The Atyrau Refinery.

On Dec. 29, 2004, KMG E&P got a controlling 50% equity in the 104,427 b/d Atyrau refinery and its petrochemicals producing units, including its polypropylene plant and the Aktau plastics plant. The company said: "These enterprises are considered as a platform for creation of petrochemical technology parks".

The company said KMG E&P, together with the Ministry of Energy and Mineral Resources and KMG Holding, were taking part in the development of "a special economic zone (SEZ) and a "National industrial petrochemical technology park in Atyrau Oblast". On Dec. 29, 2004 shares of KMG E&P were included in a listing of "A" at the Kazakhstan stock exchange.

The company's website said the entry of KMG E&P into the Kazakh stock exchange was "an evident confirmation of adherence to development of the securities market, and also corresponds to the policy of improving of corporate management and increasing of the transparency of the company's activity".

In 2004 the refinery processed 2.91m tons of crude oil, which exceeded its 2003 throughput by 25.5%. Built in 1945 by the Soviet system, the refinery is being modernised and upgraded by Marubeni and JGC Corp of Japan under a turnkey contract signed in 2001 and activated in 2003.

The plant produces motor gasoline, fuel oil, vacuum gasoil, jet fuel, different sorts of petroleum coke, and LPG. Nearly all products are consumed by the domestic market. The upgrading will enable the refinery to produce cleaner fuels.

The Background: Atyrau province in the west is where oil has been produced since 1911 - with Atyrau town split in two by the Ural River which divides Asia and Europe. Near the end of World War II the Soviets built the Atyrau refinery on the bank of the river, close to the Caspian Sea. The plant has seldom operated at its nameplate capacity of 104,427 b/d.

Oil products from the plant are often sold below cost to local farmers during the sowing seasons, as the agricultural sector needs cheap fuel. Surplus output at the refinery is exported through the river and the Caspian.

A majority share in the plant was sold in early 1997 to a virtually unknown firm, Essex Refinery, but by April 1997 the sale was revoked by the government. Later a Swiss firm called Telf Co. acquired a 45% stake, with another 41% held by KazakhOil and the rest by the refinery's staff. In 1999 KazakhOil bought Telf out and raised its stake to 86%.

The refinery, unlike the other two plants, runs solely on domestic crude oils. It is near Kazakhstan's richest oilfields, including Tengiz, Zhanazol, Karachaganak, Uzen, Martyshi and Zhetybay. Some of the local crude oils are very heavy and require special processing capabilities.

The main product has been low quality gasoil. But the refinery produces motor and industrial fuels, such as gasoline, low quality diesel, paraffin and coke. Also produced at the plant are consumer items such as shampoo and cleaning products. Like the other refineries, this plant is operating below capacity.

The Atyrau and Pavlodar refineries have been designed to process Russian crude oils supplied by pipeline from Western Siberia. But now local crudes are being used as well, with the government wanting to reduce the dependence on Russia as rapidly as possible.

The refining sector in Kazakhstan has not received high levels of FDI like other parts of the petroleum industry. Since domestic prices for refined products have remained low, oil producers have more incentive to export crude oil to international markets instead of refining it locally. Consequently, this has affected refinery performance, and Kazakhstan's refineries currently operate at only 51-52% of their nameplate capacity.

The refining sector is supplying the northern region (at Pavlodar), western region (at Atyrau), and southern region (at Shimkent), with total crude oil throughput of 345,093 b/d. The refinery at Pavlodar is supplied mainly by a crude oil pipeline from western Siberia (since Russian reserves are well placed geographically to serve that refinery); the Atyrau refinery runs solely on domestic crude from north-western Kazakhstan; and the Shimkent refinery currently uses crude oil from Kazakh fields at Kumkol, Aktyubinsk, and Makatinsk, although it is linked by pipeline to Russia.

TengizChevrOil (TCO), the Chevron-operated JV eveloping the Tengiz gas field announced in early 2004 that it had started construction of a new gas refinery as part of its "second generation" project which was due to go on line in 2006.

The government initially tried transporting some crude oil by rail to the refineries at Shimkent and Pavlodar. But this proved to be too expensive. It then built a 1,200-km crude oil pipeline from the western oilfields to the refineries at a cost of $1 bn. Work began in 1996 but was only completed in 2005, because the project was executed without foreign help.