Here are a series of very interesting articles from Platt's Oilgram courtesy of Donald Hart, a soon-to-be-participant in our discussion who has not yet received his SI ID number. These articles offer good background on how deals are done in Kazakstan.
Cheers...Faris
Volume 75 Number 116 June 17, 1997
HURRICANE WINS KAZAKSTAN OIL, AND A WHOLE LOT MORE
New York--How did tiny, Calgary-based Hurricane
Hydrocarbons end up with $2-bil of oil reserves, 45,000
b/d of production, a soccer team, a 2,500-sq-mile sheep
ranch, plus drilling, roadbuilding and construction
companies--all in the middle of Kazakstan?
The answer is in the stubborn perseverance of
Hurricane's president, chemical engineer John
Komarnicki, and maverick geophysicist Werner Wenzel, a
Hurricane director.
Back in USSR days, Wenzel wowed Soviet engineers with
his proprietary oil recovery technology. But lacking
cash, they paid him with development rights on a group
of oil fields 200 miles northeast of the Aral Sea, with
170-mil bbl of oil.
In 1991, Hurricane, under Komarnicki's new management
and looking for foreign plays, picked up Wenzel's
concession and became a 50% owner in the Turan
Petroleum Joint Enterprise.
It was an ambitious undertaking for Hurricane, which
until recently had total production of only 30 b/d from
a small Alberta property. So Komarnicki went for help
to Canadian Occidental, whose president was Bernard
Isautier. Komarnicki worked for Isautier earlier at
Canterra Energy, and he persuaded CanOxy to pick up
four-fifths of Hurricane's stake in the Kazakstan deal
and become the operator.
One of the local Kazak partners was Yuzhneftegaz, a
state-owned oil and gas production association
responsible for all hydrocarbon development in southern
Kazakstan, including the 31,000-sq-mile South Turgai
Basin.
To operate in the barren and remote Kazak steppe,
Yuzhneftegaz had its own drilling and completion
divisions, transportation unit, construction team and
road-building group. To feed its 5,500 employees, it
had its own 50-mile-sq farm, with 30,000 sheep, several
hundred camels, horses and pigs, and about 700 farm
workers. It also has its own trading house and 13
gasoline stations. For fun, it has a soccer team, the
Kaizars, and a 10,000-seat stadium in Kislorda (pop.
150,000).
Besides a 25% stake in the Turan joint-venture,
Yuzhneftegaz owns 100% of the estimated 121-mil bbl
remaining in the south half of the Kumkol field,
discovered in 1984, and 50% of the more than 200-mil
bbl reserve in the north half of that field. It also
owns 50% of the roughly 150-mil bbl reserve in four
other nearby oil fields. Yuzhneftegaz net proved
reserves: 133-mil bbl, with 166-mil bbl probable and
65-mil bbl possible, according to McDaniel &
Associates.
When the Soviet Union dissolved, Yuzhneftegaz was
Kazakstan's first major oil privatization. The initial
bid-winner last year was Oklahoma-based Samson
Investments Ltd. But when Samson and the Kazak
government failed to agree on final terms, runner-up
Hurricane got a chance to negotiate.
Hurricane tried to persuade US major Chevron and CanOxy
to team up to buy the Kazak company. But Chevron wanted
reserves, not a conglomerate. And CanOxy's interest in
Kazakstan was flagging after Isautier's departure in
late 1995. Indeed, CanOxy's slow pace on the Turan
joint-venture last year caused it to lose one of its
licenses, picked up by Yuzhneftegaz. Hurricane and
CanOxy are now in talks over the unwinding of CanOxy's
involvement there. CanOxy won't comment.
So without allies, Komarnicki went after reserve-rich
but cash-poor Yuzhneftegaz with Hurricane's own offer
of $120-mil for the company's stock and a pledge to
spend another $280-mil on development over six years.
It was a gigantic leap for Hurricane, which at mid-year
1995 had only $8-mil of net worth and less than
$200,000 a year in oil and gas revenues.
Familiar with risks
But having dealt with Yuzhneftegaz officials for five
years, the risks were well known to Hurricane. Funding
would prove to be a minor problem: Last year Hurricane
floated $110-mil of long-term debt and $110-mil of
equity, effectively doubling its outstanding shares.
Last August, Hurricane's offer was accepted and the
purchase was completed in December with the final
$30-mil installment paid in April.
The Kazak government, eager to show the International
Monetary Fund and World Bank they were committed to
privatization, helped spur the deal, says Hurricane
chief financial officer Richard Norris. "They wanted to
use it as a model sale. The government has been quick
to resolve difficulties as they arose."
Not the least of those problems was a troubled
joint-venture between Yuzhneftegaz and Russia's Lukoil
to explore and operate the northern half of the Kumkol
field. Lukoil, behind $15-mil in its payments for oil
lifted there, has agreed to pay its debt in cash and
oil, says Norris.
