JANUARY 31, 2007
This publication was produced for review by the United States Agency for International Development. It was prepared by SEGURA/IP3 Partners LLC


JANUARY 31, 2007 Contract No. AFP-I-00-03-00035-00 Task Order # 002

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government

LIST OF ACRONYMS ................................................................................................................. iii 1. 2. 3. 4. 5. 6. 7. INTRODUCTION ................................................................................................................... 1 BACKGROUND .................................................................................................................... 1 LOCAL CONTENT AND RECENT DEVELOPMENTS ........................................................ 3 ACTIVITIES OF LARGE IO&GCs TO DEVELOP LOCAL COMPETITIVENESS ................ 5 KAZAKHSTAN DEVELOPMENT STRATEGIES .................................................................. 7 RECURRING ISSUES .......................................................................................................... 9 PROPOSALS/OPPORTUNITIES FOR USAID ASSISTANCE .......................................... 13 7.1 7.2 ANNEX A ANNEX B ANNEX C ANNEX D Conduct a sector specific roundtable or series of roundtables .......................... 13 English Language Training ..................................................................................... 16 CONTACT LIST ............................................................................................... A-1 MAP OF SELECTED CASPIAN PROJECTS.................................................. B-1 MEMORANDUM ON THE DEVELOPMENT OF LOCAL CONTENT ............. C-1 MEMORANDUM ON PROCUREMENT TRANSPARENCY INITIATIVE ......... D-1

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 LIST OF ACRONYMS Agip KCO API ASME bbl/d boe CMAR GOK Gosstandart IFC IFK Innovative Industrial Strategy IO&GCs ISO ITECA KAPE Kazakhstan 2030 KazEnergy Kazinvest KIO KPA KPO MEMR MIT PSA RCI SMEs SPE Strategic Plan to 2010 Tcf TCO USAID USD VAT Agip Kazakhstan North Caspian Operating Company NV American Petroleum Institute American Society of Mechanical Engineers Barrels of oil per day Barrels of oil equivalent Center for Marketing and Analytical Research Government of Kazakhstan Committee for Standardization.and medium-sized enterprises Society of Petroleum Engineers Strategic Plan for the Development of the Republic of Kazakhstan to 2010 Trillion cubic feet of natural gas TengizChevroil United States Agency for International Development United States Dollars Value Added Tax iii . Gas and Energy Sector Organizations Kazakhstan Investment Promotion Center Karachaganak Integrated Operation Kazakhstan Petroleum Association Karachaganak Petroleum Operating Company BV Kazakhstan Ministry of Energy and Mineral Resources Kazakhstan Ministry of Industry and Trade Production sharing agreement Regional Competitiveness Initiative Small. Metrology and Certification of the Ministry of Industry and Trade International Finance Corporation Investment Fund of Kazakhstan Innovative Industrial Development Strategy of the Republic of Kazakhstan for 2003-2015 International oil and gas companies International Standards Organization International Trade Exhibitions & Conferences Kazakhstan Agency for Applied Ecology Kazakhstan Development Strategy to 2030 Kazakhstan Association of Oil.

with net exports of one million bbl/d. is being developed under a PSA by Karachaganak Integrated Operation (KIO). local operators. 2007. Chevron (U. with estimated recoverable reserves of 8 to 9 billion barrels of oil and gas condensate. the assessment was conducted primarily through interviews with representatives of USAID. Major production expansion projects are planned or underway at both fields. LukARCO (Russia/U.) – 5 percent. a joint venture formed in 1993.6 billion barrels as of December 2005.and medium-sized enterprises (SMEs) in the Europe and Eurasia Region. The production is expected to come from the onshore Tengiz. The field is being developed under a production sharing agreement (PSA) by TengizChevroil (TCO). 2. declared to be commercial in 2002.) – 32.5 percent. and the offshore Kashagan field (the largest oil field outside the Middle East) in the northern Caspian Sea. BACKGROUND Kazakhstan’s combined onshore and offshore proved crude oil reserves were estimated at 39. 2007 1. large international oil and gas companies (IO&GCs). local oil and gas service companies. and Karachaganak fields.S. The purpose of the report is to summarize the necessarily abbreviated assessment of the oil and gas industry local support services in Kazakhstan. KIO is a consortium consisting of BG Group Plc (U. The Kashagan field is still undergoing appraisal with production to begin in 2009-2010. international oil and gas service companies.) – 50 percent. A list of parties with whom meetings were held is set forth in Annex A.S. The Tengiz field (the world’s deepest operating super-giant oil field) was discovered in 1979 and its recoverable crude oil reserves have been estimated at 6 to 9 billion barrels. with the Karachaganak Petroleum Operating Company BV (KPO) acting as operator.) – 20 percent. The report also presents prioritized proposals to improve competitiveness of the domestic oil and gas services sector. INTRODUCTION This report is prepared as of January 31. also discovered in 1979. ExxonMobil (U. The Government of Kazakhstan (GOK) plans to increase production to 3.S. Although. and proven natural gas reserves are estimated to be in the range of 65 to 100 trillion cubic feet (much of it associated gas).K.) – 25 percent. government officials and other stakeholders. The country produced approximately 1.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. and 47 trillion cubic feet (Tcf) of natural gas. Agip unit of ENI (Italy) – 32. under the United States Agency for International Development (USAID) Europe & Eurasia Bureau Regional Competitiveness Initiative (RCI). The Kashagan oil and gas field was discovered in 2000.5 percent. and Lukoil (Russia) – 15 percent.S.5 million bbl/d by 2015. and KazMunaiGaz (Kazakhstan state oil company) – 20 percent. Karachaganak oil and gas field. and currently composed of Chevron (U. The RCI aims to increase the competitiveness of small. with an emphasis on identifying opportunities for local firms to provide or improve provision of support services to the petroleum industry in Kazakhstan. as 1 .29 million barrels of oil per day (bbl/d) in 2005. To maximize the limited time in-country. and is considered the most important discovery in the last 30 years.

