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Country Commercial Guides
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CHAPTER V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT
BEST PROSPECTS FOR NON-AGRICULTURAL GOODS AND SERVICES:
A. Sector Rank: 1
Sector Name: Oil and Gas
ITA Industry Code: OGSNo sector has generated greater international exposure for Kazakhstan than its oil and gas industry, and U.S. upstream oil companies and service companies have been most active in this key sector. This industry contributes about 32 percent of Kazakhstani hard-currency export earnings and strongly affects the entire economy. Kazakhstan has proven oil reserves of 16 billion barrels and may have, according to Kazakhstani government projections, a further 30 billion barrels both onshore and under its portion of the Caspian seabed. In 1998, oil output in Kazakhstan was 25.9 million tons and natural gas output was 5.5 billion cubic meters, a slight increase from 1997. The Kazakhstani government hopes to boost oil output to 80 million tons per year by 2005 and to 120 million tons by 2020. The success of six test wells to be drilled in the offshore Caspian Kashagan structure in late 1999 will provide an early indicator of how likely these plans are to succeed. Western investment and technical assistance will be a prerequisite to sharply increasing output in the next decade. Though upstream and downstream opportunities exist for U.S. companies, newly-legislated requirements for producers to use Kazakhstani goods and services, transportation problems, unclear legislation and licensing procedures, and constant personnel changes within the hierarchy of Kazakhstan's energy-related entities present serious challenges.
Chevron, with its 45-percent stake, is leading the TengizChevrOil (TCO) venture, which was set up to develop the Tengiz oil field. Mobil and Kazakhoil each have 25 percent and Russia's LUKoil holds the remaining 5 percent. Chevron and the Kazakhstani government have been working on the Tengiz project since 1992. Tengiz is one of the biggest oil fields in the world and may require up to $20 billion in investment. In early 1999, Chevron announced that it would continue its large investment program in Kazakhstan's oil sector despite the dramatic fall in world oil prices. Chevron invested $550 million in the TCO joint-stock company in 1998 and will stick to its plans for another $450 million investment in 1999. TCO produced 8.5 million tons in 1998 (more than 30 percent of Kazakhstan's oil production) and plans to raise annual output to 12 million tons by 2000. California-based Bechtel, in a joint venture with Enka (Turkey), provides engineering, construction, project management, procurement, and financial control services to the integrated TCO team.
The Offshore Kazakhstan International Operating Company (OKIOC), under a production sharing agreement signed in November, 1997, with the government of Kazakhstan, will explore for oil and gas in the North Caspian Sea. The initial owners of OKIOC were Shell, Agip, British Gas, British Petroleum, Kazakhoil, Mobil, Statoil, and Total. In September 1998, Oklahoma-based Phillips Petroleum and the Japanese corporation Inpex each acquired half of Kazakhoil's 14 percent share in OKIOC. OKIOC expects to start drilling in late summer 1999. The first exploration well, East Kashagan, is located 50 miles away from Atyrau city on the northern coast of the Caspian Sea. OKIOC plans to explore and develop 10 out of 200 blocks of Kazakhstan's portion of the Caspian Sea shelf, which may hold an estimated four billion tons of hydrocarbon reserves. OKIOC plans to spend around $450 million over the first six years of operations and anticipates about $220 million of that amount will have been spent by the first drilling.
All the oil majors will be watching OKIOC's progress particularly closely now that two consortia exploring in the Azerbaijani section of the Caspian have closed after failing to find commercially viable quantities of oil.
Negotiations continue with Russia, Azerbaijan, Turkmenistan, and Iran on establishing a viable Caspian demarcation and legal regime for the Caspian Sea. In July 1998, Kazakhstan and Russia signed an agreement dividing their portions of the seabed in the north Caspian. This represents the first and only deal to date that clarifies borders within the Caspian between any of the littoral states.
Kazakhstan has very limited experience in offshore oil production and operations, creating opportunities for U.S. firms in rig work; oil tools (completion, workover, and services); well stimulation; water injection and gas treatment packages; support infrastructure; and environmental technologies. The Caspian Basin's oil bearing formations are quite deep (15,000 feet), under considerable pressure, and often contain a high degree of sulfur and other contaminants, making special Western-made drilling and processing equipment necessary.
Another production sharing agreement signed in 1997 is between Kazakhstan and a consortium of British Gas, Agip, and Texaco to develop the giant Karachaganak oil and gas field in northwestern Kazakhstan. This project is expected to run through 2036, with oil and gas production capacity peaking at 12 million tons per year and 25 billion cubic meters per year respectively. Bechtel won the contract to provide engineering and procurement services for the refurbishment and expansion of existing crude processing facilities, additional export pipelines for oil and gas, and new infrastructure required to support the project.
