Karachaganak: New Opportunities for Local Business
Karachaganak project is one of the leaders in the oil and gas industry of the country in terms of the volume of purchased goods and services from Kazakhstani producers. At the end of last year, the project partners signed a major agreement with the Republic of Kazakhstan on the authorization of the KPC Gas Debottlenecking Project. The implementation of the project will lead to the expansion of capacities and growth of production volumes at Karachaganak. This project also provides good opportunities for Kazakhstani business to improve their skills, organize joint production with a foreign partner to become a contractor of the Karachaganak Petroleum Operating B.V. (KPO) consortium. Marat KARIMOV, KPO Deputy General Director, in an interview with Petroleum talks about the work of the consortium to develop local content in the project and where and how local suppliers and producers will be able to participate in new promising KPO projects.
– To ensure the acquisition of the best goods, services, and works necessary for the operation of the Karachaganak field, we cooperate with a large number of contractors, suppliers and contracting parties. The priority is to purchase from Kazakhstani suppliers and contractors, as we are aware of the impact of our presence on the country’s economy and responsibility for the sustainable development of both the region and Kazakhstan as a whole.
At the behest of the times and with the growing competencies of local companies, KPO has updated the Local Content Policy and developed a two-year Local Content Development Program that supports the implementation of state programs for industrialization and development of engineering, as well as assists in the creation of an oil service cluster around the Karachaganak project.
Today, the figures show the success of this policy. Thus, at the end of 2018, the share of local content of KPO in the supply of goods, works and services reached 60 percent, which in monetary terms is 474 million US dollars. In general, since the signing of the Final agreement on the production sharing of the Karachaganak field in November 1997, the share of local content in KPO procurement reached 7 bln dollars.
The strategy on the introduction of mandatory conditions for the establishment of partnerships and joint ventures by major oil service contracts, adopted by KPO, in the last two or three years, allowed to involve a higher number of domestic companies and gave them the opportunity to participate in more complex works. This practice will be continued during the implementation of the Karachaganak Expansion Project.
– Mr. Karimov, please tell us more about the KPC Gas Debottlenecking Project. How widely will local suppliers be involved?
– As already reported, in September of last year, the partners of the Karachaganak project signed a significant agreement with the Republic of Kazakhstan on the authorization of the KPC Gas De-bottlenecking Project (KGDBN).
This project will allow to process up to 4 billion cubic meters of additional volumes of raw gas per year. They will be used for reinjection into the reservoir to maximize the level of production of liquid hydrocarbons, a further total increase of about 10 million tons.
A strategy and plan for local content have been developed specifically for the KGDBN project, which set a minimum share of local content of 40% in the purchase of goods, works and services, and 75% in the recruitment of personnel. The project will attract additional investments and create a large reserve for domestic producers and local construction and oil service companies. At the same time, Kazakhstani specialists, as before, will play a vital role in the upcoming work.
Thus, in order to maximize the involvement of local producers in more complex and intricate work and realizing that in some cases, when local companies need further development and new technologies, KPO has established mandatory requirements for the establishment of joint ventures, consortia with local partners for key types of work, equipment, and components.
From now on, only joint ventures and consortia with the participation of local partners will be invited to participate in major tenders, for example, for design, construction, project management, etc.
In addition to the creation of new jobs, this approach is also intended to ensure the mutual integration and transfer of advanced technologies and know-how to the industrial sector of the regional and national economy. The types of work, goods, and services that will be performed only by Kazakhstani companies are defined separately.
– It is no secret that today many Kazakhstani producers wishing to become contractors of large oil and gas operators do not have sufficient financial resources for modernization of production, its expansion, certification of products according to international standards. The company can attract such resources if it has a long-term stable market for its products. So it is a vicious circle?
– To break it, KPO introduced a mechanism to support local producers, such as long-term contracts with them. In this case, the manufacturer invests in production, improving the quality and increasing the volume of production, the purchase of which we guarantee for the future. And there are many companies with which we have signed such contracts.
In 2017, KPO signed a long-term contract with Atyrau company ZhigerMunaiService for the supply of 16-inch drill bits of Kazakhstani production. Given the superior performance of the second improved drill bit identified in the course of its operation, in prospect, KPO is considering the localization of smaller drill bits.
