Oil and Gas Problems in Kazakhstan Essay Example

substantial oil reserves, Kazakhstan faces a significant disadvantage as it lacks direct access to open sea due to being landlocked by the Caspian Sea. Consequently, the country cannot overcome this drawback.

The costs of exploring, developing, and producing crude oil in Kazakhstan's oil industry are comparable to other countries. However, expenses increase when transporting the oil to refineries and markets. Kazakhstan relies on pipelines passing through foreign nations for global transportation. Moreover, this operation requires a substantial workforce with specific skills that are currently lacking in Kazakhstan.

Managing its oil supply chain is a challenge for Kazakhstan, as it involves 15 expenses in fulfilling customer requests. In most commercial supply chains, the profitability is closely linked to its value. This value is determined by the revenue generated from customers and the overall cost across the supply chain (Chopra and Meindl, 2003; Lee, 2002; Cavinato, 2002). To ensure continued growth, monitoring the overall value of Kazakhstan's oil supply chain in the future is crucial, particularly considering the gains achieved through refining (www. gravmag. com, 2006).

Efficient management of the global oil supply chain is crucial for maximizing economic gains. The transportation of oil from Kazakhstan through Russian territory is regulated by the Ministry of Energy and Mineral Resources in Kazakhstan and the Ministry of Fuel and Energy in Russia. On December 25, 2000, a quota of 17.3 million tons was set for this transportation. Additionally, a memorandum signed on October 9, 2000 introduced the idea of "a single route," which designates the Kazakh Oil Company as the sole operator.

The annual quotas for oil exports between two nations are primarily influenced by

political relations. There is also a technical risk factor to consider, which is the high degree of wear and deterioration in pipelines. This could potentially affect the quality of services provided to exporting countries. Additionally, the lack of proper maintenance of these pipelines is mainly due to a shortage of well-trained local technicians and engineers (Doing Business with Kazakhstan, 2004).

By the end of 2000, Kazakhstan's oil pipeline systems, with over 60 percent located in the Western branch and 75 percent in the Eastern branch, had been built during the '70s and '80s. Consequently, energy played a crucial role in sustaining global supply chains and oil-producing countries (Bud La Londe, 2006). The conventional oil supply chain encompasses various stages from crude oil production to refining, transportation, retailing, and ultimately reaching customers at gas pumps.

The top oil producers globally are Saudi Arabia, Russia, the United States, Iran, Mexico, China, Canada, United Arab Emirates, Venezuela, Norway, Kuwait, Nigeria, Brazil, Kazakhstan and Iraq. The Organization of the Petroleum Exporting Countries (OPEC) controls significant global crude oil supplies and influences crude oil prices by setting production quotas. Refining crude oil involves increasing its value and making chemical changes. A 42-gallon barrel of crude oil produces approximately 19 1/2 gallons of gasoline, nine gallons of fuel oil and four gallons of jet fuel. In addition to this primary supply,
it also generates 11 gallons of other products such as lubricants,kerosene ,asphalt and petrochemical feedstocks for plastics production.These additional products exceed the initial supply. Efficient management of the supply chain is crucial for gaining a competitive advantage in various industries and businesses. Kazakhstan faces specific challenges in managing its

petroleum supply chain due to pipelines that are between 10 to 20 years old accounting for around 55%, while those older than thirty years constitute roughly12%.

Less than 10 years of usage is evident in only 1 percent of the pipelines in the Republic of Kazakhstan, which are gradually aging. This poses not just increased maintenance risks and costs but also significant technical challenges for the country (Petroleumjournal.com, 2006). Oil extraction in Kazakhstan occurs across 55 fields, with notable reserves found in Tengiz, Karachaganak, Uzen, and Kumkola. Tengiz boasts a billion tons of estimated oil reserves while Karachaganak holds around 340 million tons. Additionally, Uzen possesses over 1.5 billion tons of geological hydrocarbon reserves and Kumkola has approximately 350 million tons. The Caspian and Aral Sea shelf also serve as substantial reserve locations. Presently, Kazakhstan operates three primary refineries: Atyrau, Shymkent, and Pavlodar (see Exhibit 2). Kazakhstan's Oil Fields and Production

The main oil producing areas in Kazakhstan are Mangistau and Atyrau oblasts (provinces) (see Exhibit 1), which account for over 70 percent of the total oil extracted in the country. The remaining oil extraction is done in Aktyubinsk, Kzylorda, and Zapadno Kazakhstanskaya. The production statistics for these regions can be seen in Exhibit 1: Production (in thousand tons) by regions 1998-2001.

In terms of refining capacity, major refineries in Kazakhstan include Shymkent Oil Refinery, Pavlodar Oil Refinery, and Atyrau Oil Refinery. The design and actual delivery capacities for these refineries can be seen in Exhibit 2: Design and Delivery Capacities of Major Refineries.

Pavlodar Oil Refinery processes mainly light crude from Siberia and supplies the northern region of Kazakhstan.Atyrau, which is part of Kazakhoil, processes

significant amounts of domestic oil and provides supplies to the western region. Shymkent, on the other hand, was primarily sold to private investors in 1996, with 95% of its ownership transferred. It processes specific types of crude from various regions (such as Kumkol, Aktyubinsk, and Turkmen fields) and supplies the southern area, particularly Almaty.

Kazakhstan's Oil Production and Distribution Costs A variety of schemes are available for dividing oil revenues between the host country and the foreign partner. Typically, about 85 percent of revenue from production to market goes to the host country, while the remaining 15 percent is allocated to the oil company. The interpretation of this ratio can vary depending on the contractual forms employed and the preferences and laws of the host country. Nonetheless, oil companies generally aim for this distribution ratio.

The ratio of oil reserves and production costs varies in different countries. For instance, in Saudi Arabia, the ratio is higher due to the vast reserves and lower production costs. However, in the Caspian region, the ratio is likely to be lower because of additional expenses like transport costs, such as pipeline construction and transit fees, as well as political risks in the area. One of the challenges in forming contracts with Caspian nations is their lack of willingness to acknowledge the importance of reducing this ratio (Feiveson, 1998).

The upstream breakdown of costs is approximately 10 percent for exploration to find an economical field (with odds around one in 10 holes drilled hitting a commercial-sized field), 80 percent (or higher) for development, and 10 percent for continued activities. The benefits of having a larger number of

well-educated personnel for the proper management of the entire supply chain activities are immense. It is crucial for the Republic of Kazakhstan to utilize and maintain future oil revenues. Refer to the Major Oil Pipelines and their Routes Map.

Here are the various Kazak pipelines and their routes, including existing and planned constructions. The map in Exhibit 3 shows the major pipelines in Kazakhstan's oil supply chain management challenges. The pipeline infrastructure in Central Asia is sourced from the Kazakhstan Oil and Gas International Conference Proceedings in 2002. The Kazakhstan Ministry of Power, Industry, and Trade has identified the major pipelines as the priority export routes for oil, listed in the following order:

The Atyrau-Samara pipeline is restricted in its oil export possibilities due to its throughput capacity and the quota set by Russia. This limitation affects the growth of both crude oil production and export supplies. To increase the throughput capacity from 10 to 15 million tons per year, technical measures in Kazakhstan and Russia are being implemented at a cost of 22 million dollars, addressing Kazakhstan's oil supply chain management challenges. Another priority in the short-term is the Tengiz-Novorossisk oil pipeline, which is part of the Caspian Pipeline Consortium's (CPC) oil export pipeline project heading westward.

This project guarantees an autonomous route for Kazakhstan's oil exports to the Black Sea and also provides possibilities for attracting foreign investments in the oil and gas industry. The project participants have already signed the necessary agreements and commenced operations. Another significant project is the Trans-Caspian pipeline, which is planned to be routed through the Black Sea to Turkey. This pipeline is considered a

top priority. It will run from Western Kazakhstan to a terminal on the Mediterranean, specifically the Turkish port of Ceyhan, passing through the Caspian Sea.

The project faces risks in Azerbaijan, Georgia, and Turkey due to the challenging mountainous terrain and water barriers, as well as the necessity to traverse conflict-prone zones. Additionally, the volume of crude oil production in the Kazakhstan section of the Caspian Sea has been growing since 2004, making it necessary to expand the export oil pipeline of the CPC. Preliminary engineering and economic calculations have indicated that an economically favorable project is an eastward oil pipeline to China.

The oil pipeline project connecting Kazakhstan and China benefits the national security interests of both countries. It also addresses China's growing oil demand by providing a route that includes both Kazakhstan and China. The funding for this project is provided by China, but it does pose a potential drawback in terms of allowing China to manipulate the oil price. An alternative option would be the Persian Gulf-Iranian oil pipeline located to the south.

There is a possibility of oil prices decreasing in the Persian Gulf due to competition from OPEC nations. This could result in a decline in profitability and activity within the oil pipeline sector. Currently, there are no specified terms for investment mobilization in this project. Additionally, the Trans-Asian oil pipeline that passes through Kazakhstan-Turkmenistan-Afghanistan-Pakistan and terminates at an outlet in the Arabian Sea presents political risks because of its route through Afghanistan.

Consideration is currently being given to the organization of funding for the project. Kazakhstan's Oil Supply Chain Management Challenges 20 Exhibit 4 shows

a comparison of transport costs per barrel of Kazakh oil. These costs include the cost to transport to the port, cost for black sea tanker, cost for second pipeline, cost for final tanker, and operating costs for oil production. The table provides detailed cost figures for each transportation route and source from the KazakhOil Report in 2005.

The text discusses the different costs associated with oil exploration, development, and distribution. These costs include payments for exploration licenses, depreciation of capital expenses for development, and operating costs covered by sales of crude oil production. Downstream costs involve transporting crude oil to the refinery, the refining process itself, transportation to market, and marketing activities.

When examining global gas prices per gallon, approximately 2 percent is allocated for exploration expenses while production and development account for around 12.5 percent or more. The host government receives about 20 percent in revenue while transportation to a refinery takes up 2.5 percent. Refining constitutes approximately 7.5 percent of the cost breakdown followed by transportation to market (2.5 percent) and marketing (2.5 percent). Additionally, consumers face a significant tax burden at the pump that represents 50 percent of the overall price.

Using Kazakhstan's oil industry as an example, Tengiz oil export costs can be divided into several categories: lifting costs ($2 per barrel), pipeline expenses ($1.2 per barrel), transit fees ($3 per barrel), and shipping via oil tanker ($1.23 per barrel). This results in a total cost of $7.65 per barrel.

In terms of supply chain management in Kazakhstan's oil sector, joint ventures between foreign firms and KazakhOil (the state-owned company) are preferred methodsBoth parties in joint ventures contribute specified amounts of capital using various means

such as physical assets or land rights allocation. The risk is shared based on the proportionate investment made by each party. Joint ventures can be considered contractual agreements for procurement, with foreign firms often having limited control. Typically, the host country receives around 85 percent of the revenue generated from production to market, while the remaining 15 percent goes to the oil company. Kazakhstan faces challenges in effectively managing its oil supply chain due to two separate pipeline networks: one transporting crude oil from Western Siberia to Pavlodar and Shymkent, and another exclusively carrying domestic crude from northwest Kazakhstan to Atyrau.

The pipeline system in Kazakhstan is fragmented and does not effectively connect the eastern and western regions of the country. Additionally, it fails to transport petroleum from the western oil fields to the Pavlodar or Shymkent refineries, both located in the north and east. Furthermore, the current capacity of domestic pipelines is insufficient for future increases in oil production. To address this issue, Kazakhstan currently exports some of its oil through barges to Baku, Azerbaijan. From there, it becomes part of Azerbaijan's pipeline network system and is distributed globally (Rasizade, 1999).

The full development of Kazakhstan's crude oil and gas potential will necessitate significant investments in the existing pipeline networks. The major oil ports in Kazakhstan are Atyrau and Aktau, and the main oil export pipelines include Tengiz-Novorossiisk (Russia), Uzen-AtyrauSamara (Russia), Kenkyak-Orsk (Russia), which transports oil from the Aktyubinsk fields to the Orsk refinery, and the Caspian Pipeline Consortium (CPC), which transports oil from Western Kazakhstan to the Black Sea at Novorossiysk (Baker and McKenzie, 2002).

