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Deals boost KMG EP's Kazakhstani output, as it looks overseas and offshore

Acquisitions are boosting KazMunaiGaz Exploration Production's onshore output, but the company won't stop there: offshore and overseas assets are next, says CEO Kenzhebek Ibrashev. Miles Lang reports

KAZMUNAIGAZ Exploration Production's (KMG EP) oil production will rise over the coming months as the company completes three domestic acquisitions, says chief executive Kenzhebek Ibrashev. But the cash-rich firm, which has around $4bn to spend, plans to accelerate its expansion with investments in Kazakhstan's offshore sector and overseas – in Iraq and the North Sea.

"Should we be able to close all three deals this year, we will add about 25% to our production volumes," says Ibrashev, raising the total from 270,000 barrels a day (b/d) to 340,000 b/d (see Figure 1). The company, which had production of 180,000 b/d when it was formed in 2004, aims "to consolidate the existing onshore hydrocarbon assets in Kazakhstan, as well as aggressive onshore exploration".

Listed on the Almaty and London stock exchanges, KMG EP is the state's onshore exploration and production arm, 61% owned by national energy company KazMunaiGaz (KMG). Its mission is to consolidate onshore resources by buying stakes previously held by KMG. And there is much at stake – Kazakhstan has the world's largest non-Opec oil resources after Russia, with proved reserves of 39.8bn barrels according to BP's Statistical Review of World Energy.

Acquisitions advancing

The two most advanced acquisition targets are a 50% stake in Kazakhoil Aktobe, resulting in a partnership with Caspian Investments Resources, and 51% of Kazakhturkmunai, resulting in a partnership with Turkish national oil company TPAO (see box). Both of these are past the due diligence stage and just need final approvals. The third acquisition, which is still being negotiated, is for 50% of Mangistaumunaigas, which would result in a joint venture with China National Petroleum Corporation (CNPC).

The Mangistaumunaigas acquisition is the biggest – in 2009 it produced 115,000 b/d, while Kazakhoil Aktobe and Kazakhturkmunai produced 19,000 b/d and 4,400 b/d, respectively. But what all three acquisitions have in common is that they involve stakes being sold down by KMG.

Another thing that KMG EP's acquisitions to date have in common is partnership with Chinese companies. If anything, this year's two immediate targets, which will lead to partnerships with Russian/Indian and Turkish companies, represent a deviation from the norm. Since its initial public offering in 2006, KMG EP has made three acquisitions – 50% of Karazhambasmunai, in partnership with China's Citic Resources, and 50% of KazGerMunai and 33% of Petrokazakhstan (PKZ) both in partnership with CNPC. KMG EP's strong relationship with Chinese interests is also seen in China Investment Corporation's 11% holding in the company.

But some Kazakhstanis are worried about growing Chinese energy-sector investment, fearing the country could sign away too much of its resource wealth while it works to get it out of the ground. In May, a group of Kazakhstani parliamentary deputies delivered an appeal to energy minister Sauat Mynbaev asking him to clarify these concerns. The reply they received was that China held a 50-100% stake in 15 companies involved in Kazakhstan's energy sector, which did little to allay fears for the country's economic security.

The most contentious stakeholder issue in Kazakhstan is the Karachaganak gas project, the only big foreign-led project that the state does not hold a share in. The project is operated by Karachaganak Petroleum Operating, which features BG Group, Eni, Chevron and Lukoil. In June, KMG said it wants a 10% stake in the project. "If the state, represented by KMG, acquires equity in the project, we will be very interested in taking that asset," says Ibrashev.

Offshore and overseas

KMG EP is moving swiftly with its onshore exploration (it is drilling eight wells this year), and is considering a move into offshore exploration. Ibrashev says: "We're looking at working as a sleeping partner in offshore projects. We hope to spend time acquiring the right skills. Given time and experience, one day we'll become an offshore operator."

As well as consolidating onshore assets in Kazakhstan, KMG EP is planning to work outside the country and is looking at opportunities in Russia, Turkmenistan and beyond the Caspian region. The company prequalified in Iraq's second licensing round, leading a consortium that featured Edison and Kogas. It came second in the bidding, which Ibrashev considers a huge success for the company.

KMG EP is now looking at other Iraqi assets in the third round and will submit bids by September. Ibrashev talks about the process as one of experience-building, and says that the company is "also gaining experience bidding on blocks in the UK and Norwegian North Sea".

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