Aside from building a welcoming investment climate, the major challenge for land-locked Kazakhstan is to build access routes to export its oil to world markets. Kazakhstan currently depends on its neighbors to transport petroleum products to the world markets. Presently, the bulk of Kazakhstan's oil exports pass through the Russian pipeline system, by railcar through Russia to the Black Sea and the Baltics, and by barge across the Caspian to Baku. In late 1998, Russia agreed to increase its export quota on Kazakhstani oil from 3.5 to 7.5 million tons per year for transit through the Atyrau-Samara pipeline via Russia to Europe. This has helped shippers, such as TengizChevrOil, who export oil through this pipeline. However, Kazakhstani production already exceeds even this increased quota and it will therefore need additional export routes as production increases. This presents medium and long-term opportunities for U.S. engineering and service companies. After two years of delays, the Caspian Pipeline Consortium's (CPC) project to build an oil export pipeline from Tengiz to Novorossiysk is moving ahead. On May 12, 1999, CPC celebrated a major milestone as construction began on the marine terminal for a 1,500-km pipeline from the northeast shore of the Caspian to Novorossiysk, the Russian port on the Black Sea. If plans proceed as expected, Kazakhstan will have an export outlet with an initial capacity of 28 million tons per year by 2001. Completion of upgrades (probably not before 2005) would boost capacity to 67 million tons per year. Approximately $1.5 billion worth of contracts have already been awarded. California-based Fluor Daniel is a main subcontractor to this project. The construction contracts have a large Russian content, with contracts awarded to companies such as Kubanneftegazstroy, Stavropoltruboprovodstroy, and JSC Koksokhimmontazh. The governments of Kazakhstan, Russia, and the Sultanate of Oman are signatories to the CPC agreement. The following petroleum companies are shareholders of CPC: Chevron, LukArco, Rosneft-Shell Caspian Ventures, Mobil, Agip, British Gas, Kazakhoil, and Oryx.
However, the CPC pipeline alone will not be enough to export Caspian production. Several pipelines may be needed to ship Kazakhstani hydrocarbons to world markets. Another possible route is a pipeline from the Tengiz field in western Kazakhstan via Baku to the Georgian port of Supsa. Oil then would be shipped through the Black Sea and the Bosporus to the Mediterranean Sea. A small Baku-Supsa pipeline, re-opened in April 1999, cost $565 million to rehabilitate, or about twice its original estimate. Another route currently moving beyond the planning stage is a pipeline from Baku, Azerbaijan, through Georgia and Turkey to Ceyhan (Turkish Mediterranean coast). Western Kazakhstani oil would, at least initially, be shipped across the Caspian Sea to Baku by tanker and then join the pipeline. Cost estimates for this pipeline range from $2.4 to $2.9 billion, although the Government of Turkey has guaranteed to reimburse builders for any costs for the Turkish portion of the pipeline exceeding $1.4 billion. The Baku-Ceyhan route avoids the commercial, environmental, and safety risks associated with increased oil shipments through the Bosporus and received the endorsement of the region's leaders at an Istanbul Summit meeting in November 1999. A proposal to build a large-scale pipeline across Kazakhstan to China is widely believed to have given the Chinese National Petroleum Corporation (CNPC) the edge in winning onshore tenders for Uzen, Zhanazhol, and Kenkiyak (three large oil fields in western Kazakhstan). CNPC agreed to study construction of this eastward-flowing, 2,000-mile pipeline, but progress on the study has been slow and the study had not been published as of December 1999.
Kazakhoil, Kazakhstan's national oil and gas company, is largely responsible for arranging tenders of oil and gas properties still to be privatized (although actual licensing for projects is issued by the State Agency for Investment) and plays the leading role in practically all contracts with foreign oil and gas companies. New legislation also gives Kazakhoil a regulatory role in overseeing contract execution, although it has not yet been implemented. Kazakhoil's portfolio also includes Kazakhstan's share of CPC and the TengizChevrOil joint venture. Kazakhoil earnings provide 37 percent of the Kazakhstani government budget revenues. In 1998, Kazakhoil's subsidiaries pumped 5.3 million tons of oil. In March 1999, Kazakhoil signed a grant agreement with the U.S. Trade and Development Agency that provides financing for a feasibility study on national oil and gas exploration and a production database project and petroleum information service. The feasibility study is being implemented by Virginia-based Mathtech International and the Sarkeys Energy Center of the University of Oklahoma.
The Kazakhstani National Oil Transportation Company (Kaztransoil) was created in 1997 to manage all of Kazakhstan's domestic oil pipelines. Mr. Timur Kulibayev, formerly a vice president at Kazakhoil, became president of Kaztransoil in March 1999. In 1997 the Kazakhstani government leased the main Kazakhstani gas pipeline system to Tractebel, a Belgian energy company. Kazakhstan's pipeline infrastructure needs are great, but Kaztransoil does not have the ability to finance upgrades and/or new pipelines. It remains to be seen how prominent a role Kaztransoil can really play in Kazakhstan's transportation picture.
Kazakhstan has three oil refineries: Shymkent, Pavlodar, and Atyrau. Shymkent is currently owned by Kazakhstan's largest private bank, Kazkommertsbank. In 1996, CCL Oil, a U.S.-registered company, took a five-year concession on the Pavlodar refinery. The Atyrau refinery is under the control of Kazakhoil. The three refineries are all producing below their design capacity due to poor maintenance. All of the refineries need funds for repairs and working capital.
Extensive construction continues in Astana, Kazakhstan's new capital. There are many business opportunities for U.S. suppliers of equipment for gas stations. In other regions new gas stations continue to open despite the fact that a number of gas stations meet demand. Texaco opened up two new gas stations in Astana and Almaty between the end of 1998 and the beginning 1999. In August 1998, Chevron also opened its third gas station in Atyrau. U.S. firms involved in build-operate-transfer of gas station networks should explore opportunities in this sector.
