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Supply Chain Management of Hurricane Hydrocarbons Ltd. -
January 10th, 2011
Hurricane Hydrocarbons Ltd. is an independent energy company involved in the exploration, development, and refining of oil and natural gas, operating exclusively in the Republic of Kazakhstan. Hurricane operates six fields through its principal subsidiary, Hurricane Kumkol Munai. The company also operates its own refinery in Shymkent, Kazakhstan.
Hurricane's stature as an oil producer did not increase meaningfully until the company's fortunes were directed by an ambitious executive named John Komarnicki. Before Komarnicki joined Hurricane in 1989, he held managerial positions at several oil companies, assisting in the stewardship of established, veteran concerns in the industry. At Hurricane, Komarnicki's duties would be different, primarily because the Canadian oil company he was handed control of barely registered as a blip in the industry during the late 1980s. Hurricane's production total in 1989 was a pittance, amounting to 60 barrels of oil a day, giving Komarnicki the opportunity to build an oil company virtually from the ground up, a challenge he accepted with relish.
Komarnicki's aim was clear: to dramatically increase Hurricane's production total. How to achieve this goal was less clear, requiring ingenuity, foresight, and the willingness to take on risk. Komarnicki was convinced that transforming Hurricane into a legitimate industry stalwart would take too long to accomplish by developing oilfields in western Canada. His aggressiveness led Hurricane far afield. Komarnicki resolved to turn to international markets and to develop oilfields in emerging markets, a strategy that offered greater growth potential and greater risk.
Komarnicki was aided in his search for a suitable market by the timing of his decision. At roughly the same time he and his management team launched their search for fertile soil, the Soviet Union was splintering apart, opening up vast tracts of oil-producing fields to Western investment for the first time in nearly a century. Komarnicki set his sights on the Republic of Kazakhstan, a Central Asian country with more than 16 million inhabitants. Bounded by Russia to the north, China to the east, the Caspian Sea to the west, and Kyrgyzstan, Uzbekistan, and Turkmenistan to the south, Kazakhstan became an independent republic in December 1991. The country counted oil production among its principal industries, laying claim to more than five billion barrels of crude oil reserves. Not long after gaining independence, the Kazakh government invited Western oil producers to help develop the country's rich oil reserves. Among the first to arrive was the emissary from a small Canadian oil company, Komarnicki.
Although the potential rewards were large, the intricacies of conducting business in nascent Kazakhstan were foreboding, promising to be fraught with bureaucratic difficulties and a host of other unpredictable problems. Beginning in 1991, Hurricane started conducting business in Kazakhstan, entering the republic through a joint venture with a Kazakh partner. The joint venture was expected to begin producing cash flow within two years, but early optimism faded when Komarnicki was unable to secure the financing he needed. In 1994, the Hurricane president and chief executive officer enlisted the help of Calgary-based Canadian Occidental Petroleum Ltd., but that effort failed as well. Komarnicki did not register his signal success until 1996, but the difficulties he endured during his first five years in central Asia must have been worth the struggle. Overnight, Hurricane became one of the largest oil producers in Canada, a stature achieved solely because of its involvement in Kazakhstan.
Privatization of the Kazakh Oil and Gas Industry in 1996
In mid-1996, Komarnicki brokered his landmark deal, one that would be a blessing and somewhat of a curse for Hurricane during the latter half of the 1990s. Hurricane won an auction to buy 100 percent of the equity voting shares in state-owned Yuzhneftegaz, a Kazakh oil production cooperative that produced 50,000 barrels a day and held 500 million barrels of oil reserves. For a company with virtually no petroleum production before the deal, Hurricane benefited immensely from the acquisition, enabling it to stand tall among Canada's other elite oil producers. By comparison, Imperial Oil Ltd., Canada's largest oil company, boasted 362 million barrels of reserves. The acquisition of Yuzhneftegaz also cast Hurricane into several different roles, as the company assumed the responsibilities and the assets of managing a self-sustaining operation. Included in the deal were a 920,000-hectare farm, complete with sheep and camels, a soccer team, a road construction crew, and a children's camp, all of which Hurricane retained to support the cooperative's 5,000 workers. The Yuzhneftegaz deal closed in December 1996, its value set at $120 million.
From the Kumkol field, Hurricane produced 60,000 barrels a day, a thousandfold increase over the production total supporting the company when Komarnicki assumed the reins of command. The Yuzhneftegaz cooperative was renamed Hurricane Kumkol Munai, a subsidiary that stood as the Calgary-based company's only major asset. Through Hurricane Kumkol Munai, Hurricane sold its production to the local market in east Kazakhstan, using a refinery named Shymkent to process its crude. For a time, the relationship with Shymkent and the isolation of the east Kazakhstan market served Komarnicki's company well. Hurricane Kumbol Munai operated as virtually the only producer in the area and the Shymkent refinery operated as the only buyer. The arrangement and relationship with Shymkent soon soured, however, sparking acrimony that led to what the Oil Daily, in a December 19, 2000 article, referred to as "scenes of almost total farce." The trouble came from the west, and it arrived in 1998.
In western Kazakhstan, Chevron Corporation was busy developing the massive Tengiz field, an ominous development for Hurricane. Through Tengizchevroil, a Chevron-operated company, 70,000 barrels of crude per month began arriving by rail to Shymkent in 1998, ending Hurricane's monogamous relationship with its refinery. The Shymkent refinery found itself in a position of power, strengthened by having the luxury of two suppliers. The refinery took advantage of its new power and negotiated a lower buying price with Hurricane, which delivered a blow to Komarnicki's profit margins. When Komarnicki announced a nearly 25 percent drop in price between Shymkent and Hurricane Kumbol Munai, shareholders and the NASDAQ and Toronto exchanges were quick to react. Shareholders were angry, their ire piqued by one two-day period that saw Hurricane's stock price plunge 25 percent. In response, Komarnicki announced that the company was attempting to expand beyond the local Kazakhstan market, offering China and Turkmenistan as two viable options. Toward this end, Hurricane invested in a rail trans-shipment terminal at Druzhba on the Chinese border. Exporting to Turkmenistan involved pumping oil through an existing pipeline running south from Shymkent, a journey that would continue through Uzbekistan to the Chardzhou refinery located just inside Turkmenistan.
