Competition and innovation in the oil and gas companies of Kazakhstan
Abstract
This paper focuses on the key factors of economic development - competition and innovations in the oil and gas companies of Kazakhstan.
The introduction of innovative technologies allows companies to significantly improve operational efficiency and reduce costs by increasing capacity and reducing power. The development of innovations is the sole purpose of oil and gas companies to successfully improve their business in emerging market conditions. Oil and gas companies, being not innovative by definition, act as innovations consumers of the market.
There are some points about competition and innovation in the oil and gas companies of Kazakhstan. First of all, Kazakh oil and gas companies occupy privileged positions due to their authority and large proven mineral reserves. Oil market, despite on the development of alternative energy sources, expands every year, along with emergence of the new players. All of this leads to serious competition, since the oil companies as well as companies that supply oil and gas equipment, divide, in fact, a limited space. This causes them to explore new ways to promote its services, and themselves in every possible way.
Increasing competition in the industry encourages companies to seek innovative ways and new ideas that will help to join the market and become an active participant of the Kazakhstan oil business
One of the most significant and the main, but not the only factor of oil companies’ competition is the quality of the products and the consumption price.
Thus, exported Kazakhstani products can be divided into two groups. The first one is the Karachaganak and Tengiz fields' oil, which is light, but with a high sulfur content. The second group is all the rest oil deposits "Urals".
Mangistau oil contains a large amount of paraffin, while Buzachinsky one is characterized by high metal content. From the perspective of the complex use of raw materials the extraction of paraffin, vanadium, and nickelwould be most profitable in the mining areas, so that to transport already refined raw materials. . In terms of Tengiz oil, which according to the signed contract remains in the hands of the State, it is necessary to carry out same operation. The required limit of sulfur compounds - mercaptans that bring extremely harmful effects on transport arteries and the technological equipment, which will be used by consumers of raw materials in the course of its processing - should be extracted from this oil. The specific consumer demand on certain oil types causes the creation of even more sophisticated system of oil and petroleum products trade in order to balance their relationship and consider the nature of seasonal changes. Everything noted above gives rise to the creation of larger vehicle and industrial organizations that contribute to the achievement of the minimum costs in various areas of the oil trade.
Global oil demand is even more complicated by seasonal variations in trade. Gasoline consumption is maximized in summer, while demand for heating oil products is greater in winter period. The growth of certain petroleum products consumption can fluctuate dramatically depending on the nature of industrial growth in different countries, in the absence of the possibility of obtaining energy from alternative sources, after a dry period or as a result of government measures to curb pollution and switching power plants to other types of fuel. These arguments could be regarded as a practical explanation of one of the main features of the world major oil companies ,particularly, their vertical integration at all work stages - from oil production to retail sale of finished products, what greatly increases their competitiveness. World oil trade conditions that have been developing for decadesand leading market to the current situation demanded the establishment of large multinational integrated oil companies. These newly formed structures inherited the most effective way to balance supply and demand.
Large integrated oil companies that are able in a quite flexible manner, depending on the prevailing market conditions, change ratios of the output in their production units (subsidiaries, the company specialized in the corporation, etc.), can counteract the fall in the market prices of petroleum products, due to the continuous efforts to achieve greater efficiency savings, which is attained through the increase of the scale of its operations.
Despite the positive trends in the oil and gas industry, it should be noted that the state's share in the total production of oil and gas raw materials is only about 27%. The remaining production is owned by foreign companies, and mainly exported to various directions, which creates serious problems in the domestic manufacturing sector.
Accordingly it can be concluded that, in strategic terms, we still focus on the export of raw materials, what, in fact, does not bring sustainable gains to the state.
Issues related to the large oil companies competition and the strategies development aimed at improving of their competitiveness, are complex and include problems of economic and energy security, trade, technology and innovation policy.