Oil and Gas Sector Statistics for oil and gas equipment in USdollars:
1997 1998 1999(est.) Total market size $860m $960m $1.0b Total local production* n/a n/a n/a Total exports n/a n/a n/a Total imports $860m $960m $1.0b Imports from the U.S. $12.8m $23m $25m** b=billions of dollars, m=millions of dollars* Total local production and export of oil and gas equipment is not significant and consists entirely of auxiliary equipment such as pressure vessels and metal construction, according to a Kazakhoil representative. Local production is estimated at less than five percent of the total amount of oil and gas equipment used in Kazakhstan.
** This figure, provided by the Kazakhstani National Statistics Agency, is considered a very conservative estimate.
B. Sector Rank: 2
Sector Name: Power Generation Industry
ITA Industry Code: PGEKazakhstan's power generation industry is in the midst of a challenging transformation from a centrally planned economy to the free market. The Kazakhstani government has auctioned off more than 85 percent of its installed power generation capacity. The planned privatization of regional electric companies and the establishment of a market-based tariff transmission system will present further opportunities and challenges for U.S. power generation companies.
Most of Kazakhstan's power generation assets are obsolescent and, therefore, require upgrading or replacement. This presents major opportunities for U.S. equipment suppliers with the proper financing in place. Kazakhstani partners normally expect U.S. and other foreign investors to purchase new equipment and parts. Construction of new power plants in the medium-term is also being discussed. Kazakhstan's budget woes and chronic industrial and residential electricity payment arrears limit U.S. imports. The focus, for now, is on attracting foreign investment.
Since Kazakhstan does not produce its own electric power equipment, it relies on foreign imports. The total market size is conservatively estimated at $71 million, in which the U.S. share is small (2.5 percent). In 1998, leading exporters of electrical power equipment to Kazakhstan were Germany and Russia (31 percent and 20 percent respectively). U.S. strategic investors manage more than 30 percent of Kazakhstan's power generation assets. As direct investors, these companies receive incentives that make importing equipment less troublesome by reducing import barriers for U.S. equipment. Political and commercial risk will challenge businesses well into the year 2000, so most should consider medium to long-term strategies for their activities in Kazakhstan.
Kazakhstan's power generation industry has deteriorated markedly since 1991. Although Kazakhstan's installed capacity was approximately 17,000 megawatts in the early 1990's, functioning capacity has dwindled down to less than 10,000 megawatts by mid-1998. This decline was the result of several factors, including fuel shortages, breakdowns, and cannibalization of off-line equipment. Non-payment has also forced many power companies to reduce drastically the amount of electricity and heating provided. In 1998, output was 49 billion kilowatt hours, nearly a five percent drop from the 1997 figure. Consumption of electricity in the same period fell similarly, by four percent, although at 54 billion-kilowatt hours, it outstripped national production. The additional five billion-kilowatt hours was imported from Russia and neighboring Central Asian states.
Approximately 80 percent of Kazakhstan's energy generation--based largely on coal from the Ekibastuz and Karaganda regions--is centered in the north. At the same time, the north is also the largest user of electricity (nearly 70 percent of all electricity consumed) because the vast majority of Kazakhstan's electricity-intensive heavy industry is located there.
About two-thirds of Kazakhstani electricity production is generated at coal-fired plants. The remainder comes from petroleum-fired plants and seven hydroelectric stations. Forty-six of Kazakhstan's 54 coal/petroleum-fired plants supply electricity, heating, and hot water to nearby residences and industries during the winter. The remaining eight coal/petroleum-fired plants, the country's largest generating facilities, are devoted solely to electricity production.
Kazakhstan does not have its own power equipment manufacturing facilities, and Kazakhstani power stations companies traditionally have used Russian-made equipment. As the country has little experience with Western electrical equipment, U.S. companies will need to include an educational component in their marketing to raise awareness of the benefits of U.S. technology. The vast majority of Kazakhstani power generation equipment is out-of-date and in poor repair. Ninety-four percent of Kazakhstan's gas turbines, 57 percent of its steam turbines, and 33 percent of its steam boilers have been in use for at least 20 years. There will be opportunities for U.S. electrical equipment companies when existing facilities are eventually renovated and new plants are built. But much of these procurement opportunities will depend on significant U.S. and foreign investment in the sector. U.S. companies are advised that potential Kazakhstani importers of electrical equipment are extremely price-sensitive. The ability to secure trade financing will be a crucial aspect of any potential sale to Kazakhstan.
One U.S. company, AES, is active in Kazakhstan's power generation sector. The Virginia-based power generating company is a major U.S. investor in Kazakhstan, currently managing more than 30 percent of the country's power generating capacity. Since 1996, AES has invested more than $150 million in the Kazakhstani power generation industry. In August 1996, AES purchased Kazakhstan's largest power plant--coal-fired Ekibastuz GRES-1--with a total production capacity of 4,000 megawatts or about 25 percent of Kazakhstan's total installed power-generating capacity. AES intends to upgrade the facility, which was operating at less than 20 percent capacity at the time of purchase, to up to 65-70 percent of its total capacity over the investment period. In the fall of 1997, AES purchased four combined heat and power stations and won concessions on two hydroelectric stations in East Kazakhstan Oblast, with a combined total capacity of more than 1,300 megawatts. In 1998, industrial and residential consumers estimated the company's losses at $10 million for heating and $16 million for electricity due to non-payment. In summer 1999, AES reached an agreement with the government, which, when implemented, will allow AES to take over management of several regional electricity distribution companies as compensation for the government's debt to AES. AES' strategic commitment to the market is characteristic of the long-term approach needed in this challenging sector.