Despite upgrading its overall educational system, particularly

post-secondary curricula and academic rigor, modeled after the Western-style system, the Republic still lacks engineers and technicians necessary to support the growth of the oil industry. The numerous benefits of having a larger number of well-educated individuals in managing the supply chain activities are significant, making it imperative for the Republic of Kazakhstan to capitalize on and maintain future oil revenues. Current Issues in Global Energy Market

The recent increase in global energy demand has led to positive economic growth, but it has also placed pressure on suppliers due to geopolitical factors and other disruptive elements. However, consuming countries may adjust their energy policies to address concerns about energy security and the environment. These market uncertainties have caused volatility and high prices (Birol, 2006). At a symposium at Georgetown University in Washington D.C. on October 29, 2007, Daniel Yergin from Cambridge Energy Research Associates Inc. (CERA) predicted that oil prices are becoming disconnected from supply and demand fundamentals (Yergin, 2007). Unlike OPEC member states and Russia, which have significant influence in the global energy market, Kazakhstan has minimal involvement in geopolitics. Russia shares a border with Kazakhstan and possesses abundant oil reserves as well as control over refining capacities and some of the flows of refined oil from Kazakhstan to worldwide markets.

Despite being a blessing for Kazakhstan, the rich oil deposit in the country can easily be wasted due to mismanagement and poor public policy. However, the leadership of Kazakhstan now has the opportunity to take a long-term approach towards utilizing these resources effectively. With their expertise in business and lessons learned from other oil-producing nations, they can manage the proven

crude oil deposits in the Caspian Sea within their sovereign republic.⁷

References:
7.Feiveson, H. (1998)."The Problem of Caspian Energy." Princeton, New Jersey: Princeton University.
8.Gaudenzi, B. and A. Borghesi.(2006).Managing Risks in the Supply Chain Using Ahp Method." International journal of Logistics Management, vol.17, pp.114-136.www.gravmag.com
9.Lee, Hau L. (2002)."Aligning Supply Chain Strategies with Product Differentiation." California Management Review, pp.105-119.
10.Lockamy, A. and Kevin McCormack.(2004).Linking SCOR planning practices to supply chain performance.International journal of Operations &Production Management, vol.24, pp.1192-1218.
11.National Statistics Agency of Kazakhstan, 2005.www.petroleumjournal.kz
12.Birol, F. (2006)."World Energy Prospects and Challenges.The Australian Economic Review ,vol39,no2pp190195
.13.Bud La Londe.(2006)"Energy Problem Cries for Decisive Action." Supply Chain Management Review,VOL10,Issue 6.pp6
14. A publication called Project Finance International (PFI) by A. Cavenagh discusses the challenges faced by the Caspian Oil Project in syndication, and can be found on pages 50-51.
In May-June 2002, J. Cavinato published an article titled 'What's Your Supply Chain Type?' in the Supply Chain Management Review. The article explores different types of supply chains and can be found on pages 60-66.
'Supply Chain Management', a book written by S. Chopra and P. Meindl (Second Edition), was published in New Jersey by Prentice-Hall in 2004.
Another resource is the book 'Doing Business with Kazakhstan', edited by Marat Terterov, which was also published in 2004.

London, England: Kogan Page Publishers. 12. Rasizade, A. (1999). "Azerbaijan, the U.S. and Oil Prospects On The Caspian Sea." Journal of Third World Studies, vol. XVI, No. 1, pp. 29-48.

13. Report of Baker and McKenzie. (2002, November). CIS Energy Notes.

14.Report of KazakhOil (2005).

15.Sridharan,U., Caines,R.,and C.Patterson.(2005)."Implementation Of Supply Chain Management and its Impact on the Value Of Firms."Supply Chain Management ,Vol .10 ,pp .313-318.

16.Yergin,D.(2007)."Oil Market Fever as Prices Near $100."Pipeline ;

Gas Journal ,Issue II ,pp .97-97