Economics

G.Pazylkhairova

JSC “Ordabasy Corporation”, Kazakhstan

Problems of Kazakhstani companies entering world oil market

For the company to enter international oil market it is necessary to make analysis of external and internal environment, to make a list of potentially possible risks, to define a choice of strategy of entering the market.

Key words: investment holding company, the world oil market, pricing, the trans-national corporations.

I.Introduction: JSC “Ordabasy Corporation” was set up in 1997. Today, JSC “Ordabasy Corporation” has positioned itself as an investment Holding company. An oil and gas project is a catalyst of investment activity. The oil producing industry is strategic for the Corporation in terms of access to the international market and is high-profitable for the budget. The main product with which JSC “OrdabasyMunaiGaz” is going to the international market is, therefore, oil. The current situation at the world oil market has been reviewed. The situation at the world oil market and the real interests of its basic participants allow predicting a steadily high level of demand for oil in the short-term.

II. Statement of problem: World oil market is one of the most complex according to the number of countries manufactures, consumer countries, according to pricing, environmental protection, and etc. At the same time this is one of the most profitable markets. Therefore penetration of Kazakhstani JSC “Ordabasy Corporation” company and its affiliate JSC “Ordabasy MunaiGaz” into this market attracts attention both scientists and practitioners.

III. Results: In January 2007, “Ordabasy” concluded a deal on purchasing 5 oil fields in Atyrau: Matin, Kara-Arna, Kok-Arna, Zhylankabak, and Zholdybai. The total value of the deal is USD 200 million. The overall recoverable reserves of Matin, Kara-Arny, Kok-Arny confirmed by Gaffney, Cline&Associates company are 3882 mln ton. According to the data of the State National Committee for Reserves, the reserves of these three fields are 6 980 mln ton. The reserves of Zholdybai oil field are 0. 41 mln ton and Zhylankabak – 0.76 mln ton. The current annual volume of crude oil export is more than 400 thou ton.

JSC “OrdabasyMunauGaz” manages not only new oil fields but also those that have already been under its control: Shynzhir and Bekturly. All oil-producing assets of the company are estimated to be USD 400 million.

The analysis of current situation at the world oil market has been performed. The data of the National Statistics and Analysis of the Republic of Kazakhstan for 2000-2007 have been used in the computations. The experience of such companies as Standard Oil of New Jersey, Royal Dutch/Shell, Statoil, Ltd LUKOIL has been used for the analysis.

The situation at the world oil market and the real interests of its basic participants have made it possible to forecast the steadily high level of demand for oil in the near-term outlook. More than 40% of the whole primary energy input in the world falls on oil. In some countries this rate is over 60%. For the current technological setup, oil is a basic component of the supply-demand balance. The proven world oil reserves are about 140 billion tons.

Basic Producers:

- OPEC Members (78% of the world reserves): Saudi Araba 5%, Iraq 10.8%, UAE 9.3%, Kuwait 9.2%, Iran 8.6%, and Venezuela 7,3% .

- Countries of CIS including Kazakhstan - about 6%

- USA - about 3%

- Norway - about 1%.

Basic Consumers:

- USA about 25% of the world oil consumption

- European countries the share of which is about 20%

- Countries of Asia-Pacific Region - 11%.

At the same time, the level of consumption in APR has increased during the last 14 years by approximately 3%, and in the North America and Europe – on the average by only 1%. Similar high growth rates of consumption have been noted in South Korea, Thailand, China, Indonesia, and India.

Pricing: The ratio of the level of oil production and consumption in the world is a determining factor for the oil price level. Evidently, in case of excess oil production (offer) over the consumption (demand) the prices for oil are dropping and, vice versa, in case of excess consumption over the production the prices are growing. Only since 1986 the competitive principle of pricing began realistically operating due to appearing exchange trade instruments. However, the fact today is the absolute unpredictability of oil prices: from July 2007 to the September 2008 the prices have been varying from 135 to 146 $/barrel. Of that time, the experts consider $150 to be a “critical psychological” price, however, it is not a limit. Today, the prices have been varying from 50 to 55 $/barrel Oil from the hydrocarbon material and one of the industrial production components has become a synonym of big money. The economic shocks since July 2007 have convincingly shown that under certain conditions these problems can affect seriously the whole economic process and influence unfavorably the state of all spheres of the economy of quite a number of groups. Under these conditions, a political factor is considered to be one of the most important factors in the existing situation.