of which local production comprised only 3.5 million bbl/d by 2015 includes significant production from the Kurmangazy field. ConocoPhillips (U. materials.26 percent. and it is trying to collect such information. Some sources estimate that the country’s oil infrastructure could eventually attract up to 140 billion U.52 percent. 2007 previously noted. Commercial Service estimated the market for oil and gas field equipment.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. According to the Kazakhstan Contract Agency the data is unavailable. A recent study by the Center for Marketing and Analytical Research (CMAR) of the oilfield equipment and machinery industry estimated that the market for oilfield equipment and machinery was USD 2. appraisal is ongoing and production is not expected to come online until the 2009-2010 period.) – 18.S.V.757 billion in 2005. the first well drilled in the field last year was a dry hole. Pursuant to the program. KazMunaiGaz.52 percent. and that the market would grow at a rate of 15-30 percent annually. with an additional 9 to 13 boe potentially recoverable by secondary recovery.1 percent or USD 65 million. and supplies at USD 3. However. although the local percentage was slowly growing. Data concerning the oil and gas service sector is not easily obtainable. and KazMunaiGaz (Kazakhstan) – 8./Netherlands) – 18. Agip Kazakhstan North Caspian Operating Company (Agip KCO) is the single operator under the North Caspian Sea PSA on behalf of a consortium of seven oil companies comprised of Agip Caspian Sea B. (See Annex B for a map depicting the foregoing fields.52 percent. ExxonMobil (U. Most local SME oil and gas equipment and service providers have been unable to capitalize on the opportunities to become suppliers and vendors to the international oil and gas industry by virtue of inadequate equipment and product lines. Rosneft and KazMunaiGaz.S. dollars (USD) in foreign investment. with 95 percent of demand met by imports.33 percent.) – 9.) The GOK’s plan to increase production to 3. Inpex (Japan) – 8. more than 100 offshore blocks are to be tendered. In 2003 the GOK approved a new Caspian Sea development program under the Ministry of Energy and Mineral Resources (MEMR) and the state-owned oil company.33 percent. some of which treat the data as confidential.K.S. being developed under a PSA between the Russian and Kazakh state oil companies. of ENI (Italy) – 18. Royal Dutch/Shell (U.07 billion in 2003. Kazakhstan’s oil and gas sector has attracted massive foreign investment. but spread among different sources. with approximately 80-90 percent of foreign direct investment flowing to the sector. 2 . and lack of information and understanding concerning client needs and international standards. It is more likely oil and gas service sector data is available. TotalfinaElf (France/Belgium) – 18. Additional offshore blocks are being tendered. the field’s recoverable reserves are estimated at 7 to 9 billion barrels of oil equivalent (boe).S. among others in the Caspian Sea Region. The U. deficient technical and managerial training.52 percent.

Other legislative and regulatory modifications require that the tender proposal by a prospective subsurface user include the anticipated local content of their work. commitments to hire Kazakhstan nationals. and expressly provide that they in no way modify or infringe on existing subsurface use contracts. works and services for the upcoming year. 3 . The Supervisory Committee is to develop recommendations for the implementation of the transparency initiative. The participant companies agree to submit to the MIT an annual procurement plan for goods. and proposals for arranging funding for their training. represented by the Kazakhstan Contracts Agency. A Supervisory Committee is to be established composed of up to three members approved by the MIT. works. goods. in determining the winner of a tender. signed the memoranda immediately. and services. the GOK promised to amend the rules. In the face of industry criticism and allegations the regulations are unworkable. the price bid by Kazakhstani participants is to be nominally reduced by 20 percent in making the determination. The rules remain unchanged. Regulations adopted to implement the 1999 amendments impose onerous procurement burdens on oil and gas companies. Most Production Sharing Agreements and the 1999 amendments to the Subsurface Use and Petroleum Laws require oil and gas companies to give preference to goods. the GOK developed two memoranda. and to notify the MIT about planned procurements and publish the notice on the Register website. with mandatory participation of the relevant state body in the tender committee and approval of the decision of the tender committee to ensure compliance with preference requirements. works. Under the transparency initiative memorandum. all else being equal. The transparency initiative memorandum is between the Ministry of Industry and Trade (MIT). the international service company. LOCAL CONTENT AND RECENT DEVELOPMENTS The GOK for some time has sought to build competitiveness by requiring preferences be given to local suppliers and Kazakhstan nationals.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. if their goods. and one is a Memorandum on Implementation of Subsurface Users Procurement Transparency Initiative in the Republic of Kazakhstan (attached as Annex D). Tenders are to be held for any purchase of goods. but apparently are rarely enforced. Both memoranda are non-binding statements of intent. works and services from Kazakhstan entities. and now many oil and gas companies and service companies have executed the memoranda. 2007 3. or services necessary in the conduct of oil operations. or services meet the required standards and the terms of the tender. and to give preference in recruitment of personnel to Kazakhstan nationals. Further. and up to five representatives from the companies acceding to the memorandum. a Unified State Register of Kazakhstan Producers and Subsurface Users will be developed and access to the Register will be free for the participant companies. The regulations are unclear on many points. In the intervening years this “local content” requirement has been progressively strengthened. Halliburton. including whether there is a minimum threshold for tenders. One is a Memorandum on the Development of Local Content on the Services Market of Subsurface Use (attached as Annex C). More recently in March 2006. and companies holding subsurface use rights.

