KAZAKHSTAN - The Gas Sector.

Because of the old Soviet system of centralisation, only a part of the Kazakh natural gas production is consumed locally, as the output goes through the Russian pipeline system. This is insufficient to deliver gas to the southern regions. Most of the domestic gas requirements are supplied from Uzbekistan and Turkmenistan.

In March 2000, the US Trade and Development Agency (TDA) and the Kazakh Ministry of Energy signed an agreement under which TDA gave the latter a $600,000 grant to fund a strategic gas utilisation study to examine various options. The study, involving KazTransGaz which is a gas utility and pipeline unit of the state-owned KazMunaiGaz (KMG), has focused on the country's gas reserves, potential domestic uses of this fuel and the gas pipeline grid available in the country. Emphasis is being placed on connecting the main gas producers of western Kazakhstan with the major population centres as well as the remote regions of the east and south.

Kazakhstan is linked by pipeline to the gas fields of Turkmenistan and Uzbekistan as well as to the Russian transport system. In early 2000, gas from Turkmenistan began to pass through Kazakhstan to the Russian system under a deal involving Itera, an independent Russian gas marketer registered in Florida and Gazprom. Gazprom and Itera are taking more than 50 BCM of the Turkmen gas this year, with the transit fees which Astana is charging for this being considerable, and a part of this is supplied to Kazakhstan.

British Gas International (BGI), a main partner in the gas/condensate-rich Karachaganak field, has been working on development of the Kazakh gas market. In the autumn of 1999 BGI and KazTransGas established a joint task force for this in Astana.

Now Karachaganak gas is being supplied for power generation, domestic heating and other uses. The other partners in the Karachaganak venture are Agip, Texaco and LUKoil.

Tractebel, the Belgian utility now owned by France's Suez Lyonnaise des Eaux, used to operate Kazakhstan's gas distribution grid. Tractebel had signed a contract in 1996 to spend $1 bn through local affiliates: Almaty Power Consolidated (APC), supplying power to Almaty, in which Tractebel held 60%; Intergas Central Asia, managing the national grid of gas pipelines, in which the Belgian utility held 55%; Tractebel CIS; and AlmatyGreenhouse.

Having invested about $200m, Tractebel in late April 2000 sold all its Kazakh assets to KazTransGas for $100m. Tractebel's former partner in these operations, the Calverton Group (investment arm of the local Chodiev group involving three Kazakh businessmen), transferred its 45% holding in Intergas to KazTransGas. Tractebel and Calverton terminated all ties between them after the latter transferred to the Belgian utility its shares in the Swiss-based Global Gas Group. Tractebel and Astana dropped all claims and arbitration writs. Tractebel said it had repaid APC loans to commercial banks.

Tractebel's exit ended three years of troubled relations between Astana and the Belgian utility. In May 1998, when Kazakhstan was in recession due to acute financial problems in Russia, Tractebel stopped transporting Turkmen gas through the Intergas network because of non-payment of transit fees, said to be US$13.5 per 1,000 cubic metres. This angered Astana, amid accusations that the Belgian utility had secured the network operatorship through bribery. In another move angering Astana, Tractebel stopped supplying influential customers with power because of non-payment of bills. When KazTransGas tried to take over its assets, Tractebel resorted to the international arbitration court in Stockholm in early 2000. At the end of March 2000, a vocal dispute with Astana over alleged non-payment of tax by Tractebel escalated into the threatened seizure of Intergas by the authorities.

The Intergas network comprises about 9,000 km of pipelines of 530-1,420mm, 29 compressor stations and a total of 4 BCM of underground storage capacity. The network has the capacity to carry 65 BCM/year of gas. Tractebel's June 1997 contract on this stipulated that it must manage the network for a period of 15 years, with the possibility of a further five-year extension. The company paid the government a bonus of $30m, as well as a 2% royalty on gas volume and a 40% share of net profits. Astana's share of net profits was to be subject to review every five years. Tractebel was to invest $600m on planning, repairs, and new facilities.