Avoiding the sticks, grasping for the carrots: Kazakhstan’s oil operators’ social and environmental engagements/II – the North Caspian Operating Company

On December 9 last year, the North Caspian Operating Company (NCOC) consortium which operates the first major offshore oil project for Kazakhstan was rewarded the Paryz Prize in the form of a silver medal for corporate social responsibility by President Nursultan Nazarbayev – simultaneously with its older, onshore-operating peer Tengizchevroil. “This is a high appreciation for the consortium’s social investments in 2011,” the NCOC commented on the event. The good mood at the occasion has not exactly come overnight. Years of delays and repeated multi-billion rises in expenditures aggravated by the end of the first decade of the new century and triggered a drastic change in the project’s management alongside the entry of Kazakhstan’s state oil and gas company Kazmunaygas into the venture. Ever since, the consortium has upgraded its social and cultural commitments under the slogan “Being a good neighbour” in the words of a recent explanatory publication.

BY CHARLES VAN DER LEEUW, KZW SENIOR CONTRIBUTOR

Avoiding the sticks, grasping for the carrots: Kazakhstan’s oil operators’ social and environmental engagements/II - the North Caspian Operating CompanyIn his address to the recently held at the latest Kazenergy Forum in Astana, the NCOC’s chairman and managing director Pierre Offant gave a sum-up of the consortium’s contractual and supra-contractual commitments. “The North Caspian Project is one of the biggest, most complex and challenging industrial developments in the world,” the executive observed. “The Kashagan field is Kazakhstan’s answer to global energy issues and demand that can make the country one of the top petroleum exporters worldwide.” But he added that the technological solutions required to deal with the area’s geological and environmental complexities are a must. “The challenges cannot be overcome without technology,” Offant noted. “So we have to be creative and use innovative technologies because many conventional methods just do not work under such conditions.” On the social side of the issue, the executive stressed his enterprise’s compliance with contractual and legal conditions – and beyond. “The consortium is one of the largest contributors to local content in Kazakhstan,” the speaker fold his audience. “We fulfill our social responsibilities to bring long-term benefits for the citizens of Kazakhstan. Making safety our main priority, we are steadily progressing from vision to reality.”

In his presentation, Pierre Offant noted that as of mid-2012, the consortium employed in the order of 32,000 people on the territory of Kazakhstan, if one includes subcontractors. “About 80 per cent of them are citizens of the Republic of Kazakhstan, which is an outstanding ratio for this type of project,” the official added. In 2006, the percentage of expatriates working on the project still represented 32 per cent of the total workforce. Since 2003, more than a thousand employees have upgraded their skills to international standards thanks to intensive training and schooling. In 2011 alone, the consortium spent close to 12 million US dollar on a special project dubbed “Education at the training centre, construction of a process training plant and on-the-job training” in the presentation’s wordings. On top of that, more than $5 million has been spent on “training events” through the year. Since the consortium started working on-site in 2000, the education of 1447 students and apprentices has been sponsored by the consortium. Further in terms of local content, between 2006 and the middle of 2012, $8 billion has been spent on “local goods, works and services” in the consortium’s words, including $1 billion in 2011 alone.

Outside the consortium’s working boundaries, the organisation has already been, and is committed to keep spending hundreds of millions to help the poverty-stricken and poorly developed western provinces of Kazakhstan catch up and be prepared for the post-NCOC era. The consortium has fixed a ratio of “a certain percentage of development expenditure” – in Pierre Offant’s words, for social and infrastructure projects not directly related to the consortium’s work proper, including road construction, construction and repair of electricity and water supply networks, as well as upgrading existing and building new schools, kindergartens, hospitals and sport facilities. Between 1998 and the end of 2011, 142 of such projects have been carried out for the total amount of 268 million greenbacks, with $112.9 million spent in the province of Atyrau in the northwest and the remaining $155.1 million in the southwestern province of Mangistau.

In a new brochure published on the occasion under the title “Being a good neighbour – our social commitments”, the NCOC tries to explain its “sustainable development strategy and commitments” within the overall context of its North Caspian Sea Production Sharing Agreement (NCSPSA). “Beyond being an oil and gas business, the NCOC considers that NCSPSA activities offer substantial opportunities to develop Kazakhstan’s economy in a sustainable manner,” a brochure handed out at the Kazenergy Forum reads. “First and foremost, the NCOC will manage its business safely, responsibly, efficiently and transparently, in compliance with the provisions of the NCSPSA and all applicable laws and regulations of the Republic of Kazakhstan. Above and beyond operating responsibility, the NCOC is committed to fulfilling its social and environmental responsibilities in a manner that will bring long-term benefits for the citizens of Kazakhstan. Such a commitment requires close collaboration with national and local authorities, with local communities and action groups; it requires an approach that addresses the long-term expectations of stakeholders.”

