Local Content development
Since the beginning of the Karachaganak field development, KPO has been actively working to increase the share of local content in the Karachaganak project by involving Qazaq manufactures and service providers, which implies a decrease in imports and an increase in the volume of local goods, services and works in the total volume of goods, works and services procured under the Karachaganak project.
Since 2001, KPO has been developing and implementing a two-year Local Content Development Programme for the Karachaganak project. The objectives of the Programme for the period 2020 – 2021 are consistent with state initiatives for the development of mechanical engineering, industrialization and digitization of the Republic of Qazaqstan and KPO Local Content Development policy. The Programme identifies the target areas for local content development, and also the key indicators for monitoring and assessing performance.
KPO local content development initiatives have led to achieve the following results:
- In 2021, the Local Content share in Karachaganak project reached 68.6 % (US$ 564.3 mln);
- 17.7 % of total goods procured by KPO are locally produced (US$ 26.7 mln) with 8.6 % Local Content share as specified in the SR-KZ Certificate10
Why is it important to us?
The Company fully supports initiatives of the Government of the Republic of Qazaqstan aimed at the development of the local providers and recognizes the importance of attracting more local manufactures for the Karachaganak project implementation. With this end in view KPO implements various initiatives to develop Local Content; mechanisms in the procurement process were introduced to facilitate the participation of local companies in KPO activities. Nevertheless, there are risks associated with the quality of locally produced goods, as well as with an increase in the cost of production both for the Company itself and for the Authority on behalf of the Republic of Qazaqstan and local manufacturers due to the limited raw material market, the taxation system and certification as per international standards.
Graph 27. Local Content Share in total KPO purchases of goods, works and services, 2014–2021
Since signing the FPSA in 1997 by the end of 2021, the cumulative Local Content share in goods, works and services had exceeded US$ 8.85 bln.
KPO gives the highest priority to Local Content share increase for goods locally made in Qazaqstan. The stable growth of overall indicators is achieved thanks to a number of goods’ localization activities implemented since 2014.
In 2021, 50 contracts were awarded for a total value of US$ 59.7 mln to produce goods in Qazaqstan for the Karachaganak project, such as separators, transformers, substations, (electrical & instrumentation), heat exchangers, lighting equipment, remote telemetry units, office furniture, gaskets, chemicals, fastening materials, heating systems, office container, heating / air conditioning system, flanges F22, personal gas detectors, 10” trunk lines, hand tools, LV power cables, spare parts of the electric equipment, valves, Filter Self-Rescuers, safety helmets and boots.
‘Qazaqstani tendering’ contributes to the growth of competitiveness of local manufacturers and suppliers. In 2021, KPO initiated 13 so-called ‘Qazaqstani tenders’ to be held exclusively among local companies for a total value of US$ 50.4 mln. As a result, KPO awarded one contract to the local company worth US$ 1.6 mln. The tender processes for the remaining contracts continue.
KPO intentionally contributes to the sustainable development of manufacturers within its footprint in the West Qazaqstan Oblast (WQO). KPO regularly invites WQO enterprises, including enterprises of the machine building sector, to participate in market research and tenders for the supply of goods, works and services, as well as to various events held by the Company in order to develop and increase the competitiveness of local businesses.
Following the awarded contracts results, in 2021 KPO paid US$ 269.2 mln to the WQO enterprises for deliveries of goods, works and services, and Local Content share reached US$ 201.3 mln or 74.8 %.
‘Qazaqstani tendering’ contributes to the growth of competitiveness of local manufacturers and suppliers.
Development of local suppliers’ potential
The ability to attract competitive local suppliers is one of the critical factors for successful implementation of the localization initiatives.
Under the KPO Local Content Development Programme, which began in 2020, it was planned to have West Qazaqstan Machinery Building Company JSC and JSC Ust-Kamenogorsk Industrial Valves Plant certified as per ASME and API in 2021. At the same time, the set objectives were not achieved, as the contractor, engaged by KPO to provide consulting services in preparing the enterprise for certification, did not fulfil its obligations under the scope of the contract. The Certificate Programme for 2022 has been suspended due to lack of the budget.
