-What are the company plans for this year?

– PetroKazakhstan Kumkol Resources planned its oil production for this year at the level of 3.1 million tons. The company is developing 6 fields, including the south-east part of Kumkol field, Kumkol South, Kyzylkiya, Aryskum, Maibulak and North Nuraly fields.

We are still somewhat behind the production schedule, since last winter the company was facing interruptions in power supply to the fields. Currently we are eliminating these lags and we are confident that we will reach the planned volume.

– What are the company short-term goals?

– At this point adjustments to the budget and the work program for the next year and the following 5 years are being finalized. In the next 2 years we are planning to achieve a production level of 3.2 million tons per year (see the table) by opening new fields. We invest about 50 million USD in exploration and it pays off. 14 wells out of 19 wells drilled in 2008 were successful.

The fact that oil production is being carried out not from a single field, but from a number of fields and that more than 350 wells are being run influences the efficiency of the company business. The raw material is of good quality, but the water content in produced oil is high. Besides, we are facing a step-by-step depletion of reserves; therefore our primary objective continues to be expansion of the resource base by exploration and commissioning of new fields. Some part of the new fields is located in Kyzylorda Oblast of Kazakhstan, where the Kumkol group of fields is located too, and the other part of new sites is located in Karaganda Oblast. As of January 1, 2009 the total oil reserves of PetroKazakhstan Kumkol Resources made up 93.3 million tons.

– How soon will you start to operate new sites?

– The procedure for obtaining licenses for new fields and extending the existing licenses takes time. Besides, in the next three years a significant part of our resources and efforts will be engaged in a large-scale project for revamp of the Shymkent Refinery owned by the company.

– Can you provide more details on the refinery revamp?

– At this point we refine 4.1 million tons per year at our refinery, while the objective is to achieve an annual processing of 6 million tons by 2014. Moreover, the products will have to comply with Euro-3 standard and the light product yield shall reach 90%. The refinery revamp is our key financial objective. We are busy making key decisions with regard to this project. It is important to note that during the revamp the refinery will be running as usual without reducing its refining volumes.

– Can you say that the cooperation between the company shareholders – CNPC and KazMunaiGaz – is going successfully?

– Surely, it is successful. During the International Forum that took place in late September of this year in Beijing, I used operations of PetroKazakhstan company in my report as an example of efficient cooperation of two national oil and gas companies of Kazakhstan and China. Chinese investors contributed new technologies to the project for Kumkol group development and demonstrated a serious approach to business and an increase of business efficiency. Over the past few years PetroKazakhstan has become one of the ten largest oil producers in Kazakhstan and is one of the main tax payers in the country. Moreover, at this point the share of foreign personnel in 3,400 employees of the company is only 2%.

– How serious is the expansion of Chinese oil companies to the Kazakhstan market?

– According to official information among 92 oil and gas companies of Kazakhstan there are 56 companies with participation of foreign investors, 20 of which involve Chinese investors, and their share in the overall country production exceeds 20 percent. Over time this indicator may be reduced when they start to produce oil at Kashagan.

– Last week some information appeared regarding purchasing of a large share in Exploration and Production KazMunaiGaz company by Chinese investors.

-11% of depositary receipts are something to think about. We are dealing with outcomes of the global market which uses financial instruments requiring deliberate and well thought-out decisions.

Oil production by PetroKazakhstan Kumkol Resources:  

Look for Opportunities While in Crisis /Lubov Dobrota/

More than one third of the total oil product output in the country is produced by the Shymkent oil refinery. PetroKazakhstan Oil Products TOO is making several grades of gasoline and diesel, mazut, jet fuel and LPG. The vice-president of the Kazakh-Chinese joint venture, Azamat Akishev, is confident that the refinery is still not utilizing its resources to the fullest extent. For the past twelve years he has been working for KazMunaiGaz National Company and knows the oil product market well. By the way, Azamat Nurdauletovich is celebrating his fiftieth birthday today, but the reason for our meeting with him was a large-scale refinery upgrade project, the necessity of which was mentioned by the Head of the State in his Message to the people of Kazakhstan.

