–          How are bank ratings affecting the oilfield services market. 

In 2017, according to the Ministry of Energy of the Republic of Kazakhstan, non-users purchased goods, works and services worth more than 4.5 trillion tenge. In view of the current and upcoming major oil and gas field expansion projects, experts expect a growth in the oilfield services industry. According to KazService Union of Kazakhstan Oilfield Services Companies, the oilfield services industry turnover in 2015 amounted to 1.3 trillion tenge, in 2016 – more than 2 trillion, and by the end of 2017 – more than 2.3 trillion tenge, while the share of local content on average equal to 52%.

About which segments of oilfield services the percentage of participation of Kazakhstan companies is high, and in which it needs to be increased and what needs to be done for this, Almas Kudaibergen told to Forbes Kazakhstan, Chairman of the Board of Centrasia Group, which is a co-founder of KazService.

 –          What is the situation in the oilfield services market as a whole?

 Over the past year and a half, the oilfield services market has been gradually developing after a sharp recession, which we observed in 2015. This is primarily due to the increase in prices for oil. Here the principle is simple. If the market of our clients grows, then we grow too. The second positive factor that influences our sphere is that large capital projects are being implemented in the country. First of all, we are talking about the TCO Future Expansion Project (FGP). Its budget is 37 billion dollars, of which 32% is a target forecast indicator of local content. That is according to the declared conditions the Kazakhstan side should master $ 11 billion. As you understand this is a huge profit for our economy. To all this, the FGP is currently recognized as the largest project in the world, and a certain part of the work in it is performed by Kazakhstan companies. Here our main task is to make the most of all the possibilities. Although the general contractors of the project are foreign companies, within the framework of the FGP, Kazakhstan enterprises are involved in different segments of oilfield services. If we divide the market into several areas, then our companies are engaged in drilling together with foreign contractors, engineering is performed by the Kazakh-British joint venture. There are many such examples. I think that if they should be attributed to successful cases for the development of local content. In addition, we are trying to build trust with customers in order to attract more local business. And little by little we achieve this. This is, say, manifested in an increase in the share of Kazakhstan employees in the FGP. During the implementation of the second generation plant in Tengiz, a large amount of labor was attracted from abroad. There were many Filipinos, Indians, and Turks. Now the situation is in favor of Kazakhstan enterprises, and the same foreign investors attract local personnel. I hope we can also successfully interact with other upcoming projects. Proceeding from all this, we can say that this year there will be an increase in margin. The growth of the oilfield services market is predicted next year, and in 2020 when there will be a construction peak at FGP, where at least 40 thousand people will be involved. This is a big market, all these people need to be fed, transported, clothed, trained, provide them with tools and equipment. I think there are good chances for our SMEs. 

 

–          In one of the interviews in 2010, you said that the Kazakhstan oilfield service companies, unfortunately, perform low-profit work. Has the situation changed over the years?

 Today significant changes are taking place in the oilfield services market and Kazakhstan companies are beginning to be attracted to more complex types of work. Of course, local businesses still dominate low-margin jobs. However, recent data indicate a positive trend. For example, more than 50% of Kazakhstan companies are present in the construction of more complex facilities and cargo transportation. They go to the general contractor, being participants in a joint venture or consortium that is engaged in complex technological works. For example, you can take the same FGP-a number of local companies created the «Asar» consortium together with one of the major Turkish general contractors Gate and successfully won a large construction tender worth more than $ 500 million. Now they are already starting construction on the project site No. 51. Another example is from my own experience. Company Logic Services, a member of our holding, creates an equivalent and full-fledged consortium with the leader of the British oilfield services market WOOD, which employs more than 55 thousand people, also for FGP in terms of commissioning works that were previously performed by foreign companies. I would like to especially note that the Kazakhstan oil market is rather young, while British or European companies have experience gained over several decades. And this needs to be understood. Look at Norway, which had no experience in the oil and gas sector in the 1970s when they found oil in them. Now the Norwegian technologies are leading in the underwater oil production, the annual turnover of their oilfield services companies is more than 45 billion dollars, of which 35% is formed due to the export of services.

  

–          In addition to this factor, what is the reason for the backlog of the Kazakhstan oilfield services market?

There are many factors, but I would like to mention the first financial side. And this is partly due to financial services. I will give an example. There is a tender, it is required to provide several guarantees from first-class banks – not lower than the rating of «A» or «A +» – on the performance of work, on an advance payment, on a guarantee of work, etc. A foreign company can provide a guarantee from European banks, which by the way have low-interest rates. And ours cannot always provide guarantees from banks that have a rating of «A». In Kazakhstan, the highest rating is BBB-, only one bank has one. Moreover, our banks’ financial guarantee is difficult to obtain even if there is a sufficient amount of collateral and the rates are very high. Plus, it takes several months before the system is regulated by the National Bank. Accordingly, this is reflected in the price of providing services, and already on this indicator we are uncompetitive in comparison with foreign companies. That is, it turns out that foreign oilfield service enterprises are placing in their prime cost interest payments at the level of 3-4%, and we are at least 9-12%. Of course, our bid price will be higher.

