The Principle of the Development of Local Content: from Simple to Complex
The unique Karachaganak project, since 2001, one of the first in the country has a Local Content Development Programme, updated every two years to set new challenges for KPO and set the trend in the development of local content for the entire oil and gas industry.
The Karachaganak Petroleum Operating (KPO) consortium understands the importance of diversified development of the economy of the Republic of Kazakhstan, and KPO takes an active part in the economy development of the West Kazakhstan region and the Republic of Kazakhstan as a whole through the implementation of the Local Content Development Program in the Karachaganak project for 2018-2019, which was developed on the tasks stipulated in the state programs for industrialization and development of engineering, as well as in the creation of the oil service cluster around the Karachaganak project.
As part of the President’s instruction to increase the level of local content in the implementation of large oil and gas projects, KPO actively contributes to the development of Kazakhstani producers and implements a number of effective projects in support of local production, which allows Kazakhstani companies that have gained invaluable experience in such a large and complex field as Karachaganak become one of the most popular contractors for many other oil and gas projects, both domestically and abroad. Thus, for example, some KPO contractors from the West Kazakhstan region are working not only in Tengiz or Kashagan projects but also in the Russian Federation, UAE, and Iraq.
The success of the Local Content Development Programme is evidenced by the fact that over the past five years there have been significant changes in the structure of the KPO consortium procurement – the transition from simple products to more complex high-tech goods and equipment made in Kazakhstan has been clearly marked. Whereas in the past the simple and affordable products such as diesel fuel, natural gas, and petrol were usually procured, today, the more sophisticated products (thick-walled separators, modular power substations, metal structures, transformers, heat exchangers, drilling bits, ball valves, drilling pipes, chemical products, etc.) which were not previously produced in Kazakhstan as per KPO quality requirements, are purchased by KPO under long-term contracts.
This year, KPO will continue to work on:
- implementation of the Local Content Development Programme for 2018-2019;
- support of developing Kazakhstan’s manufacture of the daily demand products and technologically sophisticated equipment (wellhead control panels, remote telemetry units, process filters, operating consumables such as gaskets, flanges, fasteners, engine oils, etc.). This work is carried out in accordance with the Memorandum of understanding on the development of domestic industry, with the support of the authorized body – PSA LLP, the Ministry of Energy of Kazakhstan and the Kazenergy Association, the estimated total cost of goods for localization is about 70 mln USD;
- assistance in the establishment of joint ventures and consortia with local partners to participate in all major KPO tenders, such as design, construction, well work, maintenance of complex plant units, 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. It should be noted that KPO separately defines the types of work, goods, and services, contracts for which are awarded only to Kazakhstani companies;
- negotiations on the establishment of service centers in the Republic of Kazakhstan to perform high-tech repair work with the involvement of transnational companies such as General Electric (USA), Honeywell (USA), and the opening of the Honeywell training center on the basis of the Kazakh-British Technical University for the transfer of advanced technologies and know-how in the training of Kazakhstani specialists.
- work with international manufacturers of original equipment for the localization of spare parts, equipment manufacturing in Kazakhstan.
One of the effective tools that contribute to the development of local content is regular monitoring and direct familiarization with the capabilities of regional producers. Visiting the regions of Kazakhstan, within the framework of interregional cooperation, allows KPO to get acquainted with the products and capabilities of domestic producers and service providers. Due to this, in addition to the West Kazakhstan region, KPO actively cooperates with other regions of Kazakhstan and attracts to the maximum the enterprises operating in the region working on the oil and gas sector for the implementation of the Karachaganak project.
The KPO openness policy allows regional companies to have access to information on current and future KPO needs, including technical specifications. They have the opportunity to get acquainted with the company’s requirements for procurement and local content.
As part of the development of interregional cooperation, a delegation consisting of representatives of the West Kazakhstan region and KPO visited ten regions of the country, including Astana and Almaty. As a result of the meetings, enterprises of other regions had the opportunity to work with KPO, in total 11 contracts were concluded with companies that previously did not provide services for KPO.
In particular, the result of such interregional cooperation with the Turkestan region was the signing of a Memorandum with Kentau Transformer Plant JSC for the supply of Kazakhstani transformers for the KPC Gas Debottlenecking Project (KGDBN), which are already installed at the KGDBN project.
A contract was signed for the supply of locally manufactured oil well cement between the KPO contractor for cement works – Baker Hughes – and Shymkentcement JSC. Kazakhstani cement was successfully tested by KPO. Its localization made it possible to replace a foreign analog, and this experience aroused the interest and demand of other oil and gas operators for Kazakhstani oil well cement.