In the fall of 1996, the Belgian energy company, Tractebel, won a concession to manage Almatyenergo, the electricity provider to Kazakhstan's largest city, Almaty. While the company maintained electricity and heating supplies from 1996 to 1999, it was able to collect only 60-80 percent of its receivables. To cover renovation, reconstruction, and maintenance of its generating facilities, Tractebel has been trying to increase its rates since 1997, which drew public outcry especially among the pensioners who claimed that the increase would be more than their monthly pensions. Tractebel also faces resistance from the Kazakhstani State Anti-monopoly Committee. The fate of Tractebel's investment remains unclear.
The most pressing problem facing the strategic investors in the industry has been the difficulty in receiving payment for power supplied to industries, businesses, and households. The problem is caused by a poorly designed and poorly executed collection system, as well as from the still widely held Soviet belief that electricity and heat are "free."
The Kazakhstani electricity network is extremely inefficient. In 1995, losses during transmission and distribution were approximately 15 percent of energy produced; it is reasonable to assume that losses have increased, since little maintenance work has been done in last several years. Regional electric companies (RECs - power distributors) privatization has moved more slowly than generation assets, which is a reflection of the complexity of the issue and the politics that surround it. Only two out of 15 RECs, Almatyenergo and Karagandaenergo, have been privatized. Kazakhstani government plans to privatize the rest of the local distribution system in 1999 were postponed, but will represent a major strategic opportunity for U.S. investors when they are privatized. The REC's are generally in very poor condition and debt-ridden, thus both the number of bids and the value attached to them are likely to be less than would have been expected even one year ago. Kazakhstan maintains over 460,000 km of distribution lines, with voltages of 500, 220, 110, 35, and 10 KV. Given Kazakhstan's tremendous size, (four times the size of Texas) this presents significant opportunities for U.S. equipment suppliers who could follow on major investor acquisitions and management contracts. Continued regulatory issues, however, have discouraged investment in the grid. In 1998, the Kazakhstani Electricity Grid Operating Company (KEGOC), whose sole responsibility is to manage Kazakhstan's grid network, was identified as an impediment to further investment in the transmission network sector due to policies harmful to private electricity producers. For example, in 1998, KEGOC split the national grid into northern and southern networks that caused separation of the northern electricity suppliers, including AES, from their southern customers. The combination of KEGOC's high tariffs and customer non-payments is taking a heavy toll on power generation companies. In November 1999, former Finance Minister Zhandosov was appointed as the new President of KEGOC. It is as yet unclear whether KEGOC can evolve into an operating network that will allow the market to determine transmission tariffs. The path that KEGOC chooses will have important repercussions for future foreign investment in the energy sector.
The World Bank, The European Bank for Reconstruction and Development (EBRD), and USAID provide significant technical assistance and other support for the development of the Kazakhstani power sector. Hagler Bailly, a USAID contractor, provides technical assistance to the Ministry of Energy, Industry, and Trade on possible modernization of the Kazakhstani power industry, including strategic issues, electricity pricing methodology, privatization of regional electric companies, and introduction of retail and wholesale competition. The World Bank plans to issue a $100 million loan to KEGOC for upgrading the Kazakhstan transmission network. The EBRD has signed a loan agreement to provide $40 million to the Karaganda Power Company and is currently considering other loans to foreign and domestic investors active in the market.
Power Industry Sector Statistics ($ millions):
1997 1998 1999 (est.) Total market size 49.4 71.2 n/a Total local production* --- --- --- Total exports* --- --- --- Total imports 49.4 71.2 n/a Imports from the U.S. 0.75 1.8 n/a*Note: total local production of electric power equipment is not significant and consists entirely of auxiliary equipment and spare parts. Exports are also not significant and largely consist of re-exporting to other CIS countries.
C. Sector Rank: 3
Sector Name: Telecommunications/Telecom Equipment
ITA Industry Code: TELKazakhstan is planning an extensive, long-range effort to modernize its telecommunications network. U.S. companies should closely monitor this sector for trade and investment opportunities.
Kazakhtelecom, the national telecommunications operator for Kazakhstan, became one of Kazakhstan's largest companies upon its founding on June 17, 1994. As a natural monopoly, Kazakhtelecom controls all of the country's data communication networks and communication centers. Kazakhtelecom currently provides local, long-distance, and international telephone communication services. It also provides telegraph, e-mail, cellular, paging, and satellite communications as well as wire broadcasting throughout Kazakhstan.
In May 1997, the Kazakhstani government sold a 40-percent stake in Kazakhtelecom to South Korea's Daewoo Corporation. By February 1998, Daewoo quietly sold three-quarters of its holdings to Kazkommertsbank, a large Kazakhstani private bank. Kazkommertsbank sold 10 percent of its Kazakhtelecom shares mainly to Western investors and held the remaining 30 percent, which Kazkommertsbank hoped to sell off to a "strategic partner" with experience in the development and operations of telecommunication networks.