An example from personal experience. This year we won a tender from one of the world’s general contractors. Won due to the price. We had almost zero margin, for us the main thing was to achieve cooperation with a large company so that we could work together in the future not only in Kazakhstan but also in Russia, in the Middle East. And when it was time to sign the contract, the customer asked for bank guarantees for the work quality and for the advance payment from a bank rated at least «A-». There are no such banks in Kazakhstan. If we do not provide a guarantee, we are retained 20% of the amount of the account of work performed which we will be paid after the warranty period expires. After the long negotiations, we agreed to hold cash for two years, although the customer initially requested five years. Of course, it immediately hits the pocket, because we have a minimum margin. Also, we cannot get an advance on the mobilization of equipment and people, because of bank guarantees. And in the oil and gas sphere, it will not be possible to simply bring the workers to the construction site of the field: you need to train them in approved centers, and then there is a turn, for some specifically you need to get international certificates. Equipment must be new; construction equipment over seven years old is not allowed. Another reason for the financial non-competitiveness of Kazakhstan companies is the low level of lending to the country’s economy as a whole. At the end of 2017, it amounted to 26% of GDP, whereas in Russia it is 52%, and in the world – 120-130% of GDP. Our economy is heavily under-credited. Even after going through all the bureaucratic barriers of banks, we are not sure that we will get the money, as they may not be enough. Conclusion-need money. Another stopper is the various prudential standards of the National Bank. In particular, the regulator prohibits banks to accept the contract as a full-fledged pledge. European banks, for example, accept pledging contracts with subsoil users from their oilfield services companies, especially such first-class ones like TCO. They know that TCO is a very reliable client, with strong global shareholders, and the company has proved it in 25 years of work in Kazakhstan. If in the TCO Accounting Office they say that your act is signed and payment will be in 63 days, then you can be sure that after lunch on the 63rd day, the money will fall into your account. These are financial reasons why our oilfield services companies cannot develop systemically.

 

–          What other directions are there in oil service where local companies need to develop? 

Unfortunately, our companies have not yet grown to the implementation of the EOC-contracts, the implementation of turnkey projects (engineering, procurement, construction). We also do not have enough first-class engineering companies, technical staff, which is why engineering is carried out abroad. Construction and assembly work is being carried out more actively than design and engineering. In this we are apparently stronger. There are many other nuances in the business that lead to the stagnation of one segment or another. And the lack of information here plays a very important role. A simple example. It often happens that the work on the preparation of design and estimate documentation is performed abroad. Foreign engineers are not always able to know that we have similar companies that can do the same work or make equipment. As a result, foreign companies are listed as performers. And local engineers and businesses are losing potential jobs. In general, in the segment of design and engineering, the share of local content in large projects is only 12%. I believe that this segment should be developed, increasing the competitiveness of domestic companies.

 

–          How to solve the problems you have identified?

First of all, our entrepreneurs need government support. It is gratifying that in the past 10 years the state has turned its face to the sector, but we would like to feel a lot of support. It is necessary to raise the level of lending to oilfield services and the economy as a whole. Still, the contribution of oilfield services companies to GDP is at least 3%. In Norway, oil service is the second sector in the economy after oil and gas. And there the state actively supports it. Also, the state should actively participate in the negotiations in terms of establishing a minimum level of participation of Kazakhstan companies in large projects. Ensure that engineering is performed in Kazakhstan. This would help solve the problem of access of our companies to foreign engineers. For example, imagine where an engineer from New Delhi, who is working on a Kazakh project, might know that somewhere in Almaty there is a necessary plant. Of course, he does not know this and will lay into the project those whom he finds on the Internet.

 

–          Nevertheless, a couple of years ago, several of our oilfield services companies entered the Iranian market … 

There are almost no Kazakhstan enterprises. Unfortunately, they are not competitive enough in terms of technology, management, and even the cost of human resources. For example, companies that work in the Middle East attract a lot of cheap labor from India or Bangladesh. Kazakhstan is expensive enough to carry it there. Our companies are well present in the Russian market.

 

–          And which ones?

 From abroad, Russia is a favorable business environment for the development of Kazakhstan’s oil services. Last year, more than one and a half thousand Kazakhstan people worked in the Yamal SPG project on the Yamal Peninsula, whose budget exceeds more than $ 20 billion. Logic Services actively participated in it. Now we are working on oil and gas projects in the Tyumen region, on projects «Sibur».