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6th Annual Kazakhstan Oil and Gas Conference

Malcolm Wicks MP,  Minister of State for Energy
Cafe Royal, Piccadilly, London,  29 June 2006

Malcolm Wicks MP, Minister of State for Energy

Chairman, Minister, Ambassador – it’s a great pleasure to be meeting you in London again. This indicates the good relations between our two countries, and I look forward to a discussion with you and your colleagues later this morning. I have been impressed by the [Kazakh] artworks that are decorating this hall, which are a reminder that although oil, gas and energy are important, there is a wider cultural hinterland to this relationship.

I’ve seen, as energy Minister for thirteen months, that energy issues are on all the agendas that count, and are gaining an ever higher place on those agendas. Increasingly, internationally and in the UK, these are an issue of national importance. This was why the prime Minister, Tony Blair, recently asked me to lead a review into the UK’s energy policy.

Since its inception, this conference has focused exclusively on Kazakhstan’s oil & gas sector. This year, for the first time, it also incorporates some of Kazakhstan’s other natural resources, and this is a welcome development.

The UK government address last year identified three general areas of development opportunity for Kazakhstan, and suggested that the UK - Kazakhstan partnership provided a sound basis for delivery of mutual benefits. These areas of opportunity were:

  • the overall energy scene
  • international and national investment
  • industry and personnel development

Coming in on the second day of the conference, I would like to offer a snapshot of how these areas look to us today, one year on.

Firstly, Kazakhstan is still expected to become one of the world’s premier oil producers and exporters.

Last week, Kazakhstan signed a treaty with Azerbaijan to support and facilitate transportation of oil across the Caspian and on to international markets through the Baku – Tbilisi – Ceyhan (BTC) pipeline system. This treaty reflects Kazakhstan’s intent to develop multiple oil export routes, and we welcome this important initial step in a complex undertaking.

The Caspian and Central Asia region is important to Europe’s security of energy supply debate. We in the UK, both independently and as part of the Euopean Union, have a serious interest in the development of Kazakhstan.

We do, however, want to develop the relationship on a systematic and consistent basis across the energy spectrum. In this context, I am delighted to note that the UK – Kazakhstan Memorandum of Understanding (MOU) on Energy Issues, which was signed a year ago, has generated much productive work from both sides.

The MOU provides a platform for engagement on a range of topics including energy strategy, safety, climate change, energy efficiency, renewables, business conditions, and education. I single out climate change as being of particular importance. There is growing recognition across the world’s scientific community that climate change is a major challenge which must be addressed if we are to safeguard our plant. A first annual report on activity has just been completed. This shows considerable progress including work to expand business partnerships, to improve investment conditions, and to build cooperation on education, training, developing renewable energy potential and increasing energy efficiency. Our respective representatives on the working group will over the next year continue work in these areas.

In parallel, I am pleased to note the significant progress that has been made since Kazakhstan became a signatory to the Extractive Industries Transparency Initiative (EITI) in October 2005. So far, 38 companies and 52 NGOs and associations of NGO’s have signed up to EITI in Kazakhstan, and we look forward to seeing wider participation.

The UK is one of the largest investors in Kazakhstan’s oil & gas sector. I look forward to this level of involvement and commitment expanding further in the future, both in the oil and gas sector and in other industries as Kazakhstan steps up its efforts to bring diversity to its economy.

Progress at Kazakhstan’s world class onshore fields has been considerable, as major capital projects have generated substantial increases in production. Changes have also been brisk in the smaller “second tier” onshore fields. These fields and related facilities vary considerably in size, complexity and operational regimes.

Further development stages of key onshore fields are still being planned, including major new capital phases at Karachaganak and Tengiz. A recent gas price agreement with Russia now provides a more supportable case for BG and their partners to implement such future phases at Karachaganak.

The emergence of a potentially massive new offshore province gave a major boost to Kazakhstan’s oil & gas, and indeed national, standing. This positive prognosis still exists, albeit accompanied by some critical challenges.