to ascertain their true effect. If this is indeed the case. and domestic companies providing goods. Again. It should be noted that the Kazakhstan Contract Agency JSC was created as an official representative of the MIT and the MEMR in 2002 to address problems of competitiveness of local industries. Unfortunately. However. 2007. the new Environmental Code had not been published as of the date of this report. a new Environmental Code was adopted. very little progress was made during the first four years. If true. and proposals for amending current legislation. On January 10. The submission of annual procurement plans from oil and gas companies is an effort to permit local suppliers to match their product lines with the needs of the companies they wish to supply. amendments to the Subsurface Use Law were adopted. standards for production or performance of goods. since joint ventures with foreign firms increase the resources of and facilitate the transfer of technology to local companies. and the Agency now appears to have a higher profile. specifically in the oil and gas sector of Kazakhstan. consolidating the prior environmental laws and a number of the normative acts. up to three members from the domestic producers. and up to five members from the holders of subsurface use rights. and which do not make sense to develop locally. it could negatively impact the improvement of competitiveness of local companies. or services of Kazakhstan origin (domestic producers). A new president of the agency was appointed in January 2006. and services. based on a summary of a recent draft. with the recent memoranda and amendments related to local content referenced above. once published. However. The amendments will need to be obtained and closely reviewed. companies holding subsurface use rights.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. it is understood that the new code makes significant changes to the waste management regulations. works. the amendments had not been published. to build a database with value added. It was to offer professional services to local companies and foreign investors. However. As of the date of this report. On January 15. represented by the Kazakhstan Contracts Agency. including a database to help link foreign investors and local service companies. compliance with safety requirements. introduce advanced contract systems. 2007. the new code will dictate oil and gas companies and firms providing environmental services adapt to the new requirements. 2007 The local content memorandum is among the MIT. The Agency hopes to obtain information from both the suppliers and the oil and gas companies in order to assess what product lines and services can be developed and performed locally. and to perform 4 . a principal effect of the amendments is to calculate Kazakhstan content on the basis of Kazakh ownership of the contractors. The Working group is to develop and approve a program for development of local content in the services market. works. by forming such joint ventures local content would appear to be lowered. new technologies and consolidation of international standards. delivery time. The goal of the program is to assist local producers to become more competitive in quality and price within and without Kazakhstan. A Working Group is to be established composed of up to three members delegated by the MIT. including recommendations regarding products to be produced in Kazakhstan.

some IO&GCs are concerned that they and the Agency have differing concepts of transparency. and the associated change in government. the company’s shortcomings are noted and it becomes eligible for training. to be the new Prime Minister. to extension of 5 . As a result IFC abandoned the project last month. The oil and gas companies offer varying types of assistance. The Agency has 30 employees now and expects to add another 20 employees. was the resignation on January 8.000). success is suspect. with respect to the use of the database. and three large IO&GCs (with each IO&GC contributing USD 120. and that the Agency may require and publish information that the companies consider business sensitive. and funded by the Government of Japan. trade skills. The International Finance Corporation (IFC) considers lack of trust to be the reason for the recent failure of a project intended to support the development of SME suppliers to the oil and gas projects in Kazakhstan. training on qualification to meet international standards. Mr. and the knowledge that the GOK was planning to strengthen local content requirements. 2007 sector research for a fee. However. begun in 2005. The IO&GCs gather information from local companies they identify as having the potential to qualify as a supplier of goods or services. 2007. which it considers a particular problem in a year that is critical to assessing local company capabilities. the reconsideration of the companies concerning their funding for and participation in the project may have been prompted by uncertainties arising from pressure on the companies to sign the memoranda on procurement transparency and local content. facilitation of joint ventures or partnering. since it is unlikely to equal the proprietary vendor databases already developed at some expense by the IO&GCs. Parliament approved Karim Masimov. financial assistance (which ranges from training in finance. There appears to be mistrust between the IO&GCs and the GOK. and the political sensitivity of the issue. was endorsed by the GOK and local suppliers. If a company is determined to have the potential to qualify. of Daniyal Akhmetov as Prime Minister of Kazakhstan. Transparency in procurement is another priority for the Agency. Typically these would include some combination of general training in corporate quality and standards requirements. 4. By January 11 the government reshuffling was complete and its new composition established. On January 10. Although it is only speculation. but it is under-funded. to recommendation of projects to the Development Bank of Kazakhstan. one funding IO&GC withdrew and the others followed. Masimov became the first Prime Minister to be neither Russian nor Kazakh. The project. However. However. not directly related to local content. As a Chinese-born Uighur. the nominee of Kazakhstan’s President Nursultan Nazarbayev. Whether the change in government will have any effect on the oil and gas industry or the oil and gas service sector remains to be seen. ACTIVITIES OF LARGE IO&GCs TO DEVELOP LOCAL COMPETITIVENESS The large IO&GCs pay close attention to local content because of requirements in their PSAs or subsurface contracts.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. the IFC. A final recent development.

International oil and gas service companies vary in how proactive they are in working with the local companies. and its own approach to determining which companies can be pre-qualified as a supplier. The tenders of the large international service companies may be open or closed. However. Various IO&GCs provide support for universities and institutes. Since a number of IO&GCs use Arriba. Its operations include exploration and production. In such cases. is a significant vehicle for development of the local oil and gas service sector. and improvement of the sector’s competitiveness. and compliance with such requirements are audited by the producer.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. but many companies may be left out of the process. and oil and gas services. the state-owned. Further. experience and performance history. refining. by virtue of its strategic importance and the breadth of its operations. Some training activities sponsored by the IO&GCs are open. the tender will most frequently be won by an affiliate or joint venture of an international oil and gas service company. the principal considerations in evaluating local companies tend to be technical capability. but if closed they tend to rely on the pre-qualified vendors to the contracting producer in determining the companies to include in the tender. exploration and production operations are conducted through KazMunaiGaz Exploration and Production (and the production units EmbaMunaiGaz and UzenMunaiGaz). The effort by the IO&GCs is extensive. KazTransGaz. For example. KazMunaiGaz. and other assistance. the IO&GCs will bundle their tender and only need to tender every three to five years. Its KazTransOil has a monopoly on oil pipeline transportation. by way of its ownership stake in 47 enterprises. It is involved in almost all major oil and gas projects in Kazakhstan. Many do not maintain their own databases of local companies. One IO&GC is seeking to engage up to 130 local suppliers in business development through a series of meetings to introduce them to e-procurement. vertically integrated oil and gas company. and local content. They typically use a closed tender system in which only pre-qualified companies whose capabilities match the IO&GCs’ needs associated with the tender are included. Each of the large IO&GCs has its own set of qualifications. the CMAR study concerning oilfield equipment and machinery noted that between 70 and 100 local firms may have the potential to produce to international standards. 2007 loans to SMEs). but only 16 have been selected by KazMunaiGaz a part of an oilfield equipment and machinery supply program. its contract with the direct contractor will contain requirements concerning local content. such as seminars on procedures for prequalification. Since the local content obligations rest on the producer. For some large projects or support activities. and it is active in the development of the petrochemical industry. KazMunaiGaz was formed in 2002 by merger through Presidential decree of Kazakhoil and TransNefteGas. which controls the principal network of gas pipelines in the country and is 6 . the IO&GCs know what major projects are planned. its own vendor database. pipeline and sea transportation. For example. and may set about developing the capabilities of certain suppliers perhaps years in advance. if the local companies become familiar with Arriba eprocurement it gives them a portal to a larger market. using Arriba as the e-procurement platform.

” thus recognizing manufactured goods must be competitive in both price and quality—requiring they meet international standards. Its focus is on production of competitive and export oriented goods. and services in the manufacturing and service sectors. as well as the Atyrau Refinery. Numerous strategies have been developed subsequently related to the various objectives. The Strategy defines competitiveness as the “ability of the national economy to produce exportable products. 2007 engaged in underground gas storage. and sets out the actions to be taken during the 2003 to 2010 period to accomplish the objectives. Growth in the 7 . particularly in the areas of transportation and telecommunications. the December 2001 Strategic Plan for the Development of the Republic of Kazakhstan to 2010 (Strategic Plan to 2010). and services under contracts. is a part of KazMunaiGaz. education and welfare systems. political stability and national unity. works. but there have been three principal overarching implementation strategies: The January 1998 Mid-term Development Plan—1998-2000. The Innovative Industrial Strategy is an ambitious three stage effort to move Kazakhstan from an extraction based economy toward a service and technology based economy in the long term. the strategic plan summarizes the strengths. For each area. 5. economic growth based on a market economy and encouragement of foreign investment. effective and rapid development and utilization of the country’s energy resources. the Innovative Industrial Strategy was approved by decree of the President. establishes strategic objectives. It further recognizes the need to build upon the investment and production potential of the energy industry in the process of transition. works. The objectives included national security. It envisions state participation in the “backbone infrastructure companies” around which SMEs will develop to supply goods. and the May 2003 Innovative Industrial Development Strategy of the Republic of Kazakhstan for 2003-2015 (Innovative Industrial Strategy). President Nazarbayev now has set as a new goal for Kazakhstan—to become one of the 50 most competitive countries in the world. setting out the general long-term objectives of the nation and the strategy to achieve them.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. improvement of the health care. weaknesses. KAZAKHSTAN DEVELOPMENT STRATEGIES In October 1997. construction and maintenance services). Relying on the above strategies. opportunities and threats (performs a SWOT analysis). the President of Kazakhstan announced the Kazakhstan Development Strategy to 2030 (Kazakhstan 2030). The strategy accurately identifies the weaknesses in the Kazakhstan economy to be overcome in order to achieve its principal goal of sustainable development through non-extraction oriented economic diversification. KazMunaiGaz also owns KazStroyService (a provider of oil and gas engineering. In early 2003. The development model described includes reliance on the state as the engine for economic growth and as a counterbalance to the influence of transnational corporations. and reorganization and improvement of state bodies in order that they may become more effective and professional in the administration and execution of state activities. infrastructure development. The Strategic Plan to 2010 identifies policy areas to be addressed in order to implement Kazakhstan 2030.

To that end the Innovative Industrial Strategy calls for new development institutions to be established and existing institutions strengthened. particularly infrastructure projects. is expected to drive.and medium-term. low interest rate loans.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. IFK: To lend financial support to non-extraction private sector initiatives through noncontrolling share holding of enterprises in Kazakhstan and abroad. and to acquire foreign assets in priority areas for Kazakhstan. therefore. In April 2006. and to provide grant funding for scientific research and experimental engineering related to creation of new technologies. Fund for Small Business Development. The seven Kazakhstan development institutions were placed under the Kazyna Fund. specifically Development Bank of Kazakhstan. greater integration of Kazakhstan into the regional and global economy. to enhance conditions for competition and economic growth. generates the demand to support development of services. not only increased hydrocarbon extraction. development of goods and services with high value added. informing them of investment opportunities in Kazakhstan. through long. and CMAR. particularly in the Kazakhstan sector of the Caspian Sea. information and analytical centers). the establishment of a petrochemical industry. 2007 energy sector. new capacities in the power and telecommunications industries. and providing investment assistance. In brief. and the development of new technologies.. and creates the preconditions for international competitiveness. or services with potential for commercialization. and railway terminals. National Innovation Fund: To participate in the formation of innovation infrastructure (e. and modernization and innovation initiatives. National Innovation Fund. State Insurance Corporation for the Insurance of Export Credit and Investment. State Insurance Corporation for the Insurance of Export Credit and Investment: To provide direct assistance for the export of domestic goods and services through insurance and re-insurance against political and regulatory risks. increase in productivity of fixed assets in manufacturing sectors. but also infrastructure development. Investment Fund of Kazakhstan (IFK). including construction of oil and gas pipelines. Kazinvest: To promote investment in Kazakhstan by systematically searching for potential investors. The oil and gas industry. goods. to establish venture funds with domestic and foreign large venture investors. technoparks. The strategy seeks to encourage development of science intensive and high tech exportable products. to participate in the authorized capital of enterprises devoted to producing high tech and science intensive output. products and capabilities that are transferable to other sectors of the economy. their primary functions are as follows: Development Bank of Kazakhstan: To support private and state projects.g. seaports and port facilities. 8 . JSC “Kazyna” Fund for Sustainable Development was formed by the GOK to improve the system of state management of development institutions in the area of industrial progress and innovation. and the improvement of other infrastructure. Kazakhstan Investment Promotion Center (Kazinvest).

