08ASTANA1210, ASSET STRUCTURE OF KAZAKHSTAN’S NATIONAL OIL AND GAS

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Reference ID Created Released Classification Origin
08ASTANA1210 2008-07-03 05:33 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXRO8815
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #1210/01 1850533
ZNR UUUUU ZZH
R 030533Z JUL 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 2694
INFO RUCNCIS/CIS COLLECTIVE 0544

UNCLAS SECTION 01 OF 04 ASTANA 001210 
 
STATE FOR SCA/CEN (O'MARA) 
DOE FOR EKIMOFF 
COMMERCE FOR HUEPER 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EPET KZ
 
SUBJECT:  ASSET STRUCTURE OF KAZAKHSTAN'S NATIONAL OIL AND GAS 
COMPANY KAZMUNAYGAS 
 
Summary 
------- 
 
1.  (U) KazMunayGas (KMG), Kazakhstan's state-owned oil and gas 
company, is a vertically integrated company holding 25 subsidiaries 
in oil and gas exploration, extraction, processing, transportation, 
and sales.  KMG produces 16% of Kazakhstan's oil output, transports 
65% of its oil, and manages 100% of the country's gas trunk 
pipelines, 50% of its tanker transportation, and 30% of its oil 
refining facilities.  End Summary. 
 
Background Information 
---------------------- 
 
2.  (U) KMG was founded in February 2002 from a merger of two 
national companies, KazakhOil and Transportation of Oil and Gas 
(itself a result of the 2001 merger of KazTransOil and KazTransGas). 
 In 2006, KMG became a 100%-owned subsidiary of the newly organized 
State Assets Management Holding Company "Samruk."  Kazakhstan's Law 
on Subsoil Use gives KMG the pre-emptive right to acquire 50% stakes 
in new and existing projects in the case of an equity transfer. 
 
KMG's Relationship with Energy Ministry and Samruk 
-------------------------------------------- 
 
3.  (U) The Ministry of Energy and Mineral Resources provides policy 
supervision for KMG, establishes development priorities in the oil 
and gas sector, and identifies the role of KMG in this development. 
Moreover, the Energy Ministry dictates the rules of Kazakhstan's 
energy market, regulates the market of oil products, keeps a 
register of subsoil users, and controls the compliance of subsoil 
users with technical standards. 
 
4.  (U) Samruk coordinates the work of KMG and is responsible for 
its strategic management.  Samruk does not interfere with the 
operating activities of KMG, but establishes its strategic 
development priorities, such as corporate management, budgeting, and 
some aspects of the relationship with investors and the state. 
Samruk has the right to include its representatives on the KMG board 
of directors. 
 
5.  (U) Samruk plans to restructure KMG.  According to Samruk 
chairman Kanat Bozumbayev, KMG is affiliated with over 190 
companies, 40% of which are classified as non-core assets (not 
directly related to the company's profile operations) in education, 
mass media, construction, etc.  Examples include Kazakhstan-British 
Technical University, Rauan Media Group, and KazMunayGas-Service. 
He envisions that in 2008-2010, about 100 such companies will be 
sold.  In 2002-2006, KMG sold some of its non-core assets such as 
KazTransCom, KazStroyService, KarakudukMunay, KazakhstanCaspiShelf, 
KMGPromGeoPhizika, KMG Consulting, and others. 
 
KMG Major Projects 
------------------ 
 
6.  (U) Of major oil and gas projects, KMG holds a 20% stake in 
TengizChevrOil operating consortium, represents state interests in 
the Caspian Pipeline Consortium and in the Karachaganak project, and 
has increased its share from 8.33 to 16.81% in the consortium 
developing the Kashagan field. 
 
7.  (U) KMG also holds a 50% stake in KazakhOil-Aktobe (the other 
50% belongs to Russia's LukOil Overseas company), a 51% stake in 
KazakhTurkMunay (Turkish Oil Corporation holds 49%), 33% in 
PetroKazakhstan company (China National Petroleum Corporation CNPC 
controls the other 67%), and a 34% stake in the KazakhOil-Ukraine 
joint venture. 
 