Private companies are the basic entities of international relations in the sphere of resource utilization. These are mostly the leading TNC of western countries focusing both on the production and utilization of raw materials.

The trans-national corporations, a highly professional business, are the companies that have absorbed the international business experience. In the world practice of oil business TNC are divided into 2 categories: Upstream - extractive and Downstream- processing enterprises.

The oil processing (Downstream) is controlled by mainly private international oil companies, which cannot provide fully their refineries with the raw materials extracted inside the corporative structure of these companies and the basic “processing” companies have, therefore, turned into net buyers of raw material. The volume of oil processing by the 12 biggest “extracting” companies exceeds 1.7 times the volume of oil produced by them. At the same time, the volume of oil production by the basic “extracting” companies exceeds 3.1 times their processing capacities and they, therefore, have turned into net sellers of raw material. The national oil companies today control the access to the hydrocarbon material and it is, therefore extremely important for them to provide themselves with the reliable supplies of hydrocarbon raw material. At the same time, they have expressed their readiness to invest exactly in the oil sector giving it a priority over the other sectors. Hence, the state of business for the producers and exporters is expected to be favorable including the areas with higher production expenses such as Kazakhstan. Being the 12^th in the world for the explored reserves of oil and condensate, Kazakhstan is the 23^rd in the rating of leading oil producing states. From 2002, Kazakhstan began increasing the oil production. The objective for 2010 is to produce 100 million tons of oil and condensate.

Hence there are factors favoring the move of the Corporation to the international market such as:

External environment:

- with growth of the population and production, the world consumption of primary reserves increases;

- the growth of consumption in the European and APR countries allows Kazakhstan to orient on exactly these markets, which is geographically quite advantageous ;

- to avoid the monopolistic dependence of the world economy on the OPEC oil, part of the states seek to diversify the oil supply sources that has drawn more attention to the Caspian Sea region ;

- steadily high level of world oil prices;

- interest of TNC and foreign companies in partners in the territory of Kazakhstan.

Internal environment:

- the legislative acts determining the general rules for subsurface wealth use operations, tasks and principles of the laws, competence of executive bodies, licensing procedure, conclusion of exploring and production contracts, rules for consolidated fund accounting and conservation of mineral resources, safety conditions for the population and the staff, and rights and obligations of subsurface wealth user;

- the oil prospecting and production operations make it possible to develop the most hard-to-reach oil fields;

- the multivariate pipeline infrastructure will provide an increase in the oil production volume and make it possible to diversify its supplies depending on the situation at the world oil markets.

Oil companies operate in the most dangerous sector of the business world and have to act under the conditions of extreme ambiguity and uncertainty. The task facing them is to find methods of managing numerous risks. The basic risks are the prospecting and expropriation of profit as the nationalization of assets and implicitly, as increase in taxes, more stringent laws, expropriation of part of profit by groups of people having their interest in the company’s activity and seeking to obtain compensation for the real and fictitious mistakes and threats.

Typical risks of oil sector:

· Failures of geological prospecting

· Nationalization

· Expropriation (including the revision of the laws)

On the whole, the world oil market remains to be a market with a high level of concentration and monopolization. The share of 24 biggest oil companies (12 major “production” and 12 major “processing”) makes 61% of global oil production and 45% of oil processing. According to other data, the share of 10 biggest private companies is 16% of global oil production, however, the same share of oil product market belongs to only three oil colossuses.

For the energy consumption, oil retains a leading position; coal is steadily the second, and gas – the third.

Toughening of environmental protection requirements to reduce the volume of harmful gas released into the air in future will affect to a certain extent the consumption of coal and partly oil as the most ecologically vicious energy resources. The same measures will raise the role of natural gas and renewable power sources.