Kazakhtelecom has begun a national program to modernize the Kazakhstani telecommunications system. Kazakhtelecom aims to provide a unified information environment based on the latest telecommunication technologies, integrate existing international information networks into the new system, and provide modern telecommunications services to the public, government authorities, and the business community. Areas to be modernized in the framework of this program include: wireless communications, paging, and trunk communications. The modernization program also includes: card payphones; construction of three international switching centers (Astana, Almaty, Aktyubinsk); construction of four long-distance telephone exchanges (Aktyubinsk, Semipalatinsk, Taraz, Uralsk); and, construction of fiber optical lines. Kazakh Telecom also plans to modernize its rural telecommunications networks using digital telephone exchanges.
In March 1999, GSM-standard cellular phone service was introduced in Kazakhstan. Two GSM operators emerged in the Kazakhstani telecommunications market--K'cell--a Kazakhstani-Turkish joint venture between Kazakhtelecom (49 percent of shares) and Turkcell (51 percent of shares); and K-Mobile--a joint venture between the Kazakhstani company Investel (30 percent of shares) and Turkish Rumeli Telecom (70 percent of shares).
The long-awaited arrival of GSM to Kazakhstan has resulted in strong downward pressure on AMPS standard-based cellular equipment and services in Kazakhstan, provided to almost 30,000 subscribers by Altel, a Kazakhstani-British joint venture with Wireless Technology Corporation (UK). The launching of two competing GSM operators resulted in lower prices and new services for Altel customers, which opened the door for cellular communications services to an emerging Kazakhstani middle class. Compared to the existing Kazakhstan analog telecommunications standard, GSM's digital standard has a number of advantages: low cost air time; free incoming calls; confidentiality; noise immunity; high quality voice transmission; and, international roaming.
Along with Kazakhtelecom, a number of other telecommunications service providers operate in the Kazakhstani market: Kazinformtelecom (KIT), Nursat, Jarykh, SA Telcom, and KAZINTEL. KIT, a joint stock company organized in April 1994, provides the following services: connection to the Internet (e-mail, digital-mail services); connection to the Infotel international network; and an international Intelsat-based satellite communications network. KIT is developing projects to provide satellite communications and connections to hotels and business center networks worldwide. KIT, together with a U.S. investor in a defense conversion project, established the joint venture Nursat. Nursat provides e-mail, digital-mail, video conferencing and voice communications. Jarykh provides a number of services, including satellite communications, Inmarsat, paging and satellite television. SA Telcom offers leased channels and data transmission as well as satellite communications. KAZINTEL unites three well known Kazakhstani companies--Arna, Astel, and Ratel. Arna is the operator of local telephone communications in Almaty; Astel operates data transmission throughout Kazakhstan; and Ratel operates satellite communications systems in Kazakhstan. According to KAZINTEL's President, merging the three companies will integrate communications services to reduce expenses and increase the quality of management decisions. Finally, a Kazakhstani-Turkish joint venture called Vesnet was established in 1992 to produce digital telephone exchanges.
The Trans Asia-Europe Optical Fiber Cable (TAE) project was begun in August 1995. This international fiber-optics communication line will connect China, Central Asia, Iran, and Turkey with the European continent, with future outlets to the U.S. via Japan. In 1998 the southern branch of TAE (1750 km) went into operation, and construction of the western branch (2500 km) began in April 1999. U.S. firms should watch for contracting and sub-contracting opportunities.
The rapid and successful development of telecommunications in Kazakhstan has already encouraged several foreign manufacturers and suppliers to establish a presence in this emerging market. Such companies as Motorola, Lucent Technologies, Ericsson, Siemens, Alcatel, Nokia, Daewoo, and Nortel are presently active in Kazakhstan. High demand for telecommunications products comes from the following sectors: aviation, oil and gas, power generation, banking, and mining.
Telecommunications Sector Statistics
1997 1998 1999 (estimates) Total market size $46.4m $55.4m $79.1 Total local production* -- -- -- Total exports $0.9m $0.8m $0.9m Total imports $47.3m $56.2m $80m Imports from the U.S. $3.6m $6.25m $8m* Local production is not significant, and comprises mostly of producing telephones sets, telephone exchanges, cables and wires.
-- There are 1.8m lines: urban - 1.5 mn, rural - 0.3 mn (1999)
-- telephone density per hundred people in urban area is 16.4 and 6.3 in rural area (1999)D. Sector Rank: 4
Sector Name: Mining Industry
ITA Industry Code: MINKazakhstan, four times the size of Texas, boasts one-third of the world's chromium and manganese deposits and has substantial reserves of other minerals such as: 50% of the former Soviet Union's tungsten and lead; 40% of its zinc and copper; and 25% of its bauxite, silver, and phosphorus.
Kazakhstan is also the largest producer among NIS countries of beryllium, tantalum, barite, uranium, cadmium, and arsenic. Kazakhstan was a major producer of copper, lead, and zinc for the Soviet Union. Existing copper operations are large, such as at Dzhezkazgan and Balkhash. Geological studies indicate that there are opportunities for U.S. companies interested in copper in these regions and in other parts of the country. Large iron mines are located in the north. Large reserves of coal are found in the central and northern parts of the country. Kazakhstan also contains large reserves of phosphorus ores.
