located on the territory of the Kazakh side, in the Tuymazy - Omsk - Novosibirsk-2 (TON-2) pipeline, remained unsolved. Since 1992, 141.7 thousand tonnes were listed on the balance sheet of KazTransOil and were located in the Omsk- Pavlodar oil pipeline in Russia. Moreover, black gold in the above pipelines is the same in quality characteristics. “The parties negotiated for a long time. Last year we signed relevant agreements with our Russian colleagues that oil in our section TON-2 is recognised for Transneft. In return, the oil located in the Omsk-Pavlodar section is transferred to KazTransOil balance. And here remains the difference, which belongs to KTO, but remains on the territory of the Russian Federation. Transneft will have to oust this oil in the direction of Kazakhstan within 10 months after passing the ratification,” Kuanysh Kudaibergenov, director of the oil industry development department of the Ministry of Energy, told on the sidelines of the senate. The draft law “On ratification of the agreement between the Government of Kazakhstan and the Government of Russia on determining the status of technological oil in the Tuymazy-Omsk- Novosibirsk-2 and Omsk-Pavlodar oil pipelines was approved last week by the Parliament, and recently it was considered during an expanded committee meeting on economic policy, innovative development and entrepreneurship of the Senate of the Parliament of Kazakhstan. Now the document will be submitted for consideration during the plenary session of the Senate. The agreement itself was made in Chelyabinsk on November 9, 2017. “The agreement legally establishes the currently existing ownership of oil to the organisations specified in it, and the scheme specified in the agreement allows to simplify and minimise the necessary civil law and organisational procedures for transferring oil to its owners,” the document notes. “This was the only outstanding issue. After we go through the ratification procedure and the agreement enters into force, and since the last tonne of oil will be pumped to our side, we will not have controversial issues with our neighbouring countries regarding pipeline transport,” the head of the Oil Industry Development Department of the Ministry of Energy stressed. He emphasised that KazTransOil (and its predecessor) had paid property tax since 1992. That is, this oil has never been ownerless, it has always been on the balance sheet. The commercial value of 79 thousand tonnes of oil, which with the entry into force of the agreement will be transferred to the balance of KazTransOil, is about 8 billion tenge. Technologically, oil should always be in the pipeline. But KTO does not have enough to fill the entire pipeline system. Therefore, a part of the necessary oil is kept from the company-subsoil user: it extracts oil, pumps it through the pipeline system, and a certain percentage of oil development must be left a dead residue in the pipeline. “After KazTransOil receives these 79 thousand tonnes back, it will be able to fill its oil pipelines with its own resources. Thus, this amount of oil will be returned to subsoil users. And they, in turn, will be able to carry out either export operations, or they can supply this oil to our domestic refineries. Accordingly, the raw material will no longer simply lie in the pipeline as a dead load, but will participate in business operations. The corresponding taxes will be paid from it, and so on,” Kuanysh Kudaibergenov explained. According to estimates by the Ministry of Energy, if the technological oil obtained by the subsoil users is exported, then with a total average price of 70-80 dollar per barrel, the amount of income

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to the budget in the form of tax payments will be about 4-8 billion tenge. Moreover, the head of the Oil Industry Development Department claims that Transneft Urals and KazTransOil will not receive any economic benefits. The agreement is accepted to establish historical justice, according to ABC TV (Kazakhstan).

EBRD may participate in the modernisation of the Beineu-Shymkent gas pipeline The European Bank for Reconstruction and Development can allocate up to 300 million dollar, which is equivalent to 130 billion tenge for the modernisation of the Beineu-Shymkent gas pipeline. This is stated in the ad with trial status posted on the website of the international bank. Financing is supposed to be provided in the amount of 130 billion tenge to the borrower in the person of Beyneu-Shymkent Gas Pipeline, which is the owner and operator of the Beineu- Shymkent gas pipeline. “The loan will support the modernisation and expansion of the existing Bozoi compressor gas station, the construction of the Kereit gas measuring station and the necessary infrastructure, as well as optimisation of the borrower's balance by replacing existing obligations in hard currency with funding in national currency,” the EBRD states. Beyneu-Shymkent Gas Pipeline is a Kazakh-Chinese joint venture, KazTransGas website says. The act of state acceptance of the commissioning of the linear part of the Bozoi-Shymkent section, the Bozoi gas measuring station with a throughput capacity of up to 2.5 billion cubic metres of gas per year was signed in December 2013, being updated on the KTG corporate website. The Beineu- Bozoi-Shymkent gas pipeline was built in two phases in 2012–2017, stated by ABC TV (Kazakhstan).