and they have had meetings. CMAR has the responsibility to establish certain cluster groups. as noted above. These recurring issues are discussed below: 9 . etc. has stated that the Fund for Small Business Development is to become what he characterized as a kind of “financial supermarket. some may represent a source of financing for local oil and gas service SMEs. 2007 Fund for Small Business Development: To provide credits to small business entities— President Nazarbayev.) and include an area devoted to business incubators. However.g. CMAR has defined seven sectors for cluster formation: tourism. Currently. The 2005 action plan of the CMAR contemplates the development by relevant oblast administrations of their own action plans. The last mentioned cluster is directly relevant to the oil and gas service sector. Certainly the Fund for Small Business Development is such a source. 6. while the construction materials and the transportation and logistics clusters involve cross-cutting sectors that could involve oil and gas services.” CMAR: To provide marketing information and analytical support to enable diversification of the economy. and oil and gas machine building. food processing. transportation and logistics. in acknowledging the Development Bank and the IFC are not available to all businesses.. construction materials. A National Industrial Petrochemical Technopark is being constructed in Atyrau for production of petrochemicals and high tech industries within the oil and gas sector. more are planned under the Innovative Industrial Strategy. and CMAR consulting with the oblasts in development of appropriate strategies. but that possibility must be investigated further. Although most of the development institutions under Kazyna emphasize high tech industries and/or large infrastructure projects. In the process CMAR identified 23 priority industries with potential for external market growth of Gross Domestic Product. biotechnology. in the last 10 years Kazakhstan has established 10 national and regional technoparks and. and to enhance competitiveness and the export of Kazakhstan products (in effect a consultancy service to government and industry).RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. in the last six months momentum has slowed and there has been little progress. Additionally. The technoparks typically are specialized (e. information technology. textiles. Kazakhstan has undertaken a “cluster initiative” to improve competitiveness and promote economic development. The CMAR had hoped to inspire the oilfield equipment and machinery cluster members to be more proactive in approaching their problems and improving their competitiveness. and formed subgroups. RECURRING ISSUES Certain issues related to competitiveness were repeatedly raised by those interviewed in the course of the assessment. nuclear. The Development Bank and the IFK may also be a source of financing with respect to local oil and gas service companies involved in large infrastructure projects for the IO&GCs.

Lack of awareness of the expectations of international companies by contractors and personnel: Local oil and gas service companies are sometimes unused to the high performance standards demanded for the world class projects of international companies.g. Unequal Value Added Tax (VAT) Treatment: Currently the PSAs or subsurface use contracts negotiated with certain operators are biased in favor of imports by exempting the operators from VAT on imports. While the IO&GCs will know their needs in advance. but in terms of health. Alternatively. whether or not they are a joint venture). Although some IO&GCs in rare instances will provide limited advance payments or loans to SMEs. If the same goods or services are acquired from a local supplier.). and some lack an appreciation of the consequences to the project of a failure to meet those standards—not only in economic terms.. financing needs and terms vary with the nature of the goods. particularly when the contracts are relatively small and of limited duration. it must seek a joint venture partner to help finance the job under terms that substantially reduce the local company’s share of the profit. etc. frequently the suppliers will not know until the tender is announced. it is the exception to the rule. This places local suppliers in a disadvantageous position regardless of their ownership structure (e. notwithstanding that a subsequent opportunity perceived as more lucrative may conflict with the fulfillment of those obligations. the operator must pay VAT. 2007 Need for financing and for improved understanding of finance: Foreign investors. as well as local companies. the size and financial structure of the local company. safety and environmental injury. and there may be a relatively tight schedule for response. and for the compensation agreed. find the margins taken by Kazakhstani banks and the security required from borrowers to be burdensome. works. hidden costs. in many cases it must take a loan from a bank. Among some local oil and gas service companies there is an inadequate understanding of finance (e. for which it usually will be required to pledge its contract as collateral. A related problem for some local contractors is a failure to appreciate the sanctity of contract—that the international company is relying on the contracted work to be performed on time. financing is a problem even for some established local companies providing goods or services to the IO&GCs. the size and duration of the contract involved in the loan transaction. to specifications. if a local company wins work. Absence of understanding of the role market research and the capabilities to market to client needs: A common complaint among oil and gas companies is that there is a lingering Soviet mind-set among some local service companies. Therefore. cash flow needs. However. and often all or part of its other assets. or services to be provided by the borrower. and other commercial risks identified. including the stringent timeliness and quality requirements.g. An insufficient understanding of finance can lead to a failure to consider certain costs and a loss-making contract for the supplier.. Such companies have failed to transition from the period in which they were told what service to supply or product to produce and the customers were expected to purchase the product or 10 . Of course.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31.

