Playing in the Big Leagues
The national operator of the Republic of Kazakhstan in the field of gas and gas supply - Joint-stock company KazTransGas - from year to year demonstrates effective corporate governance and the growth of shareholder value by ensuring the protection of investors and implementation of the interests of the sole shareholder – NC KazMunayGas JSC.
Thus, in the first half of this year, the company obtained a consolidated net profit of $ 83.2 bln tenge, which is higher than in the same period last year by 39 bln tenge, or 88%.
The volume of gas sales in January-June amounted to 13.7 bln cubic meters, which is 41%, or 4 bln cubic meters more than in the same period last year.
KazTransGas Group definitely shows the strong business results, – says Igor Ivakhnenko, a Russian expert on the energy sector in the Caspian and Central Asian region. – The current growth rate continues the trend of last year, when the Group's net profit reached almost 75 bln tenge, being more than the target amount by 23 billion. This year, a half-yearly profit has already exceeded the annual indicator of 2017. It should be noted that the profit growth is not achieved due to the arithmetic increase of gas tariffs for consumers, but as a result of successful industrial actions of KazTransGas in all aspects of its activities."
Today, KazTransGas manages a centralized infrastructure for transportation of marketable gas through trunk pipelines and gas distribution networks, provides international transit and sells gas on the domestic and foreign markets, produces natural gas, develops, finances, builds and operates pipelines and gas storages. "All these businesses are linked, which gives their development a synergistic effect. Creation of new trunk and distribution systems extends gas supply to consumers, together with the increase in production it provides for the utilization of additional gas transportation capacity, allows to increase the supply domestically, and to foreign markets, – says the Russian oil and gas expert. – KTG significantly expanded the domestic gas market in Kazakhstan, due to the gasification of settlements and entire regions, not previously involved in the distribution of natural gas.
KazTransGas one of the first systemically important companies of Kazakhstan's economy that fully implemented the advantages of the geopolitical position of the country and engaged its transit potential in the economic development.
In August 2007, during the state visit to Kazakhstan Chairman of the People's Republic of China Hu Jintao, heads of the governments of China and Kazakhstan signed an Agreement on cooperation in the construction and operation of Kazakhstan-China gas pipeline. It became a key part of the largest Trans-Asia gas pipeline Turkmenistan-Uzbekistan-Kazakhstan-China (TUKC), linking gas fields in Turkmenistan, Uzbekistan and Kazakhstan with consumers in China, and one of the largest investment projects of independent Kazakhstan. With a total length of a transcontinental pipeline from Turkmenistan to the Chinese border equal 1833 km, the length of the Kazakhstan-China section amounted to 1305 km.
The pipeline was commissioned in December of 2009, and this event is of great geopolitical importance for Kazakhstan, for the first time in its history it received the opportunity to export natural gas to a promising and financially reliable Asia-Pacific region, which is especially important in anticipation of the expansion of hydrocarbon production at Kashagan and other offshore fields in the Kazakhstani sector of the Caspian sea. In addition, this pipeline, connected with oil and gas West of Kazakhstan, has eliminated years of dependence of southern regions of the country from the supply of gas from neighbouring countries, thus providing true energy security of Kazakhstan.
Last year another important milestone in the country's history was reached – for the first time Kazakhstan began exporting its gas to China. In the fall of 2017, a historic agreement for the supply of 5 billion cubic meters of Kazakhstani gas during each calendar year was signed between Kazakhstan and China. The contract of purchase and sale signed between KazTransGas JSC and PetroChina International Company Limited. The gas fields in Western Kazakhstan will be the resource base for export, as well as the available reserves of gas from underground gas storages of KazTransGas JSC. A border point Khorgos is determined to be gas receiving point at the Chinese side.
