Currently, Kazakhstan is actively attracting investments. Recently, the head of state announced that over $40 billion will be invested in renewable energy projects in the country's economy. Specifically, more than $14 billion is planned for the gas chemical sector. There is a vigorous development of new projects in the oil and gas industry, which could attract tens of billions of dollars due to the approved model contract. One of the first projects is Kalamkas-Khazar, which involves a partnership with "Lukoil" and "KazMunayGas" (KMG) with investments exceeding $6 billion, as reported by inbusiness.kz.
During the recent Dialogue Investment Forum held in Astana, the importance of developing local content in procurement not only from global companies but also from other major projects in Kazakhstan was emphasized. An analysis of procurement in the oil and gas sector reveals that it amounts to tens of billions of dollars. For instance, last year, the total procurement value reached approximately $14 billion, of which $6.4 billion occurred in Kazakhstan. The country has over 130 oil refineries, but traditionally, three major players and the KMG group are well-known in the market.
As noted by Nurlan Zhumagulov, Executive Director of Energy Monitor, "Samruk Kazyna" and "KazMunayGas" account for over 57% of all local content procurement. Companies in the second category (stabilized contracts) – NCOC, KPO, TCO only make up about 10% of the total procurement volume. However, there was a time when these companies procured a minimum, not exceeding 2%. Private companies (foreign and private investors) account for 30% of the procurement volume.
Moreover, NCOC, KPO, and TCO account for just over 70% of all procurement. This is linked to the implementation of large EBRD projects with a budget of $48 billion. Of this amount, only 1.3-3.4% consists of local procurement.
It is crucial to develop local content because investments encompass goods, taxes, services, and labor.
For instance, in the EBRD project with a budget of $48 billion, more than half of the funds will be directed toward services, technologies, and the procurement of large equipment.
The forum also presented the dynamics of gas well construction in Kazakhstan over the past 10 years and their dependence on oil prices.
On average, the cost of drilling one well is 750 million tenge at depths of up to 1425 meters. Total drilling expenses in 2023 amounted to 619 billion tenge. It was noted that the era of light oil extraction in Kazakhstan is coming to an end. Currently, investor companies are drilling oil wells deeper.
Twenty key segments of commodity groups that are procured by oil and gas companies were presented. The first category is pipe products, which constituted 22% of the total procurement volume amounting to 185 billion tenge (in 2023). Of this amount, the share of local content was 39%. Categories of goods where local production exceeds 50% were highlighted. For example, the share of fuel and lubricants in local content is 65%, electricity reaches 88.5%, and gas also stands at 88.5%. Other segments of commodity groups have much lower representation in local content.
For a long time, major operators such as NCOC, KPO, and TCO did not procure goods significantly. This is due to specific preferences in their contracts. For instance, companies like NCOC and TCO are not exempt from VAT when procuring goods, making it more advantageous for them to import products rather than purchase from a Kazakhstani factory that pays import duties on its materials and VAT. Often, the price from a Kazakhstani factory is very high.
Photo by Indira Kusaikova
"To level the playing field between Kazakhstani factories and importers, changes were made to the tax legislation. In particular, paragraph 1 of article 95 of the Tax Code states that if a Kazakhstani factory supplies products to projects like Tengiz, such as "Kashagan", VAT is calculated at a zero rate, resulting in a 12% savings. However, for a long time this provision was not effective, as many factories were unaware of it," Nurlan Zhumagulov stated.
According to him, the situation began to change only in recent years, but even this does not save Kazakhstani factories. For example, if one factory works directly with the Tengiz project, its VAT income will be zero, while expenses for purchasing materials will be burdened with VAT. Logically, the government should reimburse the VAT, but in practice, this does not always happen.
Many Kazakhstani importers prefer to procure goods from abroad as it is simpler and more cost-effective. The provisions in the tax legislation are not functioning. If, for instance, NCOC, KPO, and TCO were to procure from a Kazakhstani importer, the latter would have to pay duties and VAT. A couple of years ago, the Ministry of Finance provided clarifications that these projects are exempt from VAT and even extend to contractors, meaning construction companies. For instance, one company from the periphery annually supplies products to TCO worth $80 million, is exempt from VAT, yet continues to incur expenses.
It is essential to support Kazakhstani factories supplying their products for the Kashagan and Tengiz projects, the expert argues. It is also necessary to consider the preferences granted to investors. Currently, there are numerous agreements on projects that also exempt investors from certain tax obligations.
The question is whether it will be beneficial for an investor to purchase stone produced in Kazakhstan at a higher price or to import cheaper alternatives. Naturally, they will choose the latter. Additional measures are needed to expand the list of supported projects. There is an opinion that over time, projects under agreements will only increase.
Previously, changes were made in the subsoil use sector indicating that operators have their closed tender procedures, but to stimulate procurement from Kazakhstani subcontractors, it was decided that general contractors should procure goods from local companies according to established rules. Because when a contractor receives a large contract worth hundreds of millions of dollars, they often make procurement decisions at their discretion. This leads to a situation where even basic materials may not be procured from local partners, despite the existence of professional companies in Kazakhstan ready to work.
"Foreign purchasers typically do not visit local factories and continue to collaborate with global suppliers. We refer to such companies as non-portfolio, which come to Kazakhstan for large projects and leave once the project is completed. I won’t name the company, but after completing a major project, it earned a net profit of $800 million over the last five years. If we consider a total of 100 subcontracting companies in Kazakhstan that worked on the project, they did not earn that much," the expert explained.
In his view, it is necessary to change the operating rules for large operators. For TCO, for example, a Kazakhstani company is registered as a legal entity, where 95% of the staff are citizens of Kazakhstan. In NCOC on the "Kashagan" project, the Kazakhstani company is a legal entity where the share of equity capital from the Kazakh side is at least 50%.
Many companies create different legal entities for various projects. Consortia are formed between foreign and Kazakhstani partners. This means that there are two separate accounts, and, conditionally, for one job, payment is made separately, which is very beneficial. This helps prevent monopolies and ensures more transparent financial flows. We have many instances where foreign companies formally use Kazakhstani partners as a "pass" to obtain contracts. Once foreign companies secure contracts, they then pass them on to their main contractors – their affiliated companies, thus generating additional income.