‘Our refinery is the most stable oil refinery in Kazakhstan from the viewpoint of product supplies. Last year the Shymkent Refinery processed 4,308,190 tons of crude oil. For better understanding of the growth dynamics I can say that it is higher by one-fourth million tons than last year. Our goal is to increase the light product yield. For this purpose the refinery has developed new specifications (standards), and beginning from last May we have mastered and certified the production of a new summer diesel grade DTL-5. It has improved the refinery performance in terms of light end yields thanks to the increased diesel output in summer, and also satisfied the growing demand for this type of fuel, especially during the sowing period. The refinery has also proved that it can work to the most up-to-date requirements and norms of the environmental management. A respective international audit completed in 2008 resulted in a certificate issued to certify that the organizational structure, covering such areas of the business as refining, transportation, storage of oil and oil products, is functioning in accordance with international standard ISO 14001:2004. I would also like to mention that, as we have set a course for enhancing the process control, the refinery is completing one more important innovation: a start-up of a complex computer system Sigma-Fine. The system is intended for calculation of a crude oil and oil product material balance for any period of type by individual equipment, process units and workshops and for the whole refinery.

Nevertheless we still have some problems. In spite of the fact that our refinery is the youngest among the three refineries operating in the country, it operates based on a reduced scheme and is inferior even to the Pavlodar refinery in terms of the conversion rate. The main cause is the lack of a Delayed Coker and a Catalytic Cracker in the process diagram, which represent two secondary processes that extract higher percentages of light oil products.’

‘Azamat Nurdauletovich, the Government has approved a program for the upgrade of domestic refineries and has even pronounced a preliminary cost of the refinery upgrades of more than three billion USD. In your opinion, how important it is and what your company is doing with this regard?’

‘The construction of the Shymkent refinery started in 1972, and the refinery produced its first products in January 1985, and the last process unit was commissioned seventeen years ago. So, the refinery equipment has outdated and cannot make products in accordance with quality standards. It should have been upgraded about ten years ago. As the Catalytic Cracker was not put into operation in the refinery in its due time, the light yield does not exceed 62 percent. You can judge about it yourself. Recently the International Fuel Quality Control Center (IFQC) made a research of the fuel quality in various countries of the world. Kazakhstan was at the 90th place in the rating prepared based on the research results. The list includes 100 items in total. In terms of these indicators we are even behind Uzbekistan and Azerbaijan. We import up to 35 percent of high octane gasoline from Russia. If we do not resolve the fuel deficiency issue, then in the future our position may be similar to that of Ukraine which is fully dependant on importers. It was not by accident that our President Nursultan Nazarbayev in his Message to the nation noted that “we will continue to finance and move forward the current promising investment projects. First of all it relates to the upgrade of oil refineries.” As a result of the upgrade we want to achieve several goals. Among them are a light product yield increased from 62 to 85 percent and a product range expanded due to manufacturing of such petrochemicals as polypropylene, benzene and elemental sulfur. Improving the product quality to EURO-4 standard requirements and enhancing environmental properties are also ranked among our priorities. The refinery crude oil capacity will reach six million tons. We have completed relevant marketing researches, and the feasibility study for the upgrade project is being developed to be completed by the end of this year, and then, as we excpect, the engineering and the upgrade itself will be commenced. It is very important that on May 14 of this year the RK Government approved the “Complex development plan for oil refineries of the Republic of Kazakhstan for 2009-2015”. The main purpose of this document is to ensure the security of energy supplies in the country and a complex development of the oil refining industry.’

‘The whole world is facing the financial and economic crisis today. Did it affect the operations of your refinery as well?’

