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By Maksut Nurpeisov
Publication based on materials taken from the Panorama web-site

Over 250 delegates from 150 domestic and foreign companies gathered in Atyrau on April 26-28, 2001 for the first-everLocal Content and Infrastructure Development in West Kazakhstan international exhibition and conference. The event was organized by Golden Eagle Services withthe support of the Atyrau region akimat and the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. Theconference was designed to bring representatives from Kazakhstani enterprises and foreign investors together so that they could learn of each other�scapabilities and needs in line with the Kazakhstani government�s import substitution program.

Participants included Deputy Energy Minister Uzakbay Karabalin, Atyrau oblast Deputy Akim Ergali Dosmagambet andrepresentatives of regional administrations and every major oil project in Kazakhstan�s four western oblasts. More than 100 Kazakhstani companies tookpart, including 55 that presented stands at the exhibition. OKIOC, Central Asian Industrial Holdings, Citibank, ABN Amro Bank, and local oil company ANACOsponsored the gathering. �We are extremely pleased with the results of the conference and exhibition,� said GES Director John Mann. �We were able toovercome many of the logistical difficulties inherent in an emerging city like Atyrau to put on a top-class event. Turnout was far beyond our expectations,with every square meter of exhibit space reserved and enough delegates to fill up every available hotel room in the city.�

Conference speakers addressed specific ways that oil companies can increase their purchases from local suppliers, and howKazakhstani enterprises can better market themselves to potential clients. Participants also discussed issues related to infrastructure, small andmedium-sized business, international standards, oil field services, and financing for local businesses. �Mostimportantly, Kazakhstani enterprises had an opportunity to make valuable contacts and meet many potential new clients,� added Mann. �I learned of atleast four new joint projects even before the conference was over.�

The import substitution program, which was approved eighteen months ago, is constantly under development. At a governmentalmeeting on import substitution in Ust-Kamenogorsk that was held concurrently First Deputy Premier Daniyal Akhmetov expressed disappointment with the oil andgas sector�s commitment to import substitution, noting that only 21% or USD 9.7 MM of overall import substitution transactions were carried out by companiesin these industries. Only 2.5 MM worth of those contracts have been fulfilled to date. The Kazakhstani government is now preparing to unveil tough newlegislation to support its import substitution initiative that �will strongly induce foreign companies to work with Kazakhstani enterprises.� In any case,the new legislation should have appeared alongside the import substitution program, and the conference attendees numerous complaints about a lack of basicinformation, be it in the form of a database or normative acts, demonstrate the possibility of the discreditation of yet another basically correct strategy.

According to State Strategic Planning Agency Chairman Kairat Kelimbetov, a number of efforts to create normal conditions forthe use of domestic resources in the oil sector have been planned. An interdepartmental working group was set up to develop a draft concept for thedevelopment of a domestic services sector to ensure the production of equipment, goods, materials and services; the activities of this working group will becoordinated by the Strategic Planning Agency. The concept will outline the basic principles for the development of domestic service sector that will cater notonly oil and gas sector, but also to other sectors of the republican economy. A �Strategy for the Development of the Fuel and Energy Industry� and a�Strategy for the Development of the Gas Industry� are being drafted. Another core priority is the development of explicit and transparent financialmechanisms for investing in the domestic service sector. �Import substitution must become an intermediate step towards another long-term goal � to enablethe Kazakhstani service sector to occupy a niche in the world economy�, Kelimbetov said.

The new strategy foresees that USAID will work with the Kazakhstani government to develop policies that demonstrate theviability of the proposed strategies and introduction of new technologies. For example, the possibility of carrying out presentations and pilot projects, suchas clean-up efforts at certain areas of oil fields, modernization of Kazakhstan�s heating systems and market reforms in regional heat andelectricity systems and the reduction of negative social trends is currently under consideration. A new USAID project entitled �Improvements to theManagement of Natural Resources in Central Asia� was launched in September 2000; it is designed as a three-year program with an optional two-yearextension.

At the moment, there are two typical points of view on the import substitution process: large companies express readiness toexpand the involvement of local companies in their projects, while local companies find statements of readiness as empty promises, at least at themoment. For example, OKIOC plans to invest some USD 400-500 MM into oil exploration on Kazakhstan�s Caspian shelf next year, OKIOC BusinessDevelopment Manager Murat Mukashev said. According to Mukashev, the company is planning to conclude USD 33-35 MM worth of contracts with Kazakhstani companies,as opposed to USD 17.7 MM worth of contracts signed in 2000. Since the beginning of the year the consortium has concluded USD 2.3 MM worth of contracts withKazakhstani producers. Local enterprises will be engaged projects related to the drilling of a second test well at West Kashagan, the installation of a seconddrilling barge and the expansion of the consortium�s Bautino base. When negotiating contracts, OKIOC will pay particular attention to commerciallyviable goods and services that are up to international quality standards. The company intends to create a database that will include all Kazakhstanienterprises that produce goods and services needed for the efficient operation of the consortium. Specialists will use the database to assess proposals bylocal suppliers. Priority will be given to long-term contracts.

Another point of view is held Atyrau oil producer JSC ANACO President and Zaman Group Chairman Sagat Tugelbaev. Hebelieves that the government of Kazakhstan is ineffectively implementing the import substitution program. Tugelbaev stated that this program �has broughtno practical or serious results whatsoever for the republic�. Foreign subsurface companies working in Kazakhstan, he said, �still use operators thatimport everything: commodities and services. It is asinine to say that substantial investments are flowing into the republic�s oil industry as thoseinvestments are consequently ending up abroad in the form of payments for imported equipment and services�.

Tugelbaev believes that the government should step in and take definite measures � the volumes of locally produced productsand services purchased by foreign subsurface users cannot be increased without tough measures and appropriate legislative incentives. A special legislativebase should be put in place to aid in the development of machinery building, construction, manufacturing and food industries, taking into consideration thespecial needs of foreign subsurface users. Tugelbaev highlighted the need for the creation of a system of financial and legislative incentives that would makeit advantageous for foreign companies to hire local subcontractors and operators. In addition, he said that the government should create incentives foroil companies that create local service firms by concluding subcontractual agreements with local companies and introduce modern technologies and standardsat those local firms. The first step towards a real increase in the number of local subcontractors as well as services and sales of Kazakhstani goods would bethe creation of a quality testing lab in the republic, Tugelbaev said. �If there is an opportunity to certify a product and confirm its internationalquality locally, this would immediately influence the sales volumes of domestic producers�. Zaman Group includes the former Petrovsky Oil Machine BuildingPlant, the Prikaspiiburneft-Kazakhstan drilling company as well as a bread factory and a water bottling plant.

A brief poll conducted by conference organizers revealed that the conference was helpful, as all participantscomplained about the lack of adequate infrastructure and services in Atyrau. By the way, this was the original reason why the conference was held locally.Regional officials expressed a desire to hold similar events in other regional centers.

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