Ed Crooks KazMunaigas steps up its investment plans: another sign of recovery in the oil industry

KazMunaigas Exploration and Production, the London-listed arm of Kazakhstan’s national oil company, is drilling more wells and spending more on raising production than it planned at the start of the year.

Kenzhebek Ibrashev (left), the new chief executive of KMG E&P who took over at the start of June, discussed the plans when he spoke to the FT in London on Wednesday, when he also talked about his company’s ambitions for acquisitions both in Kazakhstan and abroad.

It is the latest sign of an oil company increasing its planned capital spending, following a similar move from TNK-BP last week, and more evidence of how $70 oil is helping restore confidence to the industry.

Like TNK-BP, KMG E&P is an onshore operator working in mature fields, where capital spending can be turned off and on relatively quickly.

At the start of the year, it was budgeting for $40 oil, which meant cutting its drilling programme in half. But in the past few weeks it has reversed some of that planned cut. Mr Ibrashev said:

The number of wells we drill is about 120 to 180 in a typical year. Under our budget for $40 oil, we cut that to 55, but now we have increased it again to 80. We had planned to cut our well workovers by 30 per cent, but now the cut will be less than that.

In other words, activity will still be less than in 2008, but not as much less as had once seemed likely. The present level of the oil price is just about perfect, he adds, because it is not so high as to stoke up cost inflation.

We are fine with $50 oil: that is enough for the dividend, and to keep our capital spending going. Working in the range of $50-$75 is preferable for us. A high oil price leads to a trend of increasing prices of goods and services.

The ageing fields need the investment. Some are 40 years old, he said, and some are 100 years old. (Kazakhstan’s first oil production began in 1911.) Their natural decline rate is about 8 per cent per year. So it is no surprise that because of the slowdown in investment, KMG E&P expects total production to fall by 4 per cent this year, to about 180,000 barrels per day. Thanks to the pick-up in activity, however, it now expects output to rise again next year.

The next thing to watch for is whether the rise in the oil price will bring stability to Kazakhstan’s shambolic banking sector.