‘Yes, we felt the consequences of the world crisis quite significantly. First of all, the fall of oil prices worsened the marketing situation in the external and internal oil product markets. Sales of oil products became complicated. We had especially hard time from last November till this February. All refinery tanks were full and we had to place mazut at other storages. The refinery produced more than 287 thousand tons of mazut or 72 thousand tons per month, while the domestic demand for mazut was about 150 thousand tons per month. Therefore all oil bases were filled with mazut. Even Energocenter-3 AO located in Shymkent that annually consumes mazut refused to accept mazut during the heating season, since it was more profitable for them to consume gas. Secondly, the depreciation of tenge resulted in the fact that the equipment and spare parts that we buy for a foreign currency from CIS and other foreign countries have significantly increased out expenses. It is not a secret that the Shymkent refinery is equipped with process units and equipment of foreign manufacturers produced in Russia, Ukraine, the USA, Germany, Poland and other countries. Spare parts and components to such equipment are either not produced in Kazakhstan at all or do not meet technical specifications, explosion-proof requirements, material quality and other parameters. Nevertheless, in 2009 the refinery is planning to buy goods, work and services to the total amount exceeding ten billion tenge. It is expected that the share of the Kazakhstan content in them will be 61 percent.’

‘Azamat Nurdauletovich, what other measures are being taken by the company management to prevent negative consequences of the crisis?’

‘We have adopted a complex anti-crisis program which includes such main actions as optimization of all costs, selling of unprofitable and non-core assets, a significant reduction of operating and administrative expenses, as well as a personnel optimization program. We have to be more responsible in deciding how and where to spend our funds and to set up our priorities in a more precise way. And our biggest achievement is that we did not allow any large-scale reductions and dismissals of the refinery operating staff to happen. You know, there is a Chinese hieroglyph for a ‘crisis’ which simultaneously means a ‘threat’ and an ‘opportunity’. On the one hand, the crisis makes us think better and work more dynamically. On the other hand, the crisis gives us an opportunity and a chance to show our worth and approve ourselves, to change our mind about something, and to find new ways for going forward. I am sure that the crisis will make us stronger.’

‘PetroKazakhstan Oil Products TOO was always showing its commitment to the corporate social responsibility policy. Does the management plan to make any corrections to the strategy of your company?’

‘In spite of the financial crisis and a drastic fall in oil prices that made many oil companies be more careful in spending funds, PKOP TOO is not going to refuse from its social responsibility policy. The oblast akimat and the company annually sign memoranda for social assistance. For example, this year it is decided to spend one million USD on social projects of the oblast. We constantly provide our sponsorship to the ballet school, the Sairam orphanage, the SKO Center for Support of Women and Children, kindergartens, and the Center for Prevention and Treatment of Infectious Diseases “Mother and Child”. The refinery financed the construction of a water supply line to Zhuldyz village and now its citizens have top-quality potable water. We also support many sport and recreational events. It is our city and we cannot be careless of its present and future.’

Protection of the environment is a top priority for CNPC in conducting petroleum operations both in China and internationally. That explains the company’s guiding principle: “Providing Energy and Creating Harmony”. Therefore, CNPC has been taking the issue of gas flaring seriously since the company started its operations in Kazakhstan.

After the acquisition of PetroKazakhstan’ assets in October 2005, the company spent more than $150 million on gas utilization projects and dismantled 112 out of 131 (by the end of Y2008 expected all 131) of the small flares in single well facilities in Kumkol group of oilfields. PKKR is now re-injecting gas into the gas cap in Kumkol and KAM fields which helps increase oil recovery and improves the environment. Besides, the associated gas produced in South Kumkol field, is being utilized for power generation in a gas turbine power plant.

Please tell us how the Kumkol group of oilfields will be developed in the future.

The Kumkol oilfield will remain central to, and play an important role in our oil and gas development operations in the South Turgai Basin. Although the field itself is maturing, the supporting infrastructure, we have created, including oil storage, power generation, water treatment and living accommodations, provides a reliable supporting base of operations for the continued exploration, appraisal and development of more remote assets.

The Kumkol oilfield has a great diversity of petroleum operations and will continue to be a tremendously important location to provide technical and practical training for our young specialists. Surrounding the Kumkol oilfield itself is a vast expanse of land, under which two new oilfields have been discovered in the past 7 years, within just a few kilometers of the main Kumkol pool. These new fields will be developed. In part they will use the common infrastructure, available in Kumkol, and help to provide growth of our operations, and sustainable development of the entire PetroKazakhstan’s upstream business.