According to KazTransGas, the export shipments to China in the first half of the year amounted to 3.1 bln cubic meters. Although, recently the management of KazMunayGas claimed that by the fall of this year Kazakhstan's exports to China will reach 5 bln cubic meters of gas. Whilst one interesting remark was made that if the supply of gas to the domestic market bring huge losses for KMG, the export of gas, conversely, compensate for these losses. Meaning that it confirms the thesis that the production and export of gas by the subsidiary company is gradually becoming the goose that lays golden eggs for KMG. But for the state gas export to China is important for several reasons. Firstly, it is the diversification of export routes given the fact that in the export of oil, for example, we are heavily dependent on transit through unpredictable Russia with its growing geopolitical ambitions, which under certain conditions can force it to exert pressure on Kazakhstan, reducing our commodity export opportunities. Secondly, expected export revenues of KTG at current energy prices should be at least about 1 bln USD per year. Besides the fact that the money will improve the economic situation of the national operator, it will keep the low prices for gas supplied to the domestic market, for the population," saysa well-known Kazakhstani political scintist, Director of the Risk Assessment Group (Almaty), Dosym Satpayev.
Commenting on exports to China, Vice-Chairman of the Board of NC KazMunayGas JSC, Chairman of the Board of Directors of KTG, Kairat Sharipbayev says: "Diversification of transit and export routes for transportation of Kazakhstan's gas, and the increase in volumes of export of natural gas is an important strategic tasks outlined by President of Kazakhstan. The head of state noted that "for the full disclosure of transport and transit potential of the country it is necessary to provide freedom of transit of cargoes, create new transport corridors". The work conducted by the national operator KazTransGas JSC is fully consistent with the strategic plans of Kazakhstan on development of the new Eurasian logistics infrastructure. Shipment of Kazakhstani gas to China will promote bilateral mutually beneficial relations aimed at creating common infrastructure and the establishment of trade and transport connections between the countries of the Eurasian region."
Solemn ceremony of launching Kazakhstan's gas from the Beineu-Bozoi-Shymkent trunk gas pipeline to transnational Central Asia - China gas pipeline was held in Unified control center of gas operator in Astana on October 15, 2017. And in January of this year, an agreement was reached on the prospective increase in the export of Kazakhstan's gas to China up to 10 bln cubic meters per year. This will require further development of gas transportation infrastructure, modernization and capacity expansion of existing pipelines. Therefore, it was decided to gradually increase the capacity of the two "A" and "B" strings of the Kazakhstan-China trunk gas pipeline by the end of 2019. For the expansion of transportation through the territory of Kazakhstan it is planned to increase the capacity of the Beineu-Bozoi-Shymkent gas pipeline by virtue of the construction of new compressor stations and upgrading existing ones.
Thus, KazTransGas nowadays has become the most important and technologically most powerful operator of gas flows in Middle and Central Asia. It is the fastest growing gas company in the CIS, from year to year increasing the volume of transit of Central Asian gas and export of own gas in the direction of Russia and China. Kazakhstan, unlike other post-Soviet countries, not just exploits what was inherited from the Soviet Union, but also actively adds the new capacity to this degree of safety and upgrades old capacity using innovative technologies to diversify routes.
This allows Kazakhstan's gas industry to apply for the role of the "driver" for the entire oil and gas industry in the region. KazTransGas Group of companies has dramatically increased the volume of gas pumped through pipelines, Kazakhstani gas export, international transit and domestic production. This sectoral approach provides Kazakhstan the status of the most diversified in the export of gas country in Central Asia, stressed the Russian expert Igor Ivakhnenko. – The Republic of Kazakhstan, ships gas to China, Kyrgyzstan, Russia, and to European countries through it, being not a raw source provider, but the seller of marketable volumes. Due to the growth of revenues from exports and international transit, KTG subsidizes the cost of supply of natural gas to the domestic market at a price below the production cost. This strategy makes KazTransGas JSC the corporation that is not only successful in a commercial sense, but also an important contributor to the economic and social development of Kazakhstan."
It is axiomatic that in today's rapidly changing world any large company needs to change as well: introduce new advanced technologies, new standards of business processes, optimize management structure. If it doesn't want to remain an outsider in the industry.
