ASSAULT AT PAVLODAR (Assalto a Pavlodar)

KazMunaiGas (KMG) is still in talks with Central Asia Petroleum, an Indonesian company which controls the Pavlodar oil refinery, trying to close the deal that would give the national oil company control over the downstream assets in Kazakhstan.

In April, Central Asia Petroleum, a murky entity with supposed ties to Kazakh leadership, agreed to sell its upstream assets to a joint venture of KMG and Chinese CNPC for $3.3 billion. These exploration assets were part of MangistauMunaiGas, an independent vertically integrated oil company, whose other assets included a 58-percent stake in the Pavlodar oil refinery and a network of gasoline stations operating under the brand Helios.

MangistauMunaiGas was one of the largest independent oil producers in Kazakhstan, and its acquisition was a coup for both the Chinese and the Kazakh side, eager to increase their reserves. The Pavlodar refinery, however, was excluded from the deal, leading to speculation over who will gain control over the valuable downstream asset, or rather, who will join KMG in managing the refinery.

Analysts estimate the market value of the refinery at $600-700 million. A similar sum would probably be needed to modernize the plant. KMG, while eager to solidify its control over Kazakhstan’s refining assets, may have to rely on a deep-pocketed partner to complete the acquisition and much needed modernization.

In the last twelve years, the refinery underwent numerous changes in ownership. In 1997, the Kazakh government awarded a five-year concession to operate the plant to CCL Oil Ltd., an unknown oil company registered in Connecticut but rumored to be run by a group of ethnic Korean businessman from Kazakhstan. At that time, the state owned 82 percent of the plant while the remaining 12 percent were owned by its employees. Shortly after awarding the concession, however, the government transferred the asset to Kazakhoil, a state-owned predecessor of KazMunaiGas, and power struggle over control over the company ensued. In 1999, CCL Oil Ltd. found itself on the losing side of the battle and was stripped of the concession, ostensibly for failing to fulfill its contractual obligations. Later that year, 58 percent of the company has been quietly transferred to MangistauMunaiGas, reportedly as a barter payment to cover government’s debt with the company.

The Pavlodar oil refinery, constructed in 1978, currently has capacity of about five million tons of crude oil per year. This is almost 30 percent below its original capacity of seven million tons due to wear and poor maintenance. Even then, the plant does not operate at full capacity and refined only 4.27 million tons of crude oil in 2008.

Nonetheless, as the largest and most modern refining facility in Kazakhstan, it produces more than 50 percent of high-octane fuels. Among its products are high-octane gasoline (93 RON and 05 RON), diesel and heating fuel, mazut, liquid gas etc. Automobile gasoline and diesel fuel make up the largest share of its production. In 2008, the refinery produced about 1.2 million tons of gasoline, almost 50 percent of the country’s entire production. However, its products do not comply with the strict international standards which have gradually begun to be introduced in Kazakhstan.

Moreover, the refinery’s location in Pavlodar, near the Russian border in northern Kazakhstan, makes it logistically difficult to refine Kazakh crude produced in western Kazakhstan, where most of the country’s oil production is located. In fact, during the Soviet times, the plant refined almost exclusively Russian crude from the West Siberian oil fields.

Analysts warn that by 2014 Kazakhstan’s existing refining capacity will be insufficient to satisfy the growing demands for refined oil products. In the last two years, Kazakhstan has already experienced localized shortages despite its vast hydrocarbon wealth, leading to calls for government intervention. The modernization of the country’s refining industry is therefore a priority of the government.

Russian Gazprom Neft and LUKOIL, Indian ONGC and Chinese CNPC figured early as potential partners for the project. A Russian company would be a logical partner given the traditional ties of the Pavlodar refinery to the Russian oil industry. At the same time, however, China’s state-run oil companies may be the only ones willing and able to invest billions in Kazakhstan’s downstream assets. China has already advanced $10 billion in loans to Kazakhstan this year to gain a stronger foothold in the country’s oil industry, as it has done in Russia and Brazil.

Yet, China, while keen to enhance its access to reserves and diversify its supplies, may not show the same level of interest to a downstream asset oriented primarily on the domestic market. The Kazakhstan-China oil pipeline, which has been completed ahead of schedule this June, will have a capacity of 20 million tons per year. Filling the completed pipeline will likely be a priority for Chinese oil companies in Kazakhstan. Moreover, China already has a major oil refinery in western China near Urumchi with refining capacity of 6 million tons a year, projected to rise to 10 million.
(Silk Road Intelligencer)

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