sponsored by EU TACIS. Although the process of certification of imported goods as meeting national standards has been improved. The Kazakhstan Contracts Agency is attempting to address this issue through the collection and publication of the annual procurement plans of oil and gas companies. but oil and gas service companies may learn of the requirements only upon issuance of a tender. but according to CMAR there is a slow shift to Italian and German machinery. Production is deep. it is still burdensome. Failure of local equipment. The standards employed tend to reflect 1980’s domestic technology. Lack of information concerning the current and future needs of international companies: The flip side of the above issue is that. A study concerning the approach to standards in Europe as compared to the approach taken by Kazakhstan with respect to national standards. but primarily devoted to the manufacturing of defense machinery. but complain the certifications to international standards that IO&GCs want to see. services. as previously noted. Kazakhstan manufacturing. They need to learn to target the companies they want to supply. There should be a broader dialogue regarding the current and future needs and requirements of oil and gas companies. In Soviet times. and manufactured goods to meet international standards: The development of the largest fields in Kazakhstan is a challenging undertaking. and it is now a struggle to meet international standards. Field development requires advanced drilling and processing equipment and skilled personnel. to research the target clients’ operations and to work with the target clients to identify their equipment and services requirements. The Committee for Standardization. requiring a high level of imported equipment. for example from the American Petroleum Institute (API) and the American Society of Mechanical Engineers 11 . They are not client oriented. Kazakhstan had a strong manufacturing sector. With this shift in attitude and approach the service companies can adjust their product lines and effectively represent what they can do to satisfy the potential clients’ needs. Local manufacturers maintain they can meet the needs of IO&GCs. There is no real system of needs analysis or for dissemination of the results of the analysis among the service sector. Most assembly lines are Russian made. fell behind technologically. Much of the required equipment and services are not currently available locally. therefore. Most international standards are not recognized by Gosstandart. was undertaken for a sub-group of the CMAR oilfield equipment manufacturing cluster. and Gosstandart certification is not recognized outside of the Former Soviet Union. Metrology and Certification of the MIT (Gosstandart) is the state body that establishes the standards and technical requirements to be met by most imported oil and gas equipment. 2007 service. with a high sulfur content. under high pressure. and the use of Western oil and gas service firms possessing the advanced technology and capabilities. President Nazarbayev has emphasized the need to transition to international standards.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. The study recommendations concerning harmonization of the standards had not been submitted as of the date of this report. and the sector was slow to convert to other applications. oil and gas companies typically know what they will need for a project well in advance of its implementation.

The situation points to the need for more independent departments. Despite these protestations. From the perspective of the companies conducting the tender. procurement managers do not always have time to debrief bidders because of the volume of tenders. which results in personnel turnover in hiring companies or internship programs as validating mechanisms.000 for international inspectors to audit for certification. and/or ISO 14001 environmental management training. or faculty being pressured by students and academic officials to award undeserved grades. and that there is no accreditation agency at present that can conduct API and ASME audits locally. but some do acknowledge it is an area that needs improvement. professional journals and other sources. 2007 (ASME). As a consequence. are too expensive. Lack of education in the latest technologies and corruption in the educational system: Some faculty members of universities and institutions providing technical training have not kept abreast of the latest technologies employed in the energy sector. The road to compliance with international standards usually begins with International Standards Organization (ISO) 9001 quality management training. with students purchasing grades. typically the greatest costs associated with certification to international standards are those to bring plants to international standards. the companies primarily address this educational deficiency by providing internships for students. and a growing number of local firms are obtaining ISO 9001 or 14001 certifications. There are between 12 and 20 other companies offering training of varying quality for certain certifications.000 to USD 15. it is rumored that there is widespread corruption in Kazakhstan educational institutions. They say it costs USD 10. and SAIT Polytechnic (South Alberta Institute of Technology) started by the Canadian International Development Agency. and better qualified and better paid instructors. There are a number of companies in Kazakhstan that provide various ISO and technical certification training. leaving local companies without feedback on the deficiencies of their bid to which they need to attend. graduates frequently lack familiarity with new technologies.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. (Note: There are professionals in Azerbaijan qualified to conduct API audits). and lengthy and extensive training programs after hire. Additionally. including the Quality Management Center started by USAID/Pragma. This state of affairs renders transcripts from Kazakhstan institutions suspect. Deficient debriefing after tenders: One complaint of local oil and gas service companies concerning the tendering process is that it takes a great deal of effort to respond to a tender. Both are now self-sustaining. However. Some IO&GCs and international service companies provide limited instruction within the institutions. which can be quite costly depending on the readiness of the company. but then the unsuccessful bidders are not notified of who won the tender or why. and encourage students to learn of new technologies on their own initiative through the Internet. They allege many IO&GCs and international service companies do not conduct a debriefing. 12 .

A work plan would then be prepared for achievement of time limited milestones. If a series of roundtables is conducted they could be held in various parts of Kazakhstan. as well as other stakeholders. requires an understanding of the English language. and a commitment from the participants to undertake the agreed steps with the assistance of USAID. the competitiveness issues identified during the assessment would be presented followed by a directed facilitated dialogue to solicit comments. At the roundtable. It is recommended that the program focus on the following sub-sectors: • • • • Oil field equipment and machinery manufacturing. PROPOSALS/OPPORTUNITIES FOR USAID ASSISTANCE USAID has long been active in assisting the development of SMEs in Kazakhstan. procurement. and Providers of skilled technical services The roundtable would consist of selected companies within one or two specific subsector(s). 7. in turn. and construction (civil and mechanical engineering).1 Conduct a sector specific roundtable or series of roundtables As an initial step USAID could conduct a roundtable or series of roundtables directed to companies with the potential to meet international standards within specific sub-sectors of the oil and gas service sector. identify additional competitiveness issues (both of a general nature and those specific to a subsector). and generate proposals to address the identified issues. which could serve as decision points for continued assistance. The anticipated outcome of the roundtable would be consensus on next steps to improve competitiveness of the sub-sector. which could include representatives of government. etc. universities and research institutes. 13 . Kazakhstan British Technical University asserts that it is moving toward teaching all disciplines in English. perhaps through Society of Petroleum Engineers (SPE) student chapters or student chapters of other professional organizations. international standards or accrediting organizations. 2007 Need for English language training: Large oil and gas operators as well as international service companies identified a need for English language training.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. Environmental services. and be devoted to different sub-sectors. international oil and gas service companies. This identified need derives from the necessity for oil and gas companies to train those it hires in new technologies. It can leverage the experience and credibility gained by supplementing its present SME assistance activities through a focused and coordinated program to improve the competitiveness and capabilities of local companies in selected oil and gas service subsectors 7. The international service company Baker Hughes is considering the possibility of supporting English language training. as discussed above. Engineering. which. international oil and gas companies.

