Alexandra Aliokhova

17 April 2023

KMG published a fresh, Year 2022, report regarding the performance of KPIs by ten leading oil and gas producing companies of Kazakhstan.  One characteristic feature about them is, that the massive presence of the National Company in the ownership structure of those companies implies the low indicators of production per one company official.

The Energy Monitor public association reported that Tengizchevroil (TCO) was the most effective in achievement of all KPIs.  In 2022, TCO produced 22.1 million tons of crude with 4.7 thousand persons on payroll. Which means, the company produced 6.1 thousand tons per one company official.  KMG holds 20% in TCO.

POSH and Loud

Ozenmunaygas, the desired employer for those fired petroleum workers on strike, features 8^th in the effectivity ratings.  The company employs twice as many officials, compared to TCO – 9.9 thousand individuals, but the production indicator is 5.7 times lower.  Oil production per one official indicator in Ozenmunaygas is 11.9 times lower, compared to TCO.  The same situation is with taxes.  Energy Monitor compiled a table that clearly shows the effectivity of each individual subsurface user, compared to peers.

In 2022, average salary paid in Ozenmunaygas was KZT 966 thousand.  Besides, some of Ozenmunaygas subsidiaries (Ozenmunayservice, Burgylau, Munayfieldservice) that employ more than 4 thousand individuals pay their officials same amounts, as does the mother company – Ozenmunaygas.  Consequently, the social and the economic burdens of the company are concentrated in one region, and not at the national level. 

This paragraph is a nutshell of the opinion expressed by Energy Monitor.

Petroleum workers in Kazakh and other oil and gas producing companies earn not less than some KZT 700 thousand a month, which means the fear of losing one’s job is a justified phenomenon.  But what is the justification for our state to further help KMG, which company is a “lame duck” and no business enterprise at all?  And, if to be honest to full, does it at all make sense for KMG, that holds various shares in 8 out of 10 above tabled companies, to further address community needs? This paragraph is a nutshell of what was said by Olzhas Baidildinov, host of the “Baidildinov.  Oil” television show and an ex-advisor to the Minister of Energy.

Business, Kazakh Style

— As the national company, KMG is extremely non-effective, particularly when it comes to indicators per one company officials, both production and profit indicators.  Profit indicators are important, because net production of a company may be low, but the company business may be, at the same time, highly profitable – on the back of petrochemistry and other types of activities – Mr. Baidildinov said

— Olzhas, why are KPIs so low?  May be KMG’s production conditions are worse than those in Tengiz? The difference is several-fold, that cannot, but not cause questions.

— I studied this situation for several years.  I worked in the National Company KMG and dealt with the compilation of the reports, like above.  KMG always looked pale in those reports.  And that was not a business decision made by KMG.  That was the order from the Government and the demand imposed by society, for the company to address community needs.  In this situation, we need to draw a clear red line between the reality, when the company addresses community needs, allocates funds for those needs and employs excessive headcount and the situation, when the company works to its own detriment.

In 2022, I prepared an assessment, by which the efforts to keep liquefied gas prices “cold” would cost KMG KZT 150 billion a year.   At present, KMG proceeds to keep those prices on leash, which means that the company proceeds to incur in further losses.

The above, quite naturally, impacts financial indicators of the company, as well as curbs its capabilities to develop new oil and gas fields and commission new plants.  Be reminded, that in the last 20 years KMG did not commission a single oilfield from scratch. Yes, there were mergers and acquisitions, but KMG never drilled into a prospect and made it a commercial asset from zero, although KMG is the flagship of the indigenous oil and gas industry.

Discovering new fields and bringing them to production regime is particularly something that a national company is supposed to do.  If to pay attention to production indicators, we will see that TCO is the main profits and production driver, not KMG’s own fields. 

Sometimes that is a shocking reality, but I want to emphasize that in KMG fields, the water intrucsion ratio is more than 90%, which means that when they produce 100 liters of bed fluid, only 10 of them stand for crude oil. Those fields are non-profitable by default and, as a rule, must be abandoned. But KMG must satisfy the local community needs, which needs, amongst others, include mandatory necessity to employ locals.  And, rather naturally, we see the convoluted consequences of that.

Parody of Market Competition

— Does such a Modus Operandi constitute a good substantiation for IPO?

— Well, they did IPO themselves.  Because the President told them to do so.  In any case, external investors shall always questions about such a manner of employment guarantee, and such excessive personnel headcount, because a company must generate profits.  But, what we see is that those community needs are pressing on KMG and dragging it downwards.

KMG is an expensive employer.  The company pays a lot and re-considers salaries every year.  IN 2021, if I am not mistaken, the company increased salaries by 30% through the whole group of companies. Of course, all of that, impacts the financial indicators.  How can you guarantee high profits, when you have way too many community needs to address?

We need to also take into account the fact that KMG is only now preparing itself to transition to the service model.  All those public manifestations are because KMG is about to begin to outsource some of the non-core activities and services.  KMG has subsidiaries dealing with non-petroleum activities. 

LLP KMG EP-Catering is a catering services company.  Why would an oil and has holding company have a catering company, which company’s managers were once apprehended for corruption?

Besides, KMG is a part of the Samruk-Kazyna system.  Within that system, national companies can buy services from single sources, in cases when those single sources are national companies or subsidiaries of the Samruk-Kazyna system.  That is something that limits competition.  Various analyses show, that in average the prices charged for those services are 20-30% higher than the market prices, because, again, all those single sources and subsidiaries must address community needs.  We need to get rid of that.

Growth is Always Pain

— But you see where that “riddance” leads?

— Yes, it is a pain, but the national company must move ahead.  There must be new plants, new petrochemistry facilities. Today we see a lot of attention paid to oil and gas chemistry, but that is done by external investors, such as companies from Russia.  KMG must make a choice – either it will remain a “community oriented company” with non-profit projects and depleted fields and without new fields, or our flagship will transform into a powerful market company, that will pay taxes and become an international player, without being curbed at domestic level, keeping prices on the leash and addressing various community needs.

— Why is it so, that TCO and other companies are more effective?  Do they not have community needs to take care of?

— That comparison is not very right, because those are different fields.

For better comprehension, be advised that Tengiz will produce some 900 bbls a day in the nearest future.  That is approximately 1% of global production.  Volumes are great, but cost value is rather low – some USD 3-4 per one bbls.  KMG does not have that.

All foreign companies employ limited amount of personnel.  Services are all outsourced.  In other words, they only employ highly qualified engineering personnel – people who elaborate various schemes for the development of the field.  Other services come from competitive market.

Given the above, I think that demands voiced by those dismissed workers to cancel the previously announced tender were illogical and illegal.  That is pressure, that must be stopped.  The national company is supposed to move ahead.