The Kumol oilfield has also recently been selected to perform another important role as a major hub and pump station along the Atasu-Alashankou oil pipeline. This is another important aspect of the multiple roles the Kumkol field will play in the future.

Shymkent refinery represents an important asset for you in Kazakhstan. What are your plans with regard to this refinery?

Shymkent refinery, built in 1985, has the annual production capacity of 5.25 mln tons. In 2007，Shymkent refinery (PetroKazakhstan Oil Products LLP) produced 4.06 million tons of oil, comparing to 4.04 mln tons of oil in 2006.

We continued our work on the re-equipment of oil tanks including removing oil sludge and rendering overhaul and reconstruction of an oil tank 304/4 with a capacity of 20 000 tons. Obsolete equipment of two transforming stations was replaced, which is essential for continuous operation of these stations. The company’s overall investment into the modernization amounted to $19 million.

Maximum of petroleum release with high octane rating of more than 50% was achieved from the total petroleum percentage, and the light oil products’ ratio to the value of the refined oil made about 62%.

In 2008 the planned modernization will allow to achieve the production increase in light oil products，improve the quality of refined products to EURO-3 standards, increase range of petrochemicals polypropylene products, benzyl and elementary sulfur, and reduce harmful discharges by the refinery.

Protection of the environment is a top priority for CNPC in conducting petroleum operations both in China and internationally. That explains the company’s guiding principle: “Providing Energy and Creating Harmony”. Therefore, CNPC has been taking the issue of gas flaring seriously since the company started its operations in Kazakhstan.

After the acquisition of PetroKazakhstan’ assets in October 2005, the company spent more than $150 million on gas utilization projects and dismantled 112 out of 131 (by the end of Y2008 expected all 131) of the small flares in single well facilities in Kumkol group of oilfields. PKKR is now re-injecting gas into the gas cap in Kumkol and KAM fields which helps increase oil recovery and improves the environment. Besides, the associated gas produced in South Kumkol field, is being utilized for power generation in a gas turbine power plant.

Please tell us how the Kumkol group of oilfields will be developed in the future.

The Kumkol oilfield will remain central to, and play an important role in our oil and gas development operations in the South Turgai Basin. Although the field itself is maturing, the supporting infrastructure, we have created, including oil storage, power generation, water treatment and living accommodations, provides a reliable supporting base of operations for the continued exploration, appraisal and development of more remote assets.

The Kumkol oilfield has a great diversity of petroleum operations and will continue to be a tremendously important location to provide technical and practical training for our young specialists. Surrounding the Kumkol oilfield itself is a vast expanse of land, under which two new oilfields have been discovered in the past 7 years, within just a few kilometers of the main Kumkol pool. These new fields will be developed. In part they will use the common infrastructure, available in Kumkol, and help to provide growth of our operations, and sustainable development of the entire PetroKazakhstan’s upstream business.

The Kumol oilfield has also recently been selected to perform another important role as a major hub and pump station along the Atasu-Alashankou oil pipeline. This is another important aspect of the multiple roles the Kumkol field will play in the future.

Shymkent refinery represents an important asset for you in Kazakhstan. What are your plans with regard to this refinery?

Shymkent refinery, built in 1985, has the annual production capacity of 5.25 mln tons. In 2007，Shymkent refinery (PetroKazakhstan Oil Products LLP) produced 4.06 million tons of oil, comparing to 4.04 mln tons of oil in 2006.

We continued our work on the re-equipment of oil tanks including removing oil sludge and rendering overhaul and reconstruction of an oil tank 304/4 with a capacity of 20 000 tons. Obsolete equipment of two transforming stations was replaced, which is essential for continuous operation of these stations. The company’s overall investment into the modernization amounted to $19 million.

Maximum of petroleum release with high octane rating of more than 50% was achieved from the total petroleum percentage, and the light oil products’ ratio to the value of the refined oil made about 62%.

In 2008 the planned modernization will allow to achieve the production increase in light oil products，improve the quality of refined products to EURO-3 standards, increase range of petrochemicals polypropylene products, benzyl and elementary sulfur, and reduce harmful discharges by the refinery.