The structure of energy consumption by different population groups changes differently. In the developed countries, the share of oil consumption in the total primary energy resources has decreased from 47.5% in 1980 to 45.4% in 2005 and that of coal from 27.4% to 25.6%, whereas the share of gas has increased from 20.7% to 22.5%. The share of nuclear power and hydro power plants has increased from 4.4% in 1980 to 6.5% in 2005.

In the developing countries, coal still plays a leading role in the energy consumption (43% in 1980 and 41% in 2005), and oil is the second (38.4% and 38.7%. respectively). The energy share of nuclear power, hydro power plants, and other sources has increased from 3.8% in 1990 to 4.6% in 2005.

The growth of natural gas consumption is inspired by the fact that its price is lower than the oil and oil product prices, and because it is a more ecologically clean fuel. However, despite the increasing popularity of gas its sale will be limited by the following factors: 1. few companies have gas reserves and infrastructure for its transportation (limited carrying capacity of gas pipelines and liquid gas terminals in ports) ; 2. limited number of power companies has access to gas pipelines and can supply gas or electric power generated by its incineration to the end users; 3. existing technological barriers to gas processing and utilization

Progress in the gas sector will be variable, in the first place, due to the necessity to establish and develop the infrastructure. After 2020, an increase in the gas supply will continue; however, oil will also not lose its ground.

Moreover, different countries of the world keep adopting more stringent environmental protection laws in the light of Kyoto Protocol, and the replacement of oil by gas for electric power generation and energy technologies happening in some regions will be able in future to reduce considerably the world oil prices. In the long term, it is safe to say that oil is an asset the price of which can be increasing, however, its real cost will be decreasing.

In the oil business, production companies get based in the regions and countries having fields, and refineries, as a rule, are brought maximum near to consumers, a main competitive factor being the price (at fixed product quality). Therefore, the allocation of production and processing companies is influenced, in the first place, by the cost of production (certainly, on conditions that the country has hydrocarbon fields) and processing. The availability and condition of transport infrastructure (pipeline transport, oil loading terminals, ports, etc.) and remoteness of fields from refineries (for processing) and borders (for export) - “transport shoulder”, are very important for taking a decision about starting business in a new country.

Internalization (production, processing and sale of oil and oil products over the whole world) increases the competitiveness of companies and allows using common technologies, equipment, high-skilled personnel in any country where business is done. Moreover, it decreases the expenses and overall risk of the Holding due to inter-country distribution, and makes it possible to compensate the local losses on account of income of the whole Holding.

The main reasons of the resort to internationalization are as follows:

· Oil and gas production can be carried out only in the regions having their reserves;

· Use of country’s cheap resources allows reducing the cost of some link in the cost chain;

· Expansion of markets where the Holding is present;

· Proximity to the sale markets allows reducing the transport costs and customs payments and increases the revenues and economic efficiency.

For internalization, the transition to new business areas is effected through the change of geographical markets. Internalization can be affected as follows:

· by export of goods and services produced in the country of manufacturer company’s subsidiary;

· Establishing production in another country in order to:

a) bring the commodity nearer to the buyer reducing the delivery cost, customs fees, and import payments ;

b) use cheap resources or conditions beneficial for business available in a new country where the production is established;

c) combination of a) and b).

Hence, oil companies should found subsidiaries in the countries of their business (establishing company’s representative office does not allow the production and processing of hydrocarbons due to the corporative law in force and applicable taxation system). Therefore, oil companies have to become transnational holdings starting business in other countries.

The oil sector is stable, having the established rules of play. However, even under stability conditions it becomes necessary to control pricing, introduce new incentives, elaborate new products and new brands, and renew advertizing materials. It is a standard practice.

IV. Conclusion:

Thus there are groups of factors of external and internal environment favoring the corporation’s entry to the international market. The international oil market is controlled by international transnational companies interested in stable oil supplies and ready to invest projects. In its turn, the Corporation needs a strategic investor, a player at the international market.

The carried out analysis of the present situation of the world oil market shows that despite world economic crisis, oil demand in the nearest perspective will remain stable.

REFERENCES:

1. Matantsev A.N. Analyze of market. – Moscow, Alfa-press, 2007

2. Michael E. Porter. Competitive strategy. Techniques for Analyzing Industries and Competitors.- The Free Press, 1998