Guy Norton reports from Almaty on the story behind Max Petroleum, a small, independent oil company in Kazakhstan gearing up to go head to head with the global oil majors.
Max Petroleum was only incorporated in April 2005 but it is fast proving that small, independent oil and gas companies have a bright future in Kazakhstan – and can more than hold their own against the global majors that have hitherto been the dominant market players in the resource-rich central Asian state.
Within a matter of months the company has already acquired rights and licences to explore and develop four highly promising oil blocks in the country, completed an initial public offering – achieving listings on the London and Frankfurt bourses in the process – placed a further block of shares through an institutional offering over the deadzone Christmas holiday period, and most recently completed a highly successful convertible bond offering. And all this before a single drop of oil has been extracted and sold.
As Philip Morgan, an analyst at WH Ireland Stockbrokers, noted in a research report entitled The birth of a giant?, published just after Max Petroleum’s IPO: “Inside a decade, all being well, this company could even become a major. The situation appears unique and the case for early investment is compelling. It could be quite a ride.”
Birth of a giant?
It all seems a long way from the time when the company’s two founders – executive chairman James Jeffs and chief executive officer Steve Kappelle, both oil industry veterans with extensive experience of working in Kazakhstan – were approached by Kazakhstani industrial holdings group Samek. In 2003, Samek had secured the rights from the Kazakhstani energy ministry to develop fields known as Blocks A&E and East Alibek in western Kazakhstan.
Samek had previously been unsuccessful in its attempts to attract a partner to help it extract potential oil and gas reserves in its contract areas, despite the fact that the East Alibek field, for example, is next to the Alikbekmola field, which is estimated to have reserves of about 400 million barrels.
Under the terms of their agreement, Max Petroleum would help provide Samek with the necessary international expertise and funding to exploit its assets, while Max acquired an 80% interest in the fields at the same time as being able to secure the political clout of having Samek on board as a strategic partner.
This has already resulted in Max Petroleum securing a cooperation agreement with Kazakhstani state-owned oil and gas company KazMunaiGas (KMG).
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“In the Astrakhansky field alone, there could be over 1.2 billion barrels of oil – to put that in context that’s equivalent to 10% of Shell’s worldwide output”
Steve Kappelle, Max Petroleum |
Under the accord, Max Petroleum will gain access to well log data from KMG that will make it much easier to find suitable locations for reopening old wells and identify the likely position of new wells in parts of its Block E field.
It will also benefit from access to KMG’s oil treatment facilities for annual production of more than 2 million barrels of oil a year for the period 2006-10, with privileged access thereafter at the nominal cost of oil treatment. In return, KMG will hold on to the rights to retain minor parts of the Block E where it had previously produced small amounts of oil – less than 200 barrels a day on average.
Furthermore, the presence of Kazakh investors as major shareholders is widely believed to have helped Max Petroleum acquire the rights to develop a further field at Astrakhansky, located alongside the Russian-Kazakhstan border and next to massive multi-billion barrel fields being developed by Russia’s Gazprom and Kazakhstan’s KazMunaiGas.
According to Tim Whittaker, head of drilling operations at Max Petroleum in Almaty, where the company now has a staff of 70, the breakneck pace of development is testament not only to the company’s own inherent strengths and qualities but also provides a prime example of what is achievable given the largely stable and predictable investment and operating environment in Kazakhstan.
“The government is still very keen on getting foreign investment into Kazakhstan,” says Whittaker. He adds that fears of a more foreign investor-unfriendly stance by the Kazakhstani government following the passage of a new investment law in 2003 have largely proved unfounded, if Max Petroleum’s experience to date is anything to go by. “We’ve had no problems so far securing all the necessary licences and approvals for our operations here,” says Whittaker, adding: “We have a genuine wish to work closely with the government as the terms and conditions available here for oil companies are still a lot more attractive than in other countries.”
Social responsibility
Steve Kappelle, Max Petroleum’s chief executive, adds: “A degree of humility when you enter any emerging market is no bad thing in our opinion and you need to fulfil all your social obligations as well.” He says that some of the foreign oil companies that have come to Kazakhstan in the past have acted in a high-handed manner with government officials, while neglecting the social needs of the often extremely poor local populace in the areas where they have set up operations. “That’s not something we’d ever do,” Kappelle says.
Although there have been widespread criticisms of the slow pace at which the bureaucratic wheels in Kazakhstan have turned in the past, Whittaker says that the regulatory and legislative environment is clearly changing for the better. “There’s a step change happening at the state agencies here in Kazakhstan, with a younger, western-educated generation of technocrats replacing older, Soviet-era-educated bureaucrats.”
As a result Whittaker believes it is now much easier for start-up oil and gas businesses in Kazakhstan to accelerate the pace of their development towards being fully fledged producers, a vital consideration if Max Petroleum is to reap the full benefits of the current investment vogue for commodity plays and attract the necessary capital to fund the company’s move from an exploration to a production company. “Previously it would normally have taken two to three years to get as far as we have in just over a year.”