Table 1 – Globaloilreserves, 2011
№ / Country / Reserves (B/bbl) / Total reserves share1 / Venezuela / 296,5 / 20,20%
2 / Saudi Arabia / 264,5 / 18,00%
3 / Iran / 151,2 / 10,30%
4 / Iraq / 143,1 / 9,80%
5 / Kuwait / 101,5 / 6,90%
6 / UAE / 97,8 / 6,70%
7 / Russia / 79,4 / 5,40%
8 / Libya / 47,1 / 3,20%
9 / Kazakhstan / 39,8 / 2,70%
10 / Nigeria / 37,2 / 2,50%
11 / Canada / 32,1 / 2,20%
12 / USA / 30,9 / 2,10%
13 / Qatar / 25,4 / 1,70%
14 / China / 18 / 1,20%
15 / Brazil / 12,9 / 0,90%
Total / 1467 / -
Retrieved from:Statistical Yearbook for OPEC 2010/2011year.
Kazakhstan is one of the largest suppliers of crude oil in the Central Asian region. Kazakhstan takes the 9th place in the list of global proven oil reserves. Kazakhstan has significant hydrocarbon reserves - 3.3% of the world's supply. According to the Ministry of Oil and Gas, the estimated recoverable oil reserves are about 17 billion tons.
The oil and gas industry of Kazakhstan retains substantial growth potential that will increase in the current year as well. Dynamics the extracted oil and gas reserves in 20 years shows a significant increase due to the opening of the Kashagan field, and increased reserves at Tengiz. Oil production has grown by more than 3 times, gas production -more than 5 times.
Retrieved from: Statistics agency of Kazakhstan
Figure 1. Oil production in Kazakhstan, BT/year
It is worth mentioning that about 71% of total oil production is carried out by foreign investors (in Russian, U.S. and European countries), represented by a number of multinational companies, including ExxonMobil, Chevron, Agip, BG, BP / Statoil, Shell, Total, INPEKS, Philips, Lukoil , Eni, etc.
Analyzing the state of the industry in recent years, it has to be marked the intensive penetration of foreign capital, especially Chinese companies in the oil sector in Kazakhstan, observed in recent years (Table 2).
Table 2 - Members of the major oil and gas projects in Kazakhstan
Projects / Countries’ share in projectsUSA / Kazakhstan / China / Russia
The Caspian Pipeline Consortium / 15% / 19% / - / 31%
"West Kazakhstan-China" Pipeline / - / 50% / 50% / -
“Kazakhstan-China” Pipeline / - / 50% / 50% / -
Development of Tengiz reserves, BT / 50% / 20% / - / 5,0%
Karachaganak field development / 20% / - / - / 15%
"Mangistaumunaigas" field development / - / 50% / 50% / -
Kumkol field development / - / 33% / 67% / -
Shymkent Refinery / - / 50% / 50% / -
Resource development of the Kashagan field / 25,3% / 16,81% / - / -
Chinese companies have a significant share in the oil industry of the Republic of Kazakhstan. Moreover, this share is composed of hydrocarbon reserves, its mining and processing, the pipeline system and gas stations.
If we consider the competitive advantage of the largest companies in the oil sector, there is a high concentration of forces in the oil resource market. The three largest companies provide 64% of total oil production in Kazakhstan. More than a third of the market of hydrocarbons is occupied by "Tengizchevroil", followed by the JSC "KMG" KazMunaiGas "holding about 17%. In the third place in terms of production is the company Karachaganak Petroleum Operating BV (PAC), with a market share of 14%.
"Tengizchevroil" (TCO) was established on April, 6 in 1993 based on the agreement between the Republic of Kazakhstan and the "Chevron" company. Currently, the owners of TCO are: «Chevron» - 50%, JSC "NC KMG" - 20%, ExxonMobil Kazakhstan Ventures Inc. - 25% joint venture "LukArco" - 5%. Direct TCO’s payments to Kazakhstan in 2011 constituted 14.4 billion U.S. dollars. During the work period since 1993 till 2011 direct TCO's financial payments to the state budget totaled 60.1 billion U.S. dollars.