As part of its purchase offer, Hurricane agreed not to
lay off workers or restructure Yuzhneftegaz for 18
months. And though Hurricane has no specific obligation
to feed and care for the local populace, Norris admits
there remains a social onus on Yuzhneftegaz to meet
needs as they arise. Instead of paying its workers with
vouchers to use at the company store, Hurricane now is
starting to pay wages in cash. Workers now proudly wear
their new picture ID cards for social status. The
soccer team has new jerseys.
Aside from switching the company's name to Hurricane
Kumkol Munai JSC, Hurricane has made few other changes.
It has about 30 North American expatriates working in
Kazakstan and US-based engineering and construction
firm Fluor Daniel has been hired to upgrade equipment
and procedures.
Hurricane aims to ramp up production from 45,000 b/d
now to 60,000 by year-end and 75,000 by the end of
1998. Besides drilling new wells, it plans to rework
existing wells damaged by the use of local water-based
drilling muds that clogged producing formations. "If we
recomplete wells we can triple production" from the
current average of about 250 b/d per well, says Norris.
Current price: $10/bbl
The oil is piped 400 miles to a 130,000 b/d refinery at
Chimkent, recently privatized by Swiss-based Vitol.
After paying a 17% VAT, Hurricane gets about $10/bbl
currently. But even at that meager price, Hurricane
booked an impressive C$8.1-mil ($5.8-mil) profit or
C$0.21/share on C$46-mil of revenues in the quarter
ended March 31, with C$20-mil of cash flow. "We think
we'll make C$100-mil a year of cash flow," says Norris.
That will be more than enough to fund new drilling and
the buyout of CanOxy's interest, Norris says. "We do
plan to use most of our cash in capital programs," he
says, but after a 5% withholding tax on dividends,
under a pending tax treaty with Canada, Hurricane can
freely repatriate profits.
As a result, Hurricane's stock has doubled in value
from a year ago, to $4.10/share. St. James Securities
analyst Chirvani Abdoullaev forecasts another doubling
in 12 months, with a net asset value of more than
$15/share.
--James Norman
[Image]
c 1997 by Platt's Oilgram
Volume 75 Number 127 July 2, 1997
HURRICANE EXCITED BY PROSPECT OF A KAZAK-CHINA PIPE
Almaty--Hurricane Hydrocarbons Ltd of Canada is to
begin an expanded drilling program in southern
Kazakstan in the second half of the year, company
president John Komarnicki told Platt's.
"We will be doing in-fill drilling and recompleting
existing wells," Komarnicki said. Hurricane is also to
begin expanding its exploration activity across 2,100
sq km of its Kumkol field by the end of the year.
Current production from the southern section of Kumkol
is 45,000 b/d, of which Hurricane produces 38,000 b/d.
The northern Kumkol section, in production in
conjunction with Russia's Lukoil, is producing 12,000
b/d to 14,000 b/d.
The crude is moved by pipeline directly to Chimkent
where it is sold and processed for the domestic Kazak
market. "We are not currently getting world market
prices, but we expect further inroads in this area,"
Komarnicki commented. He added that Hurricane's
contract gives the company full freedom to export, but
there are no export pipelines to enable the company to
enjoy that freedom.
"The pipeline idea that is exciting for us is the one
to China," said Komarnicki, referring to a proposed
pipeline linking western Kazakstan to its eastern
neighbor, China (ON 6/10). The China National Petroleum
Co expressed interest in investing in such a pipeline
after it bought a 60% stake in Aktyubinskmunaigas in
early June (ON 6/5).
"Of all the pipeline ideas, the one to China has a good
chance of succeeding. Look at China. It is currently
importing 20-mil mt and next year it will be double,"
Komarnicki said.
Hurricane acquired 89.5% common voting shares of the
former state-owned JSC Yuzhneftegaz through a
sale-purchase agreement worth $30-mil, creating
Hurricane Kumkol Munai. The purchase was completed this
April. Hurricane worked the purchase with the creation
of 50% joint ventures with KazGermanai (including DEA
Refining and Gaz de France) and Turan Petroleum, with
Canadian Occidental.
[Image]
c 1997 by Platt's Oilgram
Volume 74 Number 143 July 25, 1996
CPC PUSHING BACK RESTRUCTURING DATE
London--The Caspian Pipeline Consortium has decided to
extend its deadline for restructuring from July 27 to
Sep 30, a senior CPC official said July 24.
Ed Smith, general director of CPC, said the decision
was made last week. "The issues are very complex and
inter-related, so it's not surprising that it's taking
time to reach conclusions," Smith said. "But I am
encouraged by the progress and feel that it's
reasonable that the reshuffle will take place prior to
the conclusion of the two-month period."
Earlier this month, Russia's fuel and energy minister
Yuri Shafranik said there was "absolutely no doubt"
that restructuring would be completed by July 27 and
that work on the line would begin Aug 1.
CPC plans to build a $1.5-bil pipeline between
Kazakhstan's 6-bil bbl Tengiz field and the Russian
Black Sea. The original consortium consisted of Russia,
Kazakhstan and Oman. However, 50% of the equity in CPC
has been made available to eight oil companies:
Chevron, Lukoil, Mobil, Rosneft, Agip, British Gas,
Oryx and Kazakstan's Kazmunaigas. They will finance
100% of the project.
The eight companies will meet in San Francisco for five
days from July 31-Aug 4. Arco and Shell, respectively
involved in cooperative agreements with Russian
companies Lukoil and Rosneft, will also attend the
meeting, the source said. "We are hoping that by the
end of this meeting, we will have most of the critical
legal documents worked out among ourselves," one source
said. "Then we will take it to the governments."
Sources said they hoped to resolve all outstanding
issues by the third week of September. They listed four
major outstanding issues: taxation, pipeline tariff
methodology, Russian government approvals, and the role
of Russian pipeline operator Transneft.
After signing a restructuring protocol Apr 26, the
partners agreed to try to put together a final deal
within three months, but kept open the option of a
two-month extension. Sources have cited difficulties in
integrating the interests of the Russian and western
firms.
CPC's Smith said that while actual laying of the line
would not start until 1997, on-site geotechnical work
was already in progress.--Margaret McQuaile
[Image]
c 1996 by Platt's Oilgram
Volume 75 Number 130 July 8, 1997
KIAPAZ DEAL REVIVES CASPIAN TENSIONS
London--The unresolved legal status of the Caspian Sea
leaped back into the limelight after Azerbaijan
signaled July 4 its intention to develop the Kiapaz
field with two Russian oil companies.
20Western oil officials have in the past held up
Kiapaz--claimed by both Azerbaijan and Turkmenistan--as
the subject of a possible ownership dispute between the
two countries.
Azerbaijani state oil company Socar late last week
signed an agreement with Russian oil firms Lukoil and
Rosneft laying out the basic provisions for a
production sharing agreement which, according to
Rosneft spokesman Vladimir Tumarkin, should be signed
"in the near future." The preliminary agreement
assigned shares of 50% to Socar, 30% to Lukoil and 20%
to Rosneft.
Turkmenistan reacted angrily, and claimed jurisdiction
over the field, which lies in the middle of the
Caspian. A statement from the foreign ministry in
Ashkabad, quoted by Chinese news agency Xinhua,
demanded that the agreement be canceled.
"Turkmenistan's rights to this deposit are obvious and
cannot be a matter of ambiguous interpretation," the
statement said.
Azerbaijan's deputy foreign minister Khalaf Khalafov
rejected Turkmenistan's protest as "totally unjustified
and unfounded."
Khalafov told the Turan news agency that Baku had not
received any protest from Turkmenistan.
Turan, monitored by the BBC, quoted Socar
vice-president Khoshbakht Yusifzade as saying that
because Kiapaz was discovered by Azerbaijani
geologists, it belonged to Azerbaijan. "In March 1989
Azerbaijani offshore oil workers found an oil strata at
a depth of 3,800 meters.
"All the subsequent work and capital investments were
made by the Azerbaijani side," he said.
Yusifzade confirmed that the field lay on the border
between the Azerbaijani and Turkmen sectors of the sea,
Turan said. "However, nobody has ever clearly defined
where the border between these sectors lies. Under
international maritime law, one of the main factors in
determining ownership of an oilfield is who discovered
it, therefore Socar owns the Kiapaz oil deposit," he is
quoted as saying.
According to Rosneft spokesman Tumarkin, Kiapaz
contains crude reserves estimated at 50-mil mt, with
full field development estimated to cost around $1-bil.
At the heart of the dispute over the Caspian Sea's
legal status is the issue of whether the Caspian should
be treated as a condominium whose resources should be
shared equally between the five littoral
states--Azerbaijan, Iran, Kazakstan, Russia and
Turkmenistan--or divided into national sectors.
Iran and Russia back a condominium approach, but
commentators say that the fact oil companies from both
countries have signed production sharing agreements
with Azerbaijan weakens their position.
The other three countries want sectoral division of the
Caspian.
Lawyers specializing in Central Asia believe the
boundary issue is likely to be resolved by political
negotiation rather than through the application of
international law. "International law can provide a
framework for addressing these issues but it won't
provide the answer. The answer has to be political,"
Rodman Bundy of Paris law firm Frere Cholmeley told a
recent Caspian conference in New York.
[Image]
c 1997 by Platt's Oilgram
c 1997 Lotus Development Corporation, an IBM subsidiary |