and the Kazakhstan Association of Oil. possibly. machinery and spare parts Manufacturing is an area in which Kazakhstan was relatively strong in the past. as well as U. and many of the plants that were idled after the fall of the Soviet Union have been improved and are operating once again. the Kazakhstan Petroleum Association (KPA). Additionally. training and. oil and gas producers. in coordination with the joint venture facilitation efforts of the international oil and gas companies Consider the appropriateness of a study tour If feasible. As with any project to improve the competitiveness of local oil and gas service companies. USAID should work with the Center CMAR to identify companies within the oil field equipment manufacturing “cluster” that are closest to possessing the capacity to meet international requirements for the manufacture of oilfield equipment. the International Executive Service Corps. USAID should also coordinate with the Kazakhstan Association of Manufacturers and Service Providers in the Sub Soil Sector. USAID would: • • • • • • • • • • Identify SMEs ready or near-ready to pre-qualify as suppliers to the international oil and gas companies Form a select group of such companies Coordinate with the international oil and gas companies to identify future needs and to confirm pre-qualification of the companies if certain requirements are met Provide technical assistance. Other international certification bodies could be called upon to assist.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. Gas and Energy Sector Organizations (KazEnergy) in ascertaining appropriate companies for participation. initiate pilot projects to serve as competitiveness demonstration models Manufacturing of oilfield equipment. and international associations of manufacturers.S. Government agencies and/or industry organizations and associations Assist in the identification of possible financing sources Facilitate joint venture formation. training and potentially limited commodity support to assist the local firms in meeting international standards. while USAID will emphasize 14 . The American Petroleum Institute (API) has indicated it would consider sending representatives to explain the standards requirements and procedures for certification necessary to earn the API monogram if at least ten companies were involved. increased productivity of manufacturing assets is a part of the GOK’s development strategy.S. and research/educational institutes Facilitate partnerships with U. in order to reduce the investment needed to successfully pass a certification audit. and provide technical assistance. limited commodity support Assist the companies to effectively interface with the GOK. and others. if and when appropriate. USAID would need to coordinate with the international operators concerning prequalification requirements. 2007 USAID Assistance In the case of each sub-sector. It must be acknowledged that. contractors.

embracing the full range of civil and mechanical engineering activities. procurement and construction services in the development or application of innovative materials and techniques. as well as quality. Engineering. and to improve their quality and competitiveness. Once their correctable deficiencies were 15 . so assistance in improved procurement practices will need to be included as part of any program to make the local manufacturing companies competitive in price. Astana. Alternatively. procurement. identification of the future needs of the international oil and gas companies will be particularly critical. With manufacturing concerns. However. in recruitment of needed skills. Training in marketing for the firms will be important in order that they can tailor their presentation to the international petroleum companies to demonstrate the local capability to meet the needs. 2007 SMEs among the oil field equipment manufacturers. Procurement and Construction The largest anticipated expenditure by IO&GCs involving local content is for engineering. A number of firms can already meet Gosstandart requirements and export to countries in the region. However. and they tend to be relatively small in size. local companies encounter difficulties. Oil and Gas Environmental Services There are a limited number of local companies providing environmental services to the oil and gas industry. it could assist in matching local companies with complementary strengths and skill sets for the purpose of an alliance for bidding purposes. with approximately 170 specialists and offices in Atyrau. Inputs tend to be more costly among Kazakh manufacturing firms.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. in order that the local firms can adjust their product lines to those needs. Kazakhstan is relatively strong in construction. Almaty. Selection of one or two companies for intensive assistance and potential commodity support with the goal of obtaining the monogram of API or other appropriate accrediting organization could be a useful pilot project. USAID could provide technical assistance to local companies offering engineering. or matching local construction companies with experienced foreign firms for formation of joint ventures. certification to international standards will open a broader export market for the local company products. when the tender involves provision of combined engineering. and local construction firms can win tenders even for complex projects. Identification of financing sources also will likely be a significant component of USAID assistance to this industry sub-sector. The companies would need to be identified and their capabilities (particularly their shortcomings) assessed to determine those with the potential to perform to international standards. likely participants within this subsector will be of a size that places them in the high range of medium-sized enterprises. Aktau. and London. The largest local environmental services company is the Kazakhstan Agency for Applied Ecology (KAPE). and construction services. procurement and construction.