8.  (U) KMG has several projects connected with the Karachaganak 
field.  The company owns a 50% stake in KazRosGas, a joint venture 
with Russia's Gazprom company based at Orenburg Gas Processing Plant 
(GPP).  The plant refines and then exports Karachaganak gas.  As a 
part of this joint venture, KMG is seeking a 50% stake in the 
Orenburg GPP.  KMG is also completing a feasibility study to build a 
Karachaganak-supplied gas refinery at Aksai that will meet the 
internal demand for gas. 
 
KMG Subsidiaries 
---------------- 
 
9.  (U) Among the most significant of KMG's 25 subsidiaries, 
Exploration&Production KazMunayGas carries out production projects, 
KazMunayTeniz manages offshore projects, the Kazakhstan Oil and Gas 
Institute assesses all KMG field exploration and hydrocarbon 
transportation projects, KazTransOil supervises oil pipeline 
transportation, KazTransGas manages domestic and international 
pipeline shipments of gas, KazMorTransFlot ships oil across the 
 
ASTANA 00001210  002 OF 004 
 
 
Caspian Sea via tankers, and Trade House KazMunayGas processes oil, 
exports oil and oil products, and sells oil products to the domestic 
market. 
 
KMG Production Subsidiary Assets 
-------------------------------- 
 
10.  (U) KMG owns 61% of Exploration&Production KazMunayGas (EP 
KMG), while the remaining 39% is traded on the London and Kazakhstan 
stock exchanges.  In 2007, EP KMG acquired a 50% stake in 
KarazhanbasMunay, which is developing the Karazhanbas oil field 
(403.15 million barrels of oil in probable reserves) in Mangistau 
Oblast, and a 50% stake in KazGerMun
ay, which is developing the 
Nuraly, Aksai, and Akshabulak oil fields (317.38 million barrels of 
oil in proven reserves) in Kyzylorda Oblast.  EP KMG also has two 
production subsidiaries, EmbaMunayGas and UzenMunayGas, which hold 
more than 1.5 billion barrels of recoverable reserves. 
 
11.  (U) EP KMG also holds a 50% stake in Kazakhstan Petrochemical 
Industries (KPI), with SAT & Company holding the other 50%.  KPI is 
constructing in Atyrau Oblast the Karabatan petrochemical complex, 
which will have an annual capacity of 0.8 million tons of 
polyethylene.  The facility will receive 6 billion cubic meters 
(bcm) of gas from Tengiz, and 3 bcm from Kashagan.  On May 28, 2008, 
EP KMG provided 4.8 billion tenge ($40 million) to select 
engineering and construction contractors. 
 
12.  (U) After a new tax code comes into effect on January 1, 2009, 
EP KMG will reportedly seek to buy 50% shares in KazakhOil-Aktobe, 
51% in KazakhTurkMunay, 33% in PetroKazakhstan from KMG, and at 
least a 51% stake in MangistauMunayGas (MMG) from Indonesia's 
Central Asia Petroleum Corp.  (Note:  EP KMG is waiting for the new 
tax code in order to measure the effect on its revenues and 
expenditures.  In the second half of 2008, EP KMG will start due 
diligence of upcoming acquisitions.  End Note.)  MMG, the fifth 
largest oil producer in the country (accounting for 9% of 
Kazakhstan's oil output), possesses 36 associated fields with 7.03 
billion barrels of oil in estimated reserves.  MMG owns Helios brand 
gas stations and holds a 54.8% stake in Pavlodar Oil Refinery. 
 
13.  (U) In 2009, EP KMG plans to launch the production of road 
bitumen at the Aktau Plastic Products Plant, in which it owns a 50% 
stake (SAT & Co is the other shareholder).  In 2010, EP KMG will 
start production of aromatic hydrocarbons at the Atyrau Polyethylene 
Plant.  EP KMG owns a 50% stake of the plant. 
 