According to the results of the early tender, in August 2017, KPO signed a long-term contract with KazSPO-N LLP for the supply of refractory winter and summer workwear, as well as winter jackets of domestic production with a 70% target level of local content. This contract, in turn, opens the door to the Kazakhstani manufacturer for the supply of refractory clothing to other primary subsoil users in Kazakhstan and foreign markets.
KPO, having analyzed the goods of constant demand, identified some imported goods, which have the potential for localization and is working on their localization, thus KPO is now completing several early tenders for the production of flanges, gaskets, fasteners with the necessary condition of manufacturing items with constant demand in the RoK, I think we will hand over these contracts in the first half of 2019. We plan to apply the same approach to some high-tech equipment.
Also in 2018, we were able to localize a number of related products, such as geotextile products used in the construction of well sites, office furniture, choosing not to use imported goods.
As part of the Energy Saving Program, in August 2017, KPO signed a long-term contract with Prolux LED LLP to localize the production of energy-saving lighting lamps in the city of Karaganda, as well as their supply to replace existing lighting lamps at KPO facilities. To date, more than 4,700 Kazakhstani energy-saving lamps have already been installed at various production facilities at the field, which allows KPO to reduce energy costs by more than 50%.
KPO initiated the process of localizing services for repair and rewinding of explosion-proof electric motors at Karachaganak, which was previously performed by a foreign contractor. KPO identified a potential Kazakhstani service provider interested in localizing work and building a new service center for the repair of explosion-proof electrical equipment in the city of Atyrau. In March 2017, a long-term contract for these services was signed with Edil-Oral.kz LLP service center.
The consortium helps local companies to find partners among foreign companies by creating joint ventures and consortia. This allows not only to create new jobs but also contributes to the transfer of technology and the development of new production capacity in Kazakhstan, as well as enables local companies to meet international quality standards, which will allow them to expand markets by entering global markets in the future.
– One of the key priorities of Kazakhstan’s development noted in the Address of the President of Kazakhstan «Third modernization of Kazakhstan: global competitiveness», is the acceleration of technological modernization through digital technologies. In December 2017, the Digital Kazakhstan state program was launched. It is based on three pillars: digitalization of the flagship industries, the introduction of advanced technologies and the use of the digital approach. How is KPO involved in this program?
– As part of the Digital Kazakhstan initiative, Karachaganak Petroleum Operating, along with other oil and gas companies operating in Kazakhstan, it was instructed to develop a Roadmap for technological modernization and digitalization. Last fall, in Uralsk, together with the local administration of West Kazakhstan region, we organized an international forum on digitalization with the participation of the Deputy Prime Minister of the Republic of Kazakhstan, the leadership of the Ministry of Education and Science of the Republic of Kazakhstan, local administration of WKR and KAZENERGY Association. Among the guests, there were representatives of leading universities of the Republic of Kazakhstan and West Kazakhstan region, international experts and representatives of major foreign IT companies.
At the forum, KPO presented its Roadmap for digitalization, which identifies critical areas for the transition to digital technologies to optimize, improve and accelerate business processes. Among them: production process, well operations, implementation of future projects, as well as increasing local content capacity and integration with other components of production infrastructure. One of the main events of the forum was the signing of a Memorandum of cooperation between KPO, the Ministry of Education and Science, local administration of West Kazakhstan region and the KAZENERGY Association, which aims to increase local content by training new professionals and support in the creation of startups.
There is no doubt that this forum has become an effective platform to discuss the prospects of joint ventures, business expansion and networking with all market participants, both from the state and from the business side, and also gave a new impetus to the development of Kazakhstani content in the field of digital technologies and automation of business processes.
– Mr. Karimov, you talked about the kind of support KPO provides to local business. And what, in turn, do you expect from your potential suppliers?
– In general, the work carried out by the consortium on the development of local content should contribute to the creation of conditions for the sustainable development of Kazakhstan’s economy by attracting investment and technology transfer.
I believe that the purposeful work of KPO will give domestic enterprises an additional incentive to achieve compliance with international quality standards. This would increase the share of local content in all future projects of the consortium and in the industry as a whole.
This is precisely what we expect.