“Modest” Modernisation Plans, Cost Cutting to Offset Falling Prices, KMG EP Head Says

In his state-of-the-nation address, “Nurly Zhol: The Path to the Future,” President Nursultan Nazarbayev said that falling oil prices would lead to a decrease in budget revenues. CEO Abat Nurseitov of KazMunayGas Exploration & Production (KMG EP), one of the top three oil producers in Kazakhstan, discussed oil production predictions for 2015 and how the economic downturn will affect his company in an interview with the Kazakhstanskaya Pravda newspaper at the end of December 2014.

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Abat Nurseitov

The circumstances under which KMG EP is working have significantly changed since the start of the year. In February there was a devaluation of tenge, thanks to which KMG EP saw the highest profits in its history. However, the second half of the year saw a fall in oil prices. How have these events, in addition to the current political instability in the world, affected KMG EP’s activities?

KMG EP received a profit of 242 billion tenge (US$1.32 billion) in the first nine months of 2014. These profits were partially offset by the rise in customs fees, transportation costs and the increase of our wages fund. As for the fall in oil prices on international markets, it is, of course, a significant challenge for our company, since it is not a secret that our oil deposits have been used for quite a long time. So we have to invest modestly into modernising our production, while carrying heavy social obligations.

Will there be any changes to plans for oil production in 2015 as a result?

The board of directors has approved the 2015 oil production plan. We still expect a gradual increase in the volumes of goods produced by our main assets [OzenMunayGas – OMG, and EmbaMunayGas – EMG] by 4 percent by 2018 (compared to the results of 2013). Other expenses not directly related to production and existing obligations were reassessed. In particular, capital investments in 2015 will cost 115 billion tenge [US$630 million]. This is 14 percent less than our planned capital investments for 2015 according to the business plan set the year before. Expenses are to be cut mainly with cuts to investments that don’t affect our level of production, expenses on infrastructure projects, as well as extending the deadlines for some of our long-term modernisation programmes.

One of the main indicators of effectiveness is, undoubtedly, meeting production goals. Is everything indeed going as planned?

Yes, by the results of the first nine months of this year, our company exceeded our targets for oil extraction. The consolidated amount, taking into account our shares in our subsidiaries, is 9.217 million tonnes of oil. Please note that our agreed target for 2014 was 12.263 tons of oil, and we have every reason to believe that it, too, will be achieved. In addition, despite certain hardships, this year we launched trial exploitations of a Novobogat SE deposit in the Liman block. Very recently, we have started to exploit the Aksai deposit of oil and gas at our joint venture, KazGerMunay LLC. The amount of gas in that deposit will be of great help in supplying the people of Kyzylorda with natural gas, the objective given to us by the President of Kazakhstan.

What modern technologies are used by the company to increase the coefficient of oil extraction? It is no secret that KMG EP deposits are well past their primes.

This is a very timely question, since our deposits are actually quite different in age, from 10 – 100 years old. The mission to increase the coefficient of oil extraction set in February by the President at the expanded government meeting also highlights the importance of the question. We mainly use secondary methods of layer pressure support. However, we also integrate new technologies. For example, on KazGerMunay’s Nuraly deposit in the Kyzylorda region, we started testing a new technology in June: polymer flooding. Similar technology is being tried out in the Zarubenie deposit by EMG. We plan to start work in the OMG and KarazhanbasMunay joint stock companies.

Another important factor is stocks replenishment. How are things in that respect? Is KMG EP conducting any geological expeditions at this moment?

KMG EP is running an ongoing and constant project aimed at increasing oil and reserves and replenishing the raw materials of the company by conducting geological expeditions. We conduct seismic explorations in prospective areas, we drill and test exploratory wells, pick and analyse core fragments and samples of rock layer fluid – we do the full spectrum of necessary research to locate concentrations of hydrocarbons. Naturally, the intensity of the work conducted depends on the perceived potential of the region. It should be noted that growth in reserves replenishment is being reported to the government’s Commission of Reserves of Kazakhstan. The increase of extracted resources in [proven reserves and possible reserves] in 2012 was 3.6 million tonnes of oil and in 2013 it was 5 million tonnes of oil and condensate. In 2014, the increase in alleged extracted resources in [those categories] is expected to be around 9.3 million tonnes of oil and condensate.