There is good gold mining potential in Kazakhstan. Newcomers to the market usually target gold, since it is easily transported out of the country and easily sold. Most of the current production of gold and silver comes as a by-product from base metal production, but there are also gold deposits that are significant in their own right. It has been estimated that there are 23 gold-bearing regions in Kazakhstan. Industrial diamonds and semi-precious gemstones are also mined in Kazakhstan.
Another opportunity for U.S. investment lies in processing of tailings or slags following the production of both base and precious metals. Soviet industrial methods resulted in high precious metal loss during processing. The processing of tailings for precious metal values can be especially attractive for U.S. firms, since capital investment is much smaller than for opening an entire mining complex.
More than half of Kazakhstani mining, processing, and smelting enterprises use outdated equipment that is often in need of repair. Most lack environmentally friendly technologies. Kazakhstan does not have its own mining machinery industry, and relies mainly on Russian imports. U.S. mining equipment firms should explore trade opportunities in used and refurbished equipment, as potential Kazakhstani buyers are quite price sensitive, given the availability of cheaper (albeit poor quality) Russian equipment.
The government began to privatize state mining companies in 1994. By July 1998, virtually the entire sector had been privatized. The Kazakhstani mining industry lost some of its traditional markets with the breakup of the Soviet Union, and is a relative novice in the international marketplace.
Although a number of business opportunities in mining exist, U.S. companies are advised that there are serious obstacles and pitfalls in this sector. The single biggest obstacle is the lack of a Western-style mining code in Kazakhstan. In this sense, such issues as recognition of title, validity of contracts, mechanisms to resolve disputes, and red tape make contract law, in general, a significant risk factor. The second problem faced by investors is the vague tax regime specifying the arrangements for taxes on imported capital equipment, royalty arrangements, and taxes on exports. Political and commercial risk remains an issue for foreign mining companies, particularly the potential for arbitrary decisions, unclear criteria for awarding licenses, or ambiguous processes to negotiate deals. Several foreign investors have experienced non-payment for everything from services to equipment; extensive due diligence is a must.
Falling prices for precious metals, poor implementation of existing foreign investment legislation, difficulties faced by foreign investors in Kazakhstan, and the real and perceived risks of investing in this potentially-lucrative sector have not allowed the Kazakhstani mining industry to achieve its potential.
The Kazakhstani government is working to improve the outlook for Kazakhstani mining. The mechanism for granting exploration licenses has been simplified, but implementation remains a problem. The procedure for obtaining environmental permits is being streamlined.
Mining Industry Sector Statistics
1997 1998 1999(estimates) Total market size $158.9m $135.5m $130.8m Total local production $371m $213m $205.6m Total exports $244.6m $105m $101.4m Total imports $32.5m $27.5m $26.6m Imports from the U.S. n/a n/a n/a (Source: Kazakhstani Committee on Statistics and Analysis)E. Sector Rank: 5
Sector Name: Architecture/Construction/Engineering Services
ITA Industry Code: ACEMost of the activities in ACE services are devoted to four areas: building the new national capital, Astana; oil and gas exploration, processing, and transportation; mining; and road and airport construction.
The transfer of Kazakhstan's capital from Almaty to Astana is a priority program under the personal supervision of President Nazarbayev. Projects associated with the move include the following: upgrading the Almaty-Astana motorway (900 kilometers); construction of a circular roadway around Astana; reconstruction of the Astana Airport; construction of business centers, a trade center, Western-standard hotels, and, residential construction. Projects underway in Astana include a new residence for the President (Mabetex, Swiss) and a building for the Ministry of Finance building (Basic A/FCH, Kazakhstani/U.S.). The estimated total cost for building the new capital is about $6 billion. U.S. companies should note that getting remuneration for their services could be a problem.
To stimulate investment, the government will grant tax holidays to companies investing in housing and public utilities construction in Astana. Those investors will reportedly be exempt from paying income tax, land tax, and property tax for up to five years.
Needless to say, the construction industry serving Astana is growing quickly, and construction materials for Astana and its outlying regions are in short supply. Housing for government employees there remains in short supply.
While the tender process for construction projects tends not to be open or transparent, U.S. companies are advised to watch for tender announcements and submit proposals. Turkey has been very active in Kazakhstan, with more than ten Turkish construction firms presently operating in the country.
The EBRD, Asian Development Bank (ADB) and the Islamic Bank have agreed on a number of projects for the rehabilitation of the Almaty-Astana motor way. The road is being built in four sections:
1) Almaty-Gulshat- EBRD - $40 million (tender TBA);
2) Gulshat-Akchatua- ADB - $34 million
(Balfour-Beatty)(British) and Mensel (Turkish);
3) Akchatau-Karaganda - EBRD - $50 million (tender TBA);
4) Karaganda-Astana - Islamic Bank - $75 million (tender TBA).U.S. firms should watch for tender announcements for both goods and services.
In the oil and gas sector, U.S. engineering firm Bechtel is undertaking a de-bottlenecking project in the Tengiz oil field, a land infrastructure project at the Karachaganak gas field, and an EBRD-financed Aktau seaport reconstruction project. Halliburton is completing an U.S. Department of Defense contract to dismantle land mines at the Baikonur Space Center. Many engineering projects are expected in the oil and gas sector, especially in pipeline construction. Such projects will require engineering and construction services. U.S. companies are advised that oil and gas contracts in exploration, drilling, producing, processing and transport are usually awarded in London or Houston, where contractors and sub-contractors are identified.