Recently completed social and infrastructure projects in Atyrau include a new kindergarten in a nearby village, a new sanitary and epidemiological centre in the district of Makat, and a series of new power substations and supply lines for the town of Atyrau (due to be completed before the end of the current year. In the Mangistau province further to the south, a new sports complex has been opened in the small town of Fort Shevchenko (named after the Ukrainian XIXth Century dissident poet, writer and artist who spent several years in exile on the spot), as well as a new school and a new boarding school in the town of Aktau. Projects in the making include a new arts academy with a dormitory in Atyrau and a sanatorium (including a school) for infected children in the countryside. On top of such projects, the NCOC spends around $1.5 million each year for direct support for individuals, families and small communities through sponsorship for health and education and donations.

Stakes in the consortium, which is based on a production sharing agreement between its members and the state of Kazakhstan, are transferrable, allowing partners to sell all or part of their shares to either existing peers or newcomers – in case the former waive their right of first offer. Investments and expenditures are proportionally shared by the partners. So far, 46.3 billion US dollar will have been spent as of spring 2013. All income to compensate expenditures’ recovery is to be cashed in by the partners preliminarily to royalties and taxes to the Kazakh state. During the first production phase, an output build-up is to take place starting from 75,000 barrels a day initially to an eventual 450,000 barrels. The second phase is due to take off in 2018/’19, and meant to double the latter amount, with the third phase due to start in the course of the 2020s leading to peak volumes up to 1.6 million barrels per diem. The contract expires in 2041, but can be prolonged in case of positive recoverable reserves reassessment. Current reserves stand at over 50 billion barrels of crude, of which in the order of 13 billion can be recovered with available technology, along with considerable amounts of associated gas and gas condensate.

Originally, the field of Kashagan, followed by four more adjacent blocks, had to come on stream almost 10 years ago. The cause of the delay mainly consisted of complications in geological conditions and technical challenges. Kashagan’s core wells, held by a subterranean salt dome structure, are located at 4.2 kilmoetre blow the seabed, with temperatures topping 1,000 degrees Celsius and pressures in the order of 770 bar. In combination with high sulfur levels, this carries the risk of H2S gas blowouts, immediately lethal for all that lives nearby and highly damaging to the maritime environment. Among the safety measures taken has been the decision to use onshore drilling technology and equipment built on an artificial island, formed by drained seabed in the shallow waters surrounded by dykes, equipped with ice pressure fences since the northern Caspian Sea is frozen to the bottom for more than four months a year. The structure is the first of its kind in the history of oil exploitation. And should a blowout yet occur, a number of ice-breaking vessels built especially for the purpose is ready night and day for emergency evacuations of all staff in a single operation from the premises.

The latest major row over the budget and over participation dates from summer 2009, when the operator and its partners upset the Kazakh community by all but tripling its expenditure budget at the expense of future royalty payments, the consortium, which now has Kazakhstan’s state-controlled oil and gas corporation Kazmunaygaz as a full-fledged partner, transferred supervision to the latter in a tandem with the Royal Dutch Shell. Together, they are responsible for operational routine and have the task to present a reduced budget, substantially down from the hilarious current amount of 136 billion US dollar. Issues at stake include the revision of deals with certain contractors, believed to be overpriced, and transfer of a number of service and delivery contracts to local suppliers, provided the latter present competitive offers without disregarding service quality.

The question whoever might be “guilty” and to what extent in the so-manieth round of squabbling had not prevented that as of now, Kashagan is supposed to start “commercial” production in the course of the winter of 2012/’13, with peak output in the order of 1.5 million barrels a day as late as 2019 according to the compromise inked back in 2009. But as to date, new disagreements over the second and third phase of the project are likely to put peak levels off to the mid-2020s. In such a case, by the time Kashagan will reach its peak virtually all other Kazakh oil resources are due to be over their peaks and decline will have set in. As noted, the Kashagan contract expires as of 2041, after which consortium members can no longer claim revenue from a single barrel – “commercial” or not. Back in 2009, then state oil and gas corporation Kazmunaygaz’s chief Kairgeldy Kabyldin demanded a reduction in expenditures of 30 per cent, or in the order of $40 billion. The issue remains subject to dispute today, with the parties having agreed on dealing with budget on a phase-to-phase basis.

SHAREHOLDERS IN THE NCOC CONSORTIUM AS OF 2012

partner country of origin stake
Royal Dutch Shell Netherlands/UK 16.81%
Eni/Agip Italy 16.81%
Total France 16.81%
ExxonMobil USA 16.81%
Kazmunaygaz Kazakhstan 16.81%
ConocoPhillips USA 8.40%
Inpex Holdings Japan 7.56%

source: NCOC

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