KazTransGas signs an agreement to increase gas exports to China KazTransGas has signed a long-term five-year contract with PetroChina International Company Limited on increasing the export of Kazakh gas to 10 billion cubic metres per year since 2019. This was reported by the press service of KazTranGaz. The document was signed on October 12 in Beijing. The first agreement on the export of 5 billion cubic metres of gas has been fully implemented, the report says. "The double increase in exports of domestic gas has become possible thanks to the strategy of Kazakhstan’s President Nursultan Nazarbayev to develop the country's transit potential and the agreement signed by the heads of the two states,” Kairat Sharipbayev, chairman of the board of directors of KazTransGas, said. It is noted that the contract was preceded by the painstaking diplomatic work of the government and the KazMunayGas national company, as well as the modernisation of the Kazakh gas transmission system. "In the near future, three high-tech compressor stations will be commissioned, which will increase the throughput capacity of the Beineu-Bozoi-Shymkent gas pipeline from 10 billion to 15 billion cubic metres of gas per year. Thus, we increase the capacity of Kazakhstan’s gas pipelines. We fully We provide for the domestic needs of the country and at the same time have the opportunity to increase gas exports to foreign markets. According to preliminary calculations, gas exports to China alone will increase to 10 billion cubic metres, will bring the country more than 2 billion in foreign currency earnings," Kairat Sharipbayev said. The income received will allow the national operator to support Kazakh gas consumers, serve the loan portfolio in the amount of 560 billion tenge and at the same time increase the resource base and continue updating the gas transmission system. KazTransGas is the national operator of Kazakhstan in the field of gas and gas supply. The structure of the KazTransGas group of companies includes enterprises and organisations that extract, transport and sell gas and products of its processing, reported by ABC TV (Kazakhstan).

Cost of construction of Saryarka gas pipeline networks determined According to a preliminary estimate, 28 billion tenge will be required for the construction of distribution networks of the Saryarka gas pipeline in Astana, the Minister of Energy of Kazakhstan Kanat Bozumbayev said. “The city of Astana has developed a feasibility study for financing distribution networks, which is now under state examination. It is assumed that next month we will receive a ready-made feasibility study. In the first quarter, the Astana City Hall should develop the design and estimate 11

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documentation for the construction of these networks, it is assumed that there will be several stages, and the first phase of design and estimate documentation will be developed in the first quarter. The preliminary amount of construction is about 28 billion tenge in Astana, this is the first stage,” Kanat Bozumbayev said at a plenary session of the Parliament on Wednesday in Astana. “It is assumed that, without waiting for support from the republican budget, they will start at the expense of the local budget and attract investors. With additional consideration of the republican budget next year, with Astana’s willingness to provide documents, we intend to support the application with the funds of the republican budget,” the minister informed. As reported, the construction of the first stage of the Saryarka gas pipeline is scheduled for completion by December 2019. The Saryarka gas pipeline will be built in four stages. At the first stage, construction of the main gas pipeline along the Kyzylorda-Zhezkazgan-Karaganda-Astana route with a length of 1081 km is assumed. At the second stage, it is envisaged to reach the gas pipeline from Astana to Kokshetau, at the third - to Petropavlovsk. The final, fourth stage involves the construction of Zhezkazgan and Temirtau compressor stations, as reported by Kapital (Kazakhstan).