The need for construction materials provides another opportunity for U.S. companies. Only 47% of the construction materials used in Kazakhstan are available domestically. Locally produced materials include cement, bricks, wooden doors, windows, steel doors, and soft and iron roofs. All other materials are imported, mainly come from Turkey, China, and Germany.
The Kazakhstani government strongly encourages U.S. companies to hire and train local workers. In 1998 a rather cumbersome work permit system was put into place to discourage importing foreign labor. A quota system will enter into effect on January 1, 2000, which will limit the total number of work permits granted to foreigners by job category and geographic region. The exact method of implementation is as yet unclear.
Architecture/Construction/Engineering Services Statistics*
1996 1997 1998 Total market size n/a n/a n/a Total local production n/a n/a n/a Total exports n/a n/a n/a Total imports n/a n/a n/a Imports from the U.S. $0.39m $0.31m $0.34m * No Kazakhstani data is currently available for this sector.F. Sector Rank: 6
Sector Name: Computers and Peripherals
ITA Industry Code: CPTThe Kazakhstani computer market is growing to meet increased demand. The government has a need for automation of its financial institutions, customs, ministries, and educational institutions. There have been a number of tenders announced for the procurement of computer equipment, some of which are projects of the World Bank and Asian Development Bank. An increasing number of domestic businesses also require the latest in information technologies and equipment.
Among the U.S. manufacturers representing the Kazakhstani computer market are: IBM, Dell, Sun Microsystems, Apple, Compaq, and Hewlett-Packard. Main foreign competitors include LG, Daewoo, Samsung, and Hyundai.
There is a growing market in Kazakhstan for computer spare parts. Given economic considerations, some local computer companies specialize in assembling computers from imported spare parts to make their products less expensive and to avoid customs duties (0.2%), VAT (20%), import tax (5%), etc.
Computers and Peripherals Sector Statistics*
1996 1997 1998 Total market size n/a n/a n/a Total local production n/a n/a n/a Total exports n/a n/a n/a Total imports n/a n/a n/a Imports from the U.S. n/a n/a n/a* No data is currently available for this sector.
G. Sector Rank: 7 Sector Name: Medical Equipment ITA Industry Code: MED
Kazakhstan's health care industry has suffered considerably since the collapse of the Soviet Union. The slow transition from a government-controlled health care system to an open one is proving especially difficult due to Kazakhstan's economic problems. A sharp decline in the quality of medical services and the lack of such basics as sanitary facilities, running water and electricity put medical equipment low on the priority list of many hospitals.
However, in 1998 the GOK identified health care as a priority sector and launched the "Health of the Nation" program. The program encompasses many aspects of health care--three of critical importance. They are as follows: 1) the development of a long-term strategy for environmental improvements in regions where the health of citizens is at risk because of damage from nuclear testing and overuse of pesticides; 2) a special effort to overcome the rapid spread of tuberculosis and other infectious diseases; and, 3) the improvement of primary health care and infant care.
Currently, the health care industry is financed through the state budget by credit lines from international banks and by grants from Japan and the U.S. As a consequence, U.S. companies interested in procurement opportunities are urged to monitor projects funded by international financial institutions that assist Kazakhstani health care providers.
In May 1999, the GOK signed a $42.5 million loan agreement with the World Bank to restructure Kazakhstan's health care system. The healthcare project includes as one of its components the procurement of medical equipment for primary health care and hospitals in Kazakhstan.
According to Kazakhstan's "Law on State Procurement," all medical equipment for public health care institutions shall be purchased only via tender. Each city and oblast in Kazakhstan has government funding for medical equipment, supplies, and pharmaceuticals to be procured through a tendering program. However, these opportunities diminish every year. For example, only $7.5 million was earmarked for medical equipment in the FY 1999 federal budget.
The lack of domestic production in Kazakhstan has resulted in a total dependency of Kazakhstani importers on Russian-made medical equipment. New state-of-the-art Western medical equipment and supplies are becoming more known and popular among Kazakhstani doctors. Market dynamics have shown that Kazakhstani consumers of medical and dental devices have started to shift from purchasing inexpensive, poor-quality Russian equipment to more costly and better quality Western-made equipment.
"The simpler, the better" sums up what many consider to be the best market-entry strategy for Kazakhstan. Low cost and minimal maintenance are key concerns of Kazakhstani medical equipment importers. U.S. companies are counseled to arrange for flexible discounts and privileges for medical equipment buyers in the form of leasing, lines of credit, and extended payment schedules.
U.S. companies should become familiar with Kazakhstan's requirements for registering, licensing, and certifying medical equipment. Moreover, any U.S. company interested in entering the Kazakhstani market might want to consider shipping manufactured parts to Kazakhstan for final assembly in order to achieve a significant edge over foreign companies that supply more expensive finished products.
The best prospects for U.S. exports include the following types of medical products and equipment: dental equipment and supplies, disposable items, surgical instruments and appliances, laboratory equipment and supplies, diagnostic and monitoring systems, ophthalmologic instruments and appliances, and manufacturing lines for pharmaceuticals production.