14.  (U) In June 2008, EP KMG expressed interest in purchasing a 50% 
stake in Turgai Petroleum Joint Venture, currently owned by LukOil 
and PetroKazakhstan (controlled by CNPC), soon after LukOil 
announced its intention to buy out CNPC's share.  Turgai Petroleum 
is developing the Kumkol oil field, which has approximately 170 
million barrels of oil in proven reserves. 
 
Assets of KMG Offshore Project Managing Subsidiary 
------------------------------------------ 
 
15.  (U) The 100%-owned KMG subsidiary KazMunayTeniz (KMT) holds a 
40% stake in Caspi Meruerty Operating Company B.V. (CMOC), which is 
exploring the Zhemchuzhina oil field along with Shell and Oman 
Pearls Company Ltd, and a 25% stake in the Zhemchuzhina Production 
Sharing Agreement (PSA). 
 
16.  (U) KMG intends to establish a joint venture with Lukoil and 
Gazprom to develop the Tsentralnaya section of the Caspian shelf 
with 300 million tons of hydrocarbons in estimated reserves.  KMG is 
close to signing with the Ministry of Energy and Mineral Resources a 
contract for exploration and extraction of hydrocarbons at the 
Mertvyy Kultuk offshore section with estimated reserves of 1.2 
billion barrels of oil, 97.5 bcm of gas, and 5.1 million tons of gas 
condensate. 
 
17.  (U) The first drilling results of the Atash field jointly 
explored by KMT and LukOil showed no oil and gas reserves present 
(the field was expected to have 1.03 billion barrels of oil).  This 
is the third failure of KMT, following the Tyub-Karagan and 
Kurmangazy offshore projects.  Moreover, according to some experts, 
the Khvalynskoye field explored by the KMG-LukOil Joint Venture, 
Caspian Oil and Gas Company, was also not as promising as had been 
expected.  EP KMG seeks to replace KMT as operator of offshore 
projects, as it claims to possess more technical expertise in field 
development. 
 
18.  (U) In May 2008, KMG signed a contract to explore the Zhambyl 
section of the Caspian shelf, which has over 120 million tons of 
hydrocarbons in probable reserves.  KMT will have 73% of the 
project, and Korea National Oil Corp. the remaining 27%.  In January 
2008, KMG also signed a PSA with the Ministry of Energy and Mineral 
 
ASTANA 00001210  003 OF 004 
 
 
Resources to explore the promising N (or Nursultan) section of the 
Caspian shelf (600-700 million tons of hydrocarbons in probable 
reserves). (Note: This is the block that ConocoPhillips and Shell 
competed for.  ConocoPhillips and Shell both hope that they will 
eventually be provided an opportunity to participate.) 
 
Projects of KMG Oil Pipeline Transportation Subsidiary 
--------------------------------------------- ----- 
 
19.  (U) The 100%-owned KMG subsidiary KazTransOil (KTO) has a 50% 
stake in the Kazakhstan-China Pipeline Ltd, with the other 50% 
belonging to China National Oil and Gas Exploration and Development 
Corporation.  In 2006, KTO started oil shipments via the first stage 
of Kazakhstan-China oil pipeline Atasu-Alashankou.  Kenkiyak-Kumkol, 
the second stage of the pipeline, is to be launched at the end of 
2009. 
 
20.  (U) In December 2006, KTO and its partners, Naftrans (owned by 
Danish Greenoak Holdings Ltd and ENR Russia Invest) and French bank 
BNP Paribas, established a joint venture based at Georgia's Batumi 
oil terminal.  In 2007, KTO acquired the stakes of its partners and 
became the sole owner of the terminal.  KMG is interested in 
increasing its transit volumes of oil to 10 million tons a year via 
Georgia's railroad and oil pipelines. 
 