Record Goldhofer order from Sarens International heavy transport and lifting specialist Sarens has ordered 92 axle lines of self propelled modular transporter from Goldhofer. The trailers are destined for a huge oil field project in Kazakhstan claimed as the world’s largest construction site. Sarens’ contract, worth €450 million, is for the entire logistics of the vast refinery project. It is the largest single contract Sarens has ever won. The entire project is estimated to have a total cost of US$ 36.8 billion. It is an upgrade of the existing refinery facility to increase well pressure and production capacity. Work for Sarens Group there began in 2017 and will continue until 2020. The first step was to deploy a multidisciplinary team drawn from Sarens operations around the world. They established two trans-shipment bases for offloading and forwarding all cargo to the construction site in Kazakhstan. Carl Sarens, director global operations, commented, “We have dispatched around 250 specialists to handle the overland transportation and on-site installation of the pre-assembled units and racks and associated oversize equipment. For the overland transportation operations, Sarens already had more than 900 axle lines available in Kazakhstan. At the beginning of 2018, however, we saw an upcoming peak in the required logistical capacities as of the beginning of 2018. We therefore had to urgently increase our capacities to avoid problems in meeting the project schedule. Goldhofer delivered a convincing response with top quality at very short notice and absolutely punctual shipments.” The equipment order was placed with Goldhofer in mid-May 2018. It comprised 68 axle lines of THP/SL and 24 of the PST/SL type plus four 280 PS PowerPacks. With the new additions Sarens has 300 axle lines from Goldhofer. Commenting on the deal, Horst Häfele, Goldhofer head of product management, said, “We are proud of the fact that our axle lines are being used by a prominent customer like Sarens for such a prestigious project. The Goldhofer production team did a great job in terms of co-ordination and completed the entire order in less than three months. Everyone was highly motivated to complete the largest single order ever received from Sarens to such a tight schedule. Many of us worked special shifts to meet the deadline.” Jan Sarens, equipment trade officer, said, “Goldhofer was the only heavy-duty module manufacturer who could guarantee punctual delivery of high-grade axle lines in such a quantity within such a short time. As a result we were able to meet our contractual obligations towards our client, and Goldhofer was able to consolidate its position as a long-serving transport technology partner of the Sarens Group.” As posted by KHL.

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SPECIAL ENERGY ISSUE, October 2018 Embassy of the Kingdom of the Netherlands PROCESSING & ENERGY Unique 100 MW wind power park to appear 40 km from Astana 40 km from Astana, a unique wind power plant with a capacity of 100 MW will appear. This is the largest project in the Akmola region, but also a springboard for new discoveries. The project is implemented by CAPEC Green Energy, established on July 23, 2014 for the purposes of developing investment projects in the field of renewable energy sources. The construction of a wind power plant is a stage of practical implementation of projects presented at the international specialised exhibition EXPO-2017, held under the slogan “Energy of the Future”, and meets the instructions of the Head of State to encourage investment in “green” technologies. Wind power plant is located near the village of Kostomar. At the moment, it employs about 300 people and over 130 units of heavy machinery. Wind turbines for the project are supplied from the European Union (Germany, Denmark, Spain). Each of the 30 wind turbines has a unit capacity of 3.3 MW, the height of the tower is 84 metres, the diameter of the blades is 112 metres. "The project is carried out with the full support of the Administration of the Akmola region, all necessary conditions have been created to increase the flow of investment resources and new industrial and innovative technologies into the regional economy," company shareholder Alexander Klebanov said. Akmola region is also an investment-attractive and challenging region for wind energy. The winds here are almost constant, but there are large temperature drops from -45 in winter to +40 in summer. "We use a low-temperature package, while using technologies such as an anti-icing and heating of the blades to collect analytical data and compare the benefits of the effectiveness of these technologies. This is the direction that we can share with those who plan to implement projects under similar conditions," the acting Director of CATEK Green Energy Bagdat Oral commented. "As part of our wind park, we are building an administrative and domestic complex that will combine not only the wind park dispatch control, but also the centre for studying wind energy. We are in talks with universities, domestic wind turbine developers, to attract students and specialists to present the entire wind farm and familiarisation with the process of practical control of the station, separately by wind generators," the speaker continued. To date, construction and installation work continues in the village of Kostomar. Soon all 15 turbines of the first start-up complex will be delivered here. The launch is scheduled for the end of the second quarter of 2019. The power of the first complex is 50 MW. The total capacity of the project is 100 MW. "100 MW is the annual energy consumption of 10,000 households. In addition to increasing the generation of energy in the country, commissioning our wind farm will reduce greenhouse gas emissions by 230,000 tonnes per year, which exceeds emissions of more than 113,000 cars per year. The project will contribute in fulfilling Kazakhstan’s international commitments to reduce greenhouse gas emissions, and fully complies with our country's strategy for the transition to a green economy,” company shareholder Sergey Kan said. The project cost is 46.1 billion tenge. DBK provided a loan for a period of 10.5 years in the amount of 30.5 billion tenge. A subsidiary of DBK, DBK-Leasing, is also involved in financing the project, which provided funds in the amount of 3.6 billion tenge in the form of financial leasing for the purchase of equipment. The borrower's own funds in the framework of project financing will amount to 12 billion tenge, reported by Zakon (Kazakhstan).

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CONTACTS

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