During the working visit to the Turkestan region, the delegation also got acquainted with the capabilities of the Karlskrona plant for the production of pumps, and the Hill Corporation plant for the production of motor and lubricating oils.
Another successful example of interregional cooperation is the conclusion in 2018 of a contract for the production of more than 2,200 tons of metal structures for the KGDBN Project with PSI Engineering LLP from Almaty, which has already begun delivery to the Karachaganak field of the first batch of metal structures of local production on the eve of the new year, 2019. KPO became the first company to place such a large order at the new machine-building enterprise, opened by the head of state during the Industrialization Day in December of 2017, which allowed ensuring the workload of the domestic enterprise for the whole year, providing work for hundreds of Kazakhstanis.
In addition, PSI Engineering has received a large order from Schneider Electric for the production of 5 modular substations for KPO in Kazakhstan as part of the KGDBN Project.
Of course, working on the development of inter-regional cooperation, we do not forget about the enterprises of the West Kazakhstan region, thus, in June 2018, following the results of complex negotiations, it became possible to reach an agreement with General Electric (GE) on the repair of the GE turbine at the service center of West Kazakhstan Engineering Company (ZKMK JSC) in Uralsk, which allowed ZKMK to receive an order for the repair of such high-tech equipment under the control of GE for the first time and ensured the workload of the service shop for servicing gas turbine equipment. Also, in December 2018, having replaced a foreign manufacturer, ZKMK successfully completed the fabrication of more than 200 internal corrosion-resistant steel plates for one of the KPO plate separators.
Two machine-building enterprises of West Kazakhstan region (WKR) participate in the KPO program to promote the certification of production according to the ASME standard, it is planned to complete this work in June 2019, which will bring the products of Kazakhstan producers to the international level.
In addition to the above, we actively involve agricultural producers of WKR in the supply of Kazakhstani meat and meat products, which allowed farms and poultry farms of the region to cover the needs of KPO dining halls with up to 80% of local meat.
In general, payments of KPO to companies registered in WKR in 2018, amounted to over 280 mln USD.
Another effective form of interaction between KPO and major service providers is the holding of forums where companies have the opportunity not only to get information on the project straight from the source but also to discuss issues relevant for suppliers. Last year alone, there were several such meetings where KPO was either an organizer or a participant.
In particular, in September 2018, our company held a Forum on the development of local content in Astana, which was attended by the Ministry of Energy, the Ministry of Industry and Development, WKR local administration, the competent authority, local and international associations, representatives of more than 130 domestic and international companies providing comprehensive services for design, procurement and construction and interested in creating consortia and joint ventures.
The main topics of discussion were the upcoming Stage-1 of the Karachaganak Expansion Project (KEP-1), KPO requirements for suppliers of goods, works, and services, as well as the strategy for the development of local content and plans for the purchase of goods, works, and services under KEP-1. Following this Forum, an agreement for joint work between the domestic machine-building plant Atyrauneftemash LLP and KNMGroup (Malaysia) was entered into to manufacture heavy vessels for KPO at the premises of Atyrauneftemash LLP.
Also, in November, Almaty hosted a joint Forum of major oil and gas operators on the localization of industrial chemicals, with the assistance of the Council for the development of strategic partnerships in the oil and gas industry. At the Forum, representatives of Kazakhstani companies were given the opportunity to get acquainted with the short – and medium-term needs of KPO in chemicals, as well as the company’s plans to assist in increasing local content in their production.
KPO helps local manufacturing companies to find partners among foreign companies to establish 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 international markets in the future.
In particular, in the fall of 2018 in Amsterdam, KPO organized, together with the Association of Dutch Suppliers in the Oil and Gas Industry (IRO), the Kazakh-Dutch Forum for Dutch and international engineering and oil service companies. It was attended by the heads of West Kazakhstan region, representatives of major international corporations working in the field of engineering and production of equipment for the oil and gas industry. The objective of the Forum was to attract international manufacturers to create new production facilities in Kazakhstan and/or partnerships with local companies in Kazakhstan in order to meet both the current needs of KPO and future projects. At the same time, the priority region of joint work is West Kazakhstan region, on the territory of which the Karachaganak field is located. In turn, representatives of the regional authorities spoke about the investment potential of the region and the initiatives implemented by the regional leadership to support business and strengthen cooperation with foreign investors, in particular, with Dutch partners.
KPO also has close business relations with the UK Department for International Trade and the Kazakh-Italian Chamber of Commerce. This allowed KPO to successfully implement several localization projects, which in turn led to the creation of new production facilities and additional jobs.
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 total, since the signing of the Final Production Sharing Agreement of the Karachaganak oil and gas condensate field, as of the end of 2018, the total share of local content in the procurement of goods, works and services exceeded 7 bln US dollars.