Projects of KMG Gas Pipeline Transportation Subsidiary 
--------------------------------------------- ----- 
 
21.  (U) The 51%-owned KMG subsidiary KazTransGas (KTG) owns 
Intergas Central Asia company, Amangeldy Gas company (gas extraction 
and processing in the Amangeldy field), and KazTransGas LNG 
(operator of Zhanazhol gas field), and also holds a stake in the 
Kazakhstan-Kyrgyzstan joint venture KyrKazGas.  In 2006, KTG bought 
Georgian Gas Distributing Company Tbilgasy. 
 
22.  (U) KTG holds a 50% stake in the Asian Gas Pipeline LLP, a 
joint venture with the CNPC affiliate, Trans-Asia Gas Pipeline Ltd. 
The joint venture was established in February 2008 to build a 
Kazakhstan-China gas pipeline with an annual capacity of 40 bcm of 
gas.  To ensure gas supply to this pipeline, the Government of 
Kazakhstan transferred to KMG the Urikhtau gas field in Aktobe 
Oblast with probable reserves of 40 bcm of gas. 
 
Operations of KMG Tanker Transportation Subsidiary 
--------------------------------------------- - 
 
23.  (U) KazMorTransFlot (KMTF) owned by Samruk (50%) and KMG (50%) 
is the national maritime trade fleet.  KMG seeks to increase its 
stake in KMTF to 100%.  KMTF has its own support fleet, including 
the tankers "Astana," "Almaty," and "Aktau,", and ships oil via 
tankers t
o the sea ports of Makhachkala (Russia), Baku (Azerbaijan), 
and Necca (Iran). 
 
Assets of KMG Processing and Sales Subsidiary 
----------------------------------------- 
 
24.  (U) The 100%-owned KMG subsidiary Trade House KazMunayGas (TH 
KMG) holds stakes in three oil refineries, Atyrau (99.09%), Shymkent 
(50%), and Pavlodar (42%).  KMG seeks to increase its stake in the 
Pavlodar Oil Refinery after the planned acquisition of at least a 
51% stake in its co-owner, MangistauMunayGas.  KMG owns 20.2% of 
Ukraine's Kherson Oil Refinery, but wants to raise its share to at 
least 50%. 
 
25.  (U) TH KMG sells oil products via the 156 gas stations of its 
daughter companies KMG-Alatau, KMG-Astana, and KMG-Zhaiyk.  By 2010, 
KMG plans to have 330 gas stations, or 15% of all gas stations in 
the country.  In 2007, TH KMG acquired a 75% stake in Rompetrol 
Group N.V., which has two oil refineries in Petromedia and Constanta 
and 630 gas stations in Romania, France, Spain, Moldova, Ukraine, 
and Bulgaria.  Rompetrol ships oil to Turkey, Ukraine, Croatia, and 
Moldova, and has a five-year contract for lease of tankers. 
 
Comment 
------- 
 
26. (U) KMG employs over 30,000 employees and accounted for 8.55% 
(or $1.58 billion) of Kazakhstan's 2007 budget revenues.  A 
diversified structure with both core and non-core assets makes KMG a 
low-risk and solvent client in the eyes of potential lenders as its 
assets are well diversified, and hence losses of a company in one 
sector can easily be compensated with gains of those in another. 
However, the heavy bureaucratic structure of KMG also creates a 
number of problems - a lack of financial and operational 
transparency,  potential misuse of funds (e.g. funds allocated to a 
core company can be used by a non-core company), difficulties in 
controlling cash flow, high interdependence of companies, and 
 
ASTANA 00001210  004 OF 004 
 
 
reduced efficiency of operative management.  KMG is awaiting further 
restructuring and administrative reforms to make it more easily 
manageable, transparent, and more streamlined. 
 
27. (U) Maksat Idenov has briefed USG officials on several occasions 
on his plans to restructure KMG along the lines of an integrated 
IOC, based in part on his experience as a senior executive with 
Shell.  With the removal of KMG President Karaballin, after 
Karaballin's unsuccessful attempt to force Idenov out, and with the 
apparent backing of the President and Prime Minister, Idenov has at 
least some room to implement his restructuring plans. 
 
 
 
1

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