KazTransGas realized this long ago, and the top management carries out a systematic work on the transformation of the national company in a compact and highly efficient Group of companies, based on the "three pillars": production, transportation and sale of natural gas. Moreover, business processes in each direction are now clearly structured and given for the execution to the converted subsidiaries. If in the past the transportation of natural gas was carried out by several subsidiaries of KTG, in the framework of the transformation program a single operator is created for the operation and maintenance of trunk pipelines and gas distribution networks on the basis of Intergas Central Asia JSC. Before the transfer of this functions, ICA only dealt with the operation and maintenance of trunk and transit gas pipelines, now company also operates the whole gas distribution network coming from these trunk gas pipelines to the final consumer in all cities and settlements of the country.
In turn, KazTransGas Aimak JSC is now fully focused on retail sale of marketable gas on the domestic market and working directly with consumers. The company no longer deals with the transport of gas and the maintenance of distribution networks. The implementation of the investment programs of regions gas supply and gas supply networks upgrading became the objective of KazTransGas Aimak. And the newly constructed pipelines will be transferred for operation to Intergas Central Asia.
Amangeldy Gas LLP, which develops Amangeldy group of gas fields in Zhambyl region, will continue work to increase the resource base, exploration and production of gas.
Clear division of production functions led to the creation of a single operator for servicing subsidiaries and branches of KazTransGas. Thus, in the process of developing a Road map for transformation, in-depth analysis of the use of machinery and vehicles was conducted. It showed that the equipment located in the branches and divisions is not used 100% on a daily basis, and in some cases this figure is below 25%. Meaning that each subsidiary in each region maintained its own fleet of vehicles and machinery. While, for example, a crane or excavator after the volume of work completed could be idle until needed again. At the same time, another branch requires the same crane and excavator, so it buys them and enters in the books, and after the job is done they are also idle. This led to the fact that the existing performance potential was not working at full capacity. Therefore, it was decided to determine the company that will manage whole fleet of motor vehicles and machinery. Now, turning to the maintenance service operator with the application, necessary equipment for the right time and for the right amount of work can be obtained.
In addition, to account and control the use of available machinery it is equipped with GPS trackers, which prevents its misuse. This allowed: firstly, to optimize the number of vehicles, secondly, to reduce the cost of its maintenance, thirdly, to renew the fleet of vehicles of service company, to get rid of the old machinery, and for KazTransGas to focus on core activities. In addition, the sale of unnecessary machinery brought the company additional revenue, which is directed at the implementation of investment programs.
Previously, such work was carried out in KazTransGas Aimak JSC, which allowed to significantly reduce the mileage of vehicles, significantly reduced consumption of fuel and lubricants, spare parts, decreased payroll. In the end, the savings amounted to billions of tenge. Besides, the service company can render services to third parties on a fee basis, allowing to get extra income.
Major structural changes occurred in the ultimate holding company. As a result, the optimal vertically integrated structure for administrative personnel was created in KazTransGas JSC, one for the whole company. The entire central administrative office of the KTG Group of companies and its subsidiaries relocated to one office building in Astana, which gave a significant savings due to multiple cuts and cheapening of the maintenance costs and repairs of the offices, maintenance of administration and general department, secretariat, security and parking. For all companies of the Group a single IT Department with a shared server and IP telephony were created, special rooms for negotiations and video conferencing were equipped.
Besides, if earlier the regional offices of the subsidiaries were in different buildings, rented, bought administrative buildings spending money on their maintenance, after the transformation all of them are located in the same office. Now, one branch and one executive office remain in the regions. A single central administrative office was created, located in one place, which led to the fact that all production costs were reduced at least twice. This gives even greater mobility, improves efficiency, simplifies the interaction. Vacant buildings and premises are sold or leased, the proceeds are transferred to the gasification and modernization of the gas distribution system. Similarly, there is a unification of storage resources.
The digitization of business processes has been a serious help in the implementation of transformation program, carried out in the framework of the State program "Digital Kazakhstan", which is the key aspect of the Third Modernisation, which was declared by President Nursultan Nazarbayev in his annual Address to the people of Kazakhstan . In all divisions of the KazTransGas Group of companies, including the regional gas sites, programs are installed for video conferencing and IP telephony. This allows to quickly collaborate in real time, so there is no need for the cost of travel and long-distance calls. For a meeting to take place it is not necessary to come to Astana, and, vice versa, to go to the regions from the center. It gives multimillion funds savings and hours of labour time savings.