Regarding geo-exploratory works, the biggest event of this year was the discovery of a new deposit in the Rozhkovskoe field. Also, initially the exploratory works in that field were aimed at locating hydrocarbons in the Boribricov and Turneyev horizons, and the supply categorised as 2P [proven and probable reserves] in those horizons, according to technical audits of international standards, rose from 5.4 million tonnes in 2012 to 7.9 million tonnes in 2013. However, apart from those horizons, oil was also found in deposits as old as Bashkir! We plan to start exploiting that deposit in 2017.

We continue to search for ways to expand our geo-exploratory portfolio and we confirm our readiness to invest funds into new exploratory works, since this is the only possible way to broaden the resource base of our company.

You announced the start of large-scale production modernisation in your main assets a few years ago. Have there been any results?

As part of our programme in OMG, a department for diagnosing and repairing our underground equipment was opened, as well as an installation for preparing the fluids for killing wells. In our Technical Transport and Well Maintenance Control LLC, we have put a new manufacturing base of 250 units of transport and specialised equipment into operation. A workshop is being built for repairing oil-extraction equipment and a service centre for 1,000 automobiles. There is also the reconstruction of equipment for pumping water into rock layers. This is all in the Mangystau region. Installations for readying and transporting associated gas were built at EMG at the East Makat and S. Balgimbayev deposits in the Atyrau region. This list can go on.

We can already see positive results. In particular, there is a decreased rate of purchases of underground equipment: tubing and pumping rods. By introducing a well-killing department, we cut the time it takes to make a well operational after repairs. Thanks to the integration of global positioning systems into deposits, we have cut fuel expenditures by 17 percent. This project paid off in two years. Overall, the modernisation let us stop the rise in controllable expenses, provided a stabilisation of extraction in 2012-2013, improved operational indicators, as well as helped in adhering to the demands of ecological legislation in the half-urgent perspective.

You signed a memorandum in the middle of the year on cooperation between the then-Ministry of Environment and Water Resources, the then-Ministry of Oil and Gas, KMG and KMG EP. Has anything been executed through this deal?

The memorandum that you are talking about is aimed at preventing waste generation and the reduction and liquidation of contaminated lands and waste disposal. In particular, we are talking about disposing of and recycling waste in the contracted territory of OMG. As you know, oil deposit exploitation in Uzen in the Mangystau region and in the Emba group’s deposits in the Atyrau region started in the last century. Back then, too little attention was paid to environmental damage, which led to the formation of vast, oil-contaminated territories. By the end of this year, in the OMG deposits, 400,000 tonnes out of 2 million tonnes of waste will be eliminated, in addition to the disposal of 52 tonnes of contaminated soil with the use of energy-accumulative additives based on humate-containing composite materials. Such disposal technology is an invention of the Bekturov Institute of Chemical Sciences, where the neutralised soil is planned to be used … to make substances for road-building. We are also investigating international technologies for waste disposal. This year, we conducted a pilot test of a hydrodynamic waste disposal method, with positive results. …

In regards to our other enterprises, EMG, KarazhanbasMunay and KazGerMunay, by the end of the year, 340 tonens of waste will be disposed of. We plan to dispose of almost 1.3 million cubic metres of historical waste in Uzen by 2021.OMG is currently working on cleaning the tubing contaminated by radiation and other equipment, where radioactive salts and dross are being deposited. This equipment was stored in OMG’s temporary containment landfills. … This year, a specialised contractor cleared 1,000 tonnes of radiation-contaminated tubing. After being cleaned, the tubes are sent back into service for further use.

Does the company have plans to expand operations by making deals with foreign corporations?

Yes, such plans exist. I can’t reveal any details, being bound by the confidentiality agreement, but I think that in the foreseeable future we will be able to announce our new foreign partners to the investment community.

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