petroleum contamination and waste management needs. and joint venture formation. as well as extensive multi-year training programs for graduates that they hire. and uncertainties regarding the accuracy of collegiate transcripts. government energy and environmental agencies. and waste management and handling requirements. for purposes of construction management training. 7. It may also be possible to tap the experience of U. assistance could be provided.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. In addition to help with identification of financing sources. Of course. technical instruction. Companies Providing Skilled Labor This was a sub-sector mentioned as worthy of attention by most international operators and international service companies interviewed. USAID could provide technical assistance. and potentially limited commodity support. leading to any required management or technical certifications (including Health and Safety). certification. as well as environmental service organizations and associations. and possibly limited commodity support.2 English Language Training Because of deficiencies in university level education with regard to the latest technologies employed by the energy industry. the international oil and gas companies and international service companies all have internship programs. the companies frequently look to a student’s fluency in English as one of.S. the production stage will require far less manpower and materials. the assistance activities would need to be coordinated with the GOK and the international oil and gas companies. welders. a financially and technically feasible pilot project(s) could be designed to demonstrate advanced project management and technical skills through cleanup of a carefully limited and delineated area selected in cooperation with the GOK. 16 . in support of the endeavor. marketing. with regard to the latest environmental technologies. and to educate the companies in the new requirements of the recently adopted Environmental Code. as needed. such as machine operators. The expertise developed by the local environmental service companies should also be exportable to other countries in the region with environmental impact assessment. 2007 ascertained. When the oil and natural gas exploration and development phases are completed. Since most of the materials related to the latest technologies in which the new graduates will be trained are in English. The GOK still has numerous contaminated sites for cleanup. USAID could identify local service firms providing skilled labor. pipe fitters. Using selected companies within group. and related oil and gas technical services. repair. training. particularly the reporting. if not the prime criteria for selection. The benefit of assistance to this sector is that skilled labor will still be needed for operation. and maintenance.

USAID could partner with Baker Hughes to offer advanced English training through the student chapters of the SPE and other student professional association chapters that USAID previously helped establish. 17 . 2007 Accordingly. In offering such training. there is a strong need for English and Advanced English training. Baker Hughes is currently considering sponsoring English language training. USAID should be able to take advantage of the student resource center at Kazakhstan National Technical University and the facilities of the institutes it also assisted in founding.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31.

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 ANNEXES .

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. Mirzakhojaev Vera Mustafina Almaty Kazakhstan Business Council for Sustainable Development Zarina Suleimenova Dr. Director of the Center for Environmental Education and Career Development Marketing SpecialistCaspian Region Senior Economist. Professor. Michael Boyd Neal Nathanson Timurlan Altayev Almaty Almaty Almaty Astana Schlumberger USAID USAID Halliburton A-1 . 2007 ANNEX A Name Dr. Perner CONTACT LIST Title General Director Country ManagerKazakhstan President Representative Director Chief of Party/Country Director Managing Director Marketing Director Regional RepresentativeCentral Asia Managing Partner Deputy Chairman CMAR Consultant Kazakhstan BranchManaging Director Deputy Director Doctor of Sciences in Technics. LLP Roxi Petroleum Kazakhstan. Dean Faculty of Energy and Oil & Gas Industry Chief Manager. Jr. George A. Machine Building Plant “Alkor” International FZE International Finance Corporation Denton Wilde Sapte JSC “Center for Marketing and Analytical Research” JSC “Center for Marketing and Analytical Research” SAIT Polytechnic SAIT Polytechnic Kazakh British Technical University Svetlana A. De Mond. LLP BMB Munai Kazakhstan National Technical University Society of Petroleum Engineers Chapter Quality Management Center Pragma Small Business Development Project “Alkor” Ltd. Rubtsova Khalida A. Office of Economic Growth Senior Competitiveness Advisor Senior Account Location Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Almaty Organization Caspiecology Environmental Services. Zelt David Barker Askar Toshtikov Roza Nursaidova Ramilya Mustafina Patrick J. Kyrykbayeva Gorton M. Marla Valdez Bakytzhan Sarkeyev Daniyar Mustafinov Aliya Kayupova Karlygash Kaziyeva Asilbek A.

Local Content Development Department Vice President President President Astana KazMunaiGaz Astana Astana Atyrau KazEnergy (Kazakhstan Association of Oil. 2007 Nourlybek S.RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. Gas and Energy Sector Organizations) JSC “Kazakhstan Contract Agency” TengizChevroil John Cheramie Atyrau TengizChevroil Kevin Ruffcorn Atyrau TengizChevroil Atyrau Nina Shandybayevna Temirbayeva Natalia Makisheva Bud DeCoste Adrian Gott Daniyar Yessaliyev Kazbek Aubakirov Atyrau Atyrau Atyrau Atyrau Atyrau Atyrau KAPE (Kazakhstan Agency for Applied Ecology) Atyrau Oblast Union of Business and Employers (Atyrau Entrepreneurs Association) ITECA (International Trade Exhibitions & Conferences) Schlumberger Baker Hughes Baker Hughes Agip KCO (Agip Kazakhstan North Caspian Operating Company NV) Marat Suleimenov Zhalgyz Toksambai Sakhimov Atyrau Atyrau Atyrau Tengizneftestroi. Major Capital ProjectsConstruction Contracts and Strategic Procurement Manager Director Project Manager Marketing ManagerCaspian Region Caspian AreaDirector of Business Development Caspian AreaCustomer Services Representative Local Content Development Supervisor. Supply Chain Management Category manager. Imanbaev Alimzhan Almambetov Aubakirov Timur Marat Dauletyarov Leader Executive Director (former President of Kazakhstan Contract Agency Advisor Chairman Local Content Development Manager. Lead Company of the TNS Group Kazkorotash Atyrau Prom Geophysics A-2 .

2007 ANNEX B MAP OF SELECTED CASPIAN PROJECTS (Including Tengiz. Karachaganak And Kashagan Fields) B-1 .RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31.

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 ANNEX C CONTENT MEMORANDUM ON THE DEVELOPMENT OF LOCAL C-1 .

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 C-2 .

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 C-3 .

2007 C-4 .RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31.

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 C-5 .

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 ANNEX D MEMORANDUM ON PROCUREMENT TRANSPARENCY INITIATIVE D-1 .

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 D-2 .

2007 D-3 .RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31.

RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31. 2007 D-4 .

2007 D-5 .RCI Assessment Report on Oil and Gas Industry Local Support Services in Kazakhstan—January 31.