By virtue of modern technology and dispatch system, there is a technical capability, while being in Astana at the head office of KTG, to monitor the route of the trunk gas pipeline, gas distribution system and the work of the whole Group of companies in any part of the country in real time. And if a problem arises, it is much easier to organize a "brainstorming" between specialists and to give recommendations for its solving "in a live broadcast".
KazTransGas and Beeline company in March of this year signed a Memorandum of new technologies introduction in data transmission in the gas industry. The project involves the installation of the innovative equipment of new generation for the consumers, the so-called "smart meters". Now in the cities, where the devices with remote metering will be installed, the inspectors will not have to go around households. By virtue of modern technology, it will be easier to track the charge and gas consumption, all data will be recorded by the electronic system, which eliminates the human factor. In addition, a very important feature of "smart meters" designed to protect the safety of operation. In the case of an emergency, the sensor detects the change and quickly transfers the data to the management company.
Another innovative improvement in the industry was the introduction of the so-called "electronic markers" that are used to identify underground utilities and the creation of a geographic information system.
In general, the complex consists of three main components: electronic intelligent marker, marker locator and software. This technology allows to promptly obtain information on the construction of new utilities and with precision of up to 5 cm to find other underground utility networks. Intelligent electronic markers will be laid in the ground next to utility lines in the process of construction or during reconstruction, emergency recovery works. During the laying of markers, using the locator, information about utilities is recorded, which is automatically entered into the software system, where in parallel an electronic card of networks is created. The use of markers gives the opportunity to see utilities on an electronic map, to quickly obtain information about network nodes, lower operating costs due to pin-point excavations and absolute identification. Such markers do not require recharging, the service life is more than 30 years.
The national operator has good prospects of economic growth. And not only the local analysts think so, but also the experts of the world's leading rating agencies. On July 13, of the current year, the International Agency Fitch Ratings confirmed the long-term issuer default ratings in foreign and national currency of KazTransGas and its 100% subsidiary companies - Intergas Central Asia JSC and KazTransGas Aimak JSC - in foreign and national currency as "BBB". The forecast on ratings is "stable". "KTG has a dominant position in the segment of transportation and distribution of gas in Kazakhstan", – noted in the message of Fitch.
The Agency believes that KazTransGas will continue to generate significant operating cash flow and maintain a moderate leverage.KTG began to export gas to China in October of 2017, and should deliver nearly 5 bln cubic meters of gas in 2018. The existing contract is signed for one year, but Fitch believes that China will extend the contract. KTG and China also consider the possibility of increasing gas exports to 10 bln cubic meters, which will require expansion of existing infrastructure. In addition, KTG supplies about 4 bln cubic meters of gas to Russia and neighboring Central Asian countries annually.
However, Fitch Ratings explicitly recognize that the rating of KTG can be upgraded if the rating of the parent company KazMunayGas will be upgraded. And, in turn, KTG rating could be downgraded if the rating of KMG will be downgraded. In this regard, taking into account sustainable economic growth of the national operator, strategic importance of KazTransGas in the implementation of the Astana gasification project, independent analysts question the need to empower KazTransGas with the status of an independent national gas company. Example is in front of us in our partners in the Eurasian economic Union – Russian Gazprom PJSC.
"The transformation of KazTransGas to the independent company, which is fully engaged in the issues of the entire gas sector: from production and transportation of gas to the international transit and export is an interesting idea, – said Kazakhstani political scientist Dosym Satpayev. – Taking into account the fact that from the point of view of economic and financial indicators KTG looks more attractive than its parent company KazMunayGas. According to official information, for 7 months of current year KazTransGas has obtained consolidated net profit of 83.2 bln tenge, which is higher than in the same period last year by 39 bln tenge, or 88 percent. Meaning that there is an effect of a "falling climber", when KMG with its problems pulls down those subsidiaries that demonstrate better financial results. As a result, even the international rating agencies can not set the ratings of KTG higher than of its parent company. And from the point of view of simple logic, may be, it would be more profitable for the state not to "keep all eggs in one basket", even if the "basket" itself is interested in this, – says the analyst Dosym Satpayev.