As a result of cooperation between KPO and Euroconsultants S.A., which is defined by the World Bank and the RoQ government as a major consultant for local company development, 17 Qazaqstani companies have been certified to ISO 14001,18001, 9001, 45001.
Engagement on local content issues
In order to attract investment for development of local production, KPO continues working with the International Trade Associations. This engagement is aimed at establishing partnerships with international companies to create joint ventures and facilitate the transfer of technology to Qazaq companies.
In June 2021, KPO participated in ITALY-KAZAKHSTAN BUSINESS FORUM, which discussed the issues of attracting international companies to the renewable and green energy area, the development of agribusiness and machine building, as well as the investment attractiveness of Qazaqstan.
On 5th August 2021, KPO organized an online forum on local content development which was held with the support and participation of the Ministry of Energy of the Republic of Qazaqstan, WQO Akimat and the Authority – PSA LLC. The purpose of the forum was to familiarize Qazaqstani companies with the Karachaganak Expansion Project Stage-1A (5ICP), with the project strategy and requirements for local content, as well as to brief engineering, procurement and construction (EPC) contractors with EPC scope of work, potential opportunities in GWS and EPC contractor requirements for local companies.
On 23rd August 2021, KPO separately held an introductory online workshop regarding Karachaganak Expansion Project Stage-1A (5 Gas Injection Compressor GIC) for representatives of WQO industrial enterprises to familiarize participants with opportunities of involvement to the project and to conduct face to face meetings among EPC contractor and WQO companies. As the outcome of the workshop, a visit to WQO enterprises by EPC contractor was organized in order to get acquainted with their production potential.
From 22 to 24 September 2021, KPO took part in the IX Forum of Machine Builders of Qazaqstan and I International Specialized Exhibition on Mechanical Engineering and Metalworking “2021 Qazaqstan Machinery Fair”. The purpose of the forum was to organize a dialogue of machine-building enterprises with the state bodies of the Republic of Qazaqstan and large subsoil users.
On 5th August 2021, KPO organized an online forum on local content development which was held with the support and participation of the Ministry of Energy of the Republic of Qazaqstan
Long-term initiatives
Under the Agreement signed in November 2020 between the Ministry of Industry and Infrastructure Development of the RoQ, the Ministry of Energy of the RoQ, the PSA LLC, the Association of Qazaqstan Machinery Industry and three major Operators: KPO, Tengizchevroil LLP and North Caspian Operating Company, International Centre for Development of Oil and Gas Machine Building (IMBC) was established and began its work in 2021. The International Centre conducts its activities on behalf of the three operators, closely interacting with relevant ministries, the Authority and petroleum associations involved in the development of the national oil and gas machinery building.
The main objective of this Centre is to increase local content in procurement by analysing the demand from the three Operators (TCO, NCOC and KPO) and studying the local market of existing manufacturers that could supply these goods that meet the requirements of the Operators. Also, the function of the Centre is to assist in expanding the production capacity of local manufacturers and developing their potential, where necessary. In addition, close cooperation with foreign companies is expected in the localization of their production in the Republic of Qazaqstan, as well as in attracting investments by facilitating the creation of joint ventures and the transfer of technologies and know-how.
During 2021, IMBC members (TCO, NCOC and KPO) approved the annual work program and budget, policies and procedures. They also provided information on categories of goods that are in demand on a long-term basis and production of which is subject to localization.
In the framework of the Memorandum of Understanding on localization, signed earlier in 2020, KPO continued activities on development of Road maps with the Original Equipment manufacturers. The categories of goods and spare parts for potential localization, timing of implementation and the estimated production scope in RoQ were defined. By the end of 2021, five Road maps were signed with such companies as Baker Hughes, Honeywell, nVent and Stuart Buchanan and John Crane, and two contracts for localization were awarded.