"TCO" includes a huge Tengiz field, and the smaller but sizable Korolev field. According to company data, the recoverable reserves of the Tengiz and Korolev fields are estimated between 750 million and 1.1 billion tons of oil. By the end of the 2011 oil production constitued 25 million m. t (206 million barrels).
Technological equipment is one of the key TCO's benefits. The principal factors of TCO's business development are associated with the expansion of production capacity and the introduction of the advanced technology in oil production. TCO is trying to expand production in the framework of the "Future expansion project" with the use of sour-gas re-injectiontechnology, which helps to maintain the required pressure in the reservoir and will result in a greater oil return. This technology is more environmentally friendly and allows prolonging of the field operation.
The main competitive advantage of JSC "EP" KazMunaiGas "is the guaranteed economic and political support from the state on behalf of the Government of the Republic of Kazakhstan. Under these circumstances, state legislation allows KMG EP to have more rights in the acquisition of alienated areas of oil and gas development. This provision helps KMG in the implementation of the Company's development strategy toincrease its asset portfolio through the acquisition of deposits. In the period from 2010 to 2014 JSC "KMG EP" plans to invest about U.S. $ 20 billion.
Availability of secured access to oil trunk routes is an important aspect of the KMG EP's competitive advantage. Company has signed several agreements, whose conditions guarantee to KMG access to the Uzen - Atyrau - Samara pipeline that allows the transportation of the majority of exports to CIS and other foreign countries and the Caspian Pipeline Consortium (CPC).
Karachaganak Petroleum Operating BV (PAC) was established in 1997 with the participation of foreign companies: «BG Group» - 32,5%, «Eni» - 32,5%, «Chevron» - 20% and "Lukoil" - 15%. Total volume of investments that KPO investedin the project of the Karachaganak field development has reached 14 billion U.S. dollars so far.
In 2011, the company produced 138.5 million barrels of oil. Extraction and processing is held in the Karachaganak field on three technological plants. The principle of production enables them to respond flexibly to changes in the market of the oil and gas export Technological equipment of KPO is a considerable company's advantage. In addition, the company has experience in drilling of deep and technologically complex multilateral wells in Kazakhstan. KPO introduced the new fiber-optic technology that can respond to fluctuations in the soil around the export pipelines and transfer the information to the operator and significantly reduce the likelihood of illegal tapping [13].
Taking into account the dynamics of company development in the oil industry it can be concluded that the competitive environment will intensify. Under these circumstances, competitive advantages will be determined by the willingness of companies to implement investment projects and development of oil and gas fields. Furthermore, the technical equipment and the potential of human resources can become a key component in the development of companies in the Republic of Kazakhstan.
Technologies and equipment of oil production in the region, often determine the strategy of the company involved in the oil sector. Usually the technological aspect of the oil field development is associated with future income of oil companies. This aspect encourages them to improve the technology of oil production, to focus on research, introduction of advanced technology, oil field machinery and equipment of the new generation for oil recovery increase, integrated methods of effective extraction of the hardly attained reserves. Further, the infrastructure, which is an integral part of the oil-producing complex and often elevated by oil companies during the exploration and production of energy resources, should be also considered.
Generally, technological requirements for the oil field development, designed to reduce environmental risks and improve safety and security of the possible force majeure and accidents, create conditions for the so-called "natural selection" of enterprises and companies that are capable of surviving in these conditions and conducting systematic work fields exploration and production.
Innovation in the oil and gas sector is the process of the new idea realization in the oil and gas complexthat can provide a balanced solving of social and economic problems, preserve natural resources potential of the complex, and ensure the present and future, energy and raw material needs of the different sectors and spheres of human activity.
The main factors that determine the features of innovation's funding in the oil and gas companiesare the following listed below: