“Europe should be valued for its big market”

Kazakh Energy and Natural Resources Minister Baktykozha Izmukhambetov talks to New Europe

Interview with: Baktykozha Izmukhambetov

Kazakhstan intends to reach the production level of one hundred million tonnes of black gold in three to four years. Kazakh Energy and Natural Resources Minister Baktykozha Izmukhambetov talked to New Europe correspondent Kulpash Konyrova in an exclusive interview about production postponements at the Kashagan field, Kazakhstan’s plans to buy or build a refinery abroad, Turkmenistan’s new leader, as well as the Caspian Pipeline Consortium (CTC), Bourgas-Alexandroupolis, Odessa-Brody, Baku-Tbilisi-Ceyhan pipelines all in the efforts of boosting EU energy security.

* Minister, you had said earlier that in June of this year the Kashagan project operator, the Italian ENI, would announce the new time for the first oil from that field. So far no announcement has been made in the media ... or did we miss it?

On June 29, ENI provided us with an official response that the production start time had been postponed for two more years, in particular, from 2008 to the second half of 2010. This was caused by the necessity to conduct additional preparatory works to ensure maximum safety for the people living in the area and for the environment.
Kashagan is the world’s largest project of this kind that has no peers by either the volumes or the complexity. When implemented, this project is expected to give from 1.2 to 1.5 million barrels a day, that is, up to 70 million tonnes of oil a year. And this is from one field alone! For comparison, Kazakhstan’s total production last year was about 65 million.

* What will be the new project costs?

According to ENI’s proposal, the costs will grow from 57 billion to 136 billion dollars. On August 6, we plan to start a month-long negotiation process with ENI on this project. If we reach a consensus, we will determine the project parameters.
One of the items on the negotiation agenda will be the increase of the Kazakh share of profit-oil from 10 to 40 percent. It is too early now to talk about the size of compensation to Kazakhstan for the oil that it would not receive for the two years of delay.

* For many years, the Caspian Pipeline Consortium (CPC) shareholders have been negotiating the expansion of the pipeline. Some experts doubt that the parties will ever come to a compromise. What is your opinion on this matter?

I do not hold such pessimistic views. In my opinion, substantial progress has been achieved over the past year and a half in the resolution of the issues. When I started the negotiation process we had about 20 outstanding issues, today we only have three or four.

* What is required from Kazakhstan?

The Russians’ main requirement is to receive the money that they had invested in the project, the so-called debts. Their total amount today is 5.2 billion dollars. Kazakhstan’s share in the debts is slightly less than 500 million dollars. To solve this problem, Transneft has proposed to issue Eurobonds this year for the entire amount of the debt. A specially established commission is currently in the process of analysing this proposal.
The second requirement is to establish a tariff that would not make the pipeline losing and instead will make it self-financing. The design tariff is 38 dollars per tonne. We suggest that the proposals to improve the pipeline economics be considered in the context of the CPC expansion project. So the negotiations continue.

* Kazakhstan is considering participation in the Bourgas-Alexandroupolis pipeline project, which, in fact, will be an extension of the CPC.

I have met and talked with the Ministers of Energy of Greece and Bulgaria (the pipeline will go through these countries). Both ministers have agreed to our participation, but I made the position of Kazakhstan clear straightaway: The transportation conditions for Kazakhstan should be the same as for Russia. I mean the tariffs and the volumes.

* Will Kazakhstan provide oil for the Odessa-Brody-Plock pipeline after the expansion of the CPC?

With the CPC expansion decision pending, it is too early to talk about the Odessa-Brody-Plock. But Kazakhstan is considering it as an alternative route to Europe.

* Kazakhstan legally joined the Baku-Tbilisi-Ceyhan (BTC) pipeline as far back as in the summer of the last year. In anticipation of a visit of the Azeri President Ilham Aliyev to Astana, work on the transport agreement that would determine when and how much of Kazakh oil will go to the world markets by the BTC has been intensified. What is the concept of this project?

I can say right off that compared to the Atyrau-Samara and CPC pipelines, transport by Baku-Tbilisi-Ceyhan will be more expensive, as there will be more costs. But in any case, the Caucusus route is necessary for us, as the production will grow sharply in 2010 and the capacity of the CPC, as has been said above, is limited. With the beginning of the second stage of development of Tengiz field, as early as next year, Kazakhstan will start producing eight to 10 million tonnes of oil more. And 2009 will see the full production of 23 to 25 million.

* When will first Kazakh oil go to the Baku-Tbilisi-Ceyhan?

Not until 2010. By the first Kashagan production, we expect the completion of the Kazakhstan Caspian Transport System.

* Kazakhstan will not abandon the plans to buy or build a refinery abroad...

That is correct, Kazakhstan is looking at several options to acquire a refinery, in the west and in the east. We are currently in negotiations on several deals in Europe.

* There has been an opinion that Europe might no longer be all that interesting to Kazakhstan; that their ecological burden is such that it makes it uneconomical to work there.

This is a wrong view. Europe should be valued for its big market. They have no own oil or gas. They are organised countries, and they would make sure that their tax and other regimes are attractive. Besides, every year there will be new projects there, including upgrade, expansion, or new refinery.

* But Kazakhstan also regards as viable the prospects of building a refinery in the port of Ceyhan that will receive up to 50 million tonnes of Kazakh oil in the future. KazMunaiGas has meanwhile received two proposals to build a refinery in Ceyhan - first from a Turkish company, and second - from their Azeri colleagues from Azeri state oil company SOCAR. So who will be it better for Kazakhstan to deal with?

As far as Ceyhan is concerned, it makes no sense to build two or three plants in the same place. To avoid competition, Kazakhstan, Turkey and Azerbaijan will likely unite their efforts. We believe that it is more reasonable for the three countries to build one big refinery together. Negotiations are underway.

* With the new leader, Turkmenistan sounds different today. I mean the announcement of a number of projects in the oil and gas sector. Apart from a Caspian onshore gas pipeline, what projects are planned with Turkmenistan?

Yes, the relations with Turkmenistan have intensified notably lately. As a co-chair of an intergovernmental committee, I have visited that country several times this year alone. I am pleased that the new leader has set a course for a close cooperation with Kazakhstan. In the nearest future, our national company KazMunaiGas is going to start the exploration of the oil structures in the Turkmen part of the Caspian shelf. KazMunaiGas will not be the only company to do that – there will be oil companies from the other countries.

* Does Kazakhstan plan to buy fields in Turkmenistan?

At present we are looking at the shelf. And we will do exploration. Such is the position of Turkmenistan. It has only allowed foreign companies off shore, onshore fields are not being considered.

* What is Kazakhstan's role in EU energy security?

Many of Kazakhstan’s present and future projects provide for supporting EU energy security. We work closely with the EU and we are interested in supplying hydrocarbons to the European market. We transport oil to Europe. As it has been said before, by 2010, our production will grow to 85 to 100 million tonnes.
As far as gas is concerned, today we transport it to the Russian border through the territory of that country (Russia). When we signed the agreement with Russia and Turkmenistan on the Caspian onshore gas pipeline, the document provided for third party exports through Russia. So we have an understanding in place for supply of our gas to Europe.
A third source of energy security for Europe can be nuclear industry. In the past, Kazakhstan produced fuel for the Russian reactors only. Now we have reached an agreement on creation of an international uranium enrichment centre, which will enable us to carry out our own programs. We will produce fuel at the Ulba Metallurgical Plant and export it not only to Russia, but also to other countries, including Europe.