Everyone who has an interest in Kazakhstan is aware that the Kashagan project is subject to major technical, logistical and schedule challenges. Related issues are being addressed by the operator and partners, and we all hope that a definitive plan of action in respect of both the Experimental Project and Full Field Development will emerge soon.

Whilst we wait for further information, I urge British companies to keep faith with the project, and to continue to position themselves for appropriate business opportunities.

The offshore development plan has recently been updated, and plans put in place to create better seismic definition of new blocks for auction.

Meanwhile, individual negotiations on certain new offshore blocks have taken place, and we are delighted that Shell has secured its first offshore operatorship in Kazakhstan with the Pearls project.

There was much speculation around last year’s conference about whether or not adjustments to Kazakhstan’s PSA and tax legislation would prove sufficiently attractive to the oil & gas majors, and this issue remains largely untested.

It is entirely natural for Kazakhstan to want to retain as much as possible of its hydrocarbons wealth, but the massive scale of planned development and investment requires that an equitable business climate be maintained.

At the time of last year’s conference, the world oil price was around $50 per barrel. We thought it could well go higher, but wondered how long such high oil prices would remain. Now we know at least the first part – the oil price has gone higher, and all predictions of a decline have so far been confounded.

This means that the global competition for oil & gas investment, and supporting resources, is significantly more pressurised now than it was a year ago. Whilst Kazakhstan has made enormous progress, there is a real risk of oil majors and supply chain companies being tempted away by less onerous conditions elsewhere.

The involvement of oil majors is vital to Kazakhstan’s future success. The same holds true for a broad range of expert supporting players providing vital components and services. Business regime permitting, however, we are confident that British companies will continue to take Kazakhstan seriously and play a key role in future projects and industry development.

The oil & gas sector is still seen as facilitating major new opportunities to diversify Kazakhstan’s economy and industrial base. Offshore activities continue to be seen as a key “pump primer” in terms of creating a new supply & services sector, involving partnership ventures between Kazakh and foreign companies and introduction of increasingly sophisticated technologies.

The progress of such positive changes is obviously linked to the rate of offshore oil & gas development itself. Attracting key participants and maintaining offshore momentum are, therefore, vital to Kazakhstan’s future and to cascading the country’s wealth down through the population.

Through UK Trade & Investment (UKTI), we have developed industry and market specific responses to the challenges presented by capability and capacity building in Kazakhstan. The British Trade Office in Atyrau has created a valuable footprint in Western Kazakhstan, and our Kazakhstan Oil & Gas Interest Group provides a focal point for British supply chain companies.

We have worked closely with operators, Agip KCO in particular, to encourage and facilitate partnerships between British and Kazakh companies. We firmly believe that the combination of well qualified organisations from each country offers the best route to generating mutual benefit, and we remain committed to further development of such mechanisms.

When we talk of the need for an equitable business climate in Kazakhstan, it is important to recognise that it is not just the very large companies which need this. Companies of all sizes and types require an enabling regime to prosper, and small companies are particularly sensitive to adverse conditions.

It is equally important to say that we recognise that Kazakh companies are just as much affected by the prevailing business regime as are foreign companies. If Kazakhstan is to succeed in building indigenous capability and capacity, the Kazakh government and regional authorities must be prepared to provide appropriate encouragement and support to local companies.

Substantive progress has been made in capability and capacity building, and Kazakhstan possesses good human resources and capable entrepreneurs. We firmly believe that Kazakhstan’s development should be based on competitiveness, as this is the only way in which Kazakh ventures will be capable of meeting WTO requirements and be truly sustainable.

The UK continues to offer the world’s best qualified and flexible supply chain capability, and British companies are open to working with Kazakh companies. Productive partnerships do not of course happen overnight, and the achievement of success requires expertise, commitment, and time.

In my “snapshot” of the last year, I have pointed up both real progress and important challenges in Kazakhstan. One thing that has not changed from last year is my conviction that British and Kazakh companies can create outstanding partnerships which are capable of delivering mutual and sustainable benefits. We remain committed to encouraging and supporting British companies in their endeavours as an integral part of our strategic engagement with Kazakhstan and its fine people.
I offer my best wishes to all of you for a successful conference and the development of new relationships and business.