American medical equipment firms with a presence in Kazakhstan are the medical divisions of 3M and General Electric. Local dealers represent other U.S. companies. These companies are: Medtronic, Beckman, A-DEC, and Hewlett-Packard. Foreign firms currently active in Kazakhstan include: Siemens, Phillips, Toshiba, and Mitsubishi.
Medical Equipment Sector Statistics
1997 1998 1999 Total market size $14.6m $14.3m n/a Total local production n/a $0.001m n/a Total exports $0.7m $0.2m n/a Total imports $15.3m $14.5m n/a Imports from the U.S. $1.1m $2.9m n/a Source: National Statistics Agency of KazakhstanThe Embassy is closely monitoring several sectors for possible inclusion in next year's Country Commercial Guide. U.S. companies may wish to explore the following potential niche markets:H. Sector Rank: 8
Sector Names: Processed Food/Food Processing and Packaging
TA Industry Code: FOD/FPPA surge of imported food products is meeting the growing demand of Kazakhstan consumers, especially for candies, cakes, potato chips, etc. This presents opportunities for U.S. firms. U.S. companies active in this sector are usually big multi-nationals who are able to work through their European-based branches. Transportation costs and in-country logistical problems present greater challenges for small to medium-sized U.S. companies. The U.S. Commercial Service published an Industry Sector Analysis (ISA) on Processed Foods in summer 1998.
MEAT PROCESSING:
The meat processing industry traditionally has been one of Kazakhstan's major agro-industries. In 1991, some 850,000 tons of meat and 150,000 tons of meat products were processed in Kazakhstani plants. The industry comprises almost 1,300 enterprises, but is dominated by approximately 50 large firms. Meat remains a highly popular food in Kazakhstan. Because of extensive grazing land, Kazakhstan has a comparative advantage in livestock production.In July 1998, American meat processing company Koch (Kansas) established a joint venture with a Kazakhstani partner. Besides operations in Astana, the company is supplying processing lines to facilities in Chromtau, a mining town in the north. The processing lines cost between one and two million dollars each. There is also tremendous potential demand for smaller-scale equipment in the $100,000 - $200,000 price range among the numerous small firms that process meat. There is some foreign competition from German and Turkish meat-processing companies.
DAIRY:
Dairy processing is growing quickly in Kazakhstan. One local Kazakhstani company, FoodMaster, has expanded rapidly in the last few years and now sells its dairy products throughout much of southern Kazakhstan. There is considerable room for further growth, however. This company and others in the dairy business could provide markets for dairy processing equipment imported from the U.S.VEGETABLE AND FRUIT PROCESSING:
No more than 10% of Kazakhstani vegetable production and 20% of fruit production is processed by local industries. Instead, vegetables and fruits are preserved by individuals in their homes. In 1991, there were 98 vegetable and fruit enterprises employing 5,500 people in Kazakhstan. Far fewer survive today. Most enterprises are relatively small. Eight large enterprises account for almost 90% of commercial production and employ 80% of all workers. Most are canning operations; there is only one frozen food factory.Kazakhstan has large vegetable and fruit storage facilities: over 500,000 tons of potato storage, 220,000 tons for other types of vegetable storage and 90,000 tons for fruit. Most of these facilities have inadequate ventilation and cooling systems and, as of June 1999, were only partially utilized. There is considerable foreign competition from the Swedish firm, Tetrapak, in the juice processing industry.
SUGAR:
Eight factories produce sugar in Kazakhstan. In 1991 output from these factories was approximately 300,000 tons of granulated sugar, although only 20% came from locally-grown sugar beets --Kazakhstan used imported raw sugar for the remainder. The industry cannot meet domestic requirements even at the much reduced consumption levels of 1998. Significant opportunities for U.S. equipment sales exist in the sugar industry.BEST PROSPECTS FOR AGRICULTURAL PRODUCTS:
There is a growing demand for meat and poultry goods in Kazakhstan, particularly higher quality imported products. One U.S. company supplying beef and pork sausages to Russia is seriously exploring market opportunities in Kazakhstan. The volume of trade in poultry products is increasing: chicken from the U.S. has become quite popular in the past few years.
Kazakhstani agricultural companies bought approximately five million dollars worth of soybean meal from the U.S. in 1998. A portion of the soybeans will be crushed into meal for poultry feed (some enterprising Kazakhstanis are starting poultry farms to meet the demand for poultry mentioned above). The remainder will be used to produce vegetable oil, another sought after commodity.
Kazakhstan's vast grain-growing areas hold potential for U.S. farm equipment, as well as for fertilizer and pesticides. In 1996, John Deere sold more than $115 million dollars worth of grain combines and cotton pickers to a Kazakhstani company. The deal was only possible because of payment guarantees by the government, however. In fact, Kazakhstan's agricultural sector remains extremely depressed; most Kazakhstani farmers are heavily in debt, and very few have money to pay for U.S. goods. A recently announced program to privatize agriculture will go a long way toward putting the sector on firmer footing, thereby enabling farms to source needed inputs with credit from banks. When privatization takes hold, U.S. suppliers are likely to find their products in high demand. In anticipation of this, U.S. companies would be well advised to closely monitor the pace of reform in the agricultural sector.
Note - See above for opportunities in Kazakhstan's food processing and packaging sector.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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