At the time the problems with the Shymkent refinery surfaced, Hurricane ranked as the second largest foreign oil producer in Kazakhstan, maintaining interests in eight oilfields. The company had grown enormously under Komarnicki's direction, building its revenue volume to $168 million by 1998, but Komarnicki did not stay on to spur further growth. In December 1998, the Hurricane president and chief executive officer abruptly resigned, ending his nine-year tenure at the company. Komarnicki insisted his departure was his own choice, although he conceded that some institutional shareholders were dissatisfied with the company's performance and direction. "People who build companies sometimes don't want to run them," he told Canadian Business in a December 24, 1998 interview. "There's great excitement and challenge in building companies and not necessarily in maintaining them," he added.
For Komarnicki's part, his departure may have been well timed. The problems stemming from Hurricane's relationship with the Shymkent refinery worsened as the 1990s ended. Hurricane's vulnerability to the pricing decisions of Shymkent was compounded by slumping oil prices, the combination of which spelled disaster for Hurricane. In May 1999, the company was forced to seek court protection from creditors under the Companies' Creditors Arrangement Act. Meanwhile, the problems with Shymkent escalated. In September 1999, Hurricane threatened to take the Kazakh government to international arbitration at the U.N. commission on international trade in Vienna. In a letter to Kazakh Prime Minister Nurlan Balgimbaev, the company stated that it would ask for international arbitration unless the government restrained the alleged monopolistic activities of the Shymkent refinery, which continued to process all the crude produced by Hurricane.
Becoming an Integrated Energy Company in 2000
Hurricane's salvation arrived nearly a year after the company sought court protection from its creditors. In a deal that took months to conclude, Hurricane and the investment affiliate of the Kazakh banking group Kazkommertsbank interlocked assets. The investment affiliate, Central Asian Industrial Holdings (CAIH), acquired 33 percent of Hurricane, which enabled Hurricane to purchase an 88 percent stake in the Shymkent refinery. The agreement was credited with freeing Hurricane from court protection and enabling the company to pay $87 million to its bondholders. In the months that followed the spring 2000 conclusion of the deal, the advantages of possessing a controlling interest in Shymkent became manifest.
The effect of the deal with CAIH was almost immediate, dramatically reversing Hurricane's fortunes. During the second fiscal quarter of 2000, Hurricane posted $48.4 million in net profit. During the same period one year earlier, Hurricane registered a loss of $12 million. In a year-to-year comparison, the difference was equally as profound. During the company's beleaguered 1999, it generated $155 million in revenue, from which it earned $8.5 million. In 2000, the company's profit equaled its 1999 sales volume. For the year, the company generated $532 million in revenue and posted $155 million in net income. In August 2000, encouraged by the success recorded under the new arrangement, the company announced that it would use some of its newfound profits to purchase the remaining 12 percent of the refinery from a group of private shareholders, but the particulars of the deal soon were overshadowed by further problems in Shymkent. By the end of the year, the company was battling--literally--to keep control over the 130,000 barrel-per-day refinery.
In its new battle with Shymkent, Hurricane executives faced Nurlan Bizakov. Bizakov had served as Shymkent's chairman, but when Hurricane took over the refinery, the company abolished the title and fired Bizakov, setting the stage for a serious confrontation. In early October 2000, Bizakov obtained a ruling from a district court that reinstated him as Shymkent's chairman. Hurricane refused to accept the ruling and accused Bizakov of spearheading a slur campaign. Bizakov reacted decisively. In late November 2000, he mustered an armed brigade from the Kazakh Interior Ministry and stormed Shymkent's offices, where he announced he was in charge. Sitting in the office of the absent chairman, a Canadian named Marlo C. Thomas, Bizakov began issuing orders. Not to be outdone, Thomas quickly returned and responded in kind. Within three days of Bizakov's coup, Thomas arrived in Shymkent with his own brigade, which he recruited in the Kazakh capital, and regained control of his office within 24 hours. Bizakov responded by using the same political connections that had enabled him to raise a brigade for the Interior Ministry. In mid-December 2000, the internal affairs department of the south Kazakhstan region filed a suit against Thomas for what it referred to as Thomas's criminal expulsion of Bizakov. The case was transferred to the regional branch of the National Security Committee.
As Hurricane's battle with Bizakov ensued, the company faced another assault. During the first half of 2001, CAIH launched a hostile takeover of Hurricane, seeking to obtain an additional 23 percent of the company, which would give it control over Hurricane. The takeover, begun in April 2001, was motivated by CAIH's belief that Hurricane's management lacked the ambition and expertise to ensure that the Kazakh operations were a success. Hurricane executives were adamantly opposed to the proposal and prevailed. In July 2001, CAIH withdrew its $125 million bid.
As Hurricane planned for the future, the vagaries of conducting business in Kazakhstan continued to present their own peculiar difficulties. Although there were numerous bumps along the road, the company's first decade in Kazakhstan had delivered substantial rewards, enabling Hurricane to shed its anonymity and emerge as a genuine force in the oil industry. As the company plotted its future course, it was taking important steps to improve its profitability, namely by lowering the transportation costs it incurred. In late 2002, the company and state-owned Kazmunaigaz signed an agreement to build a two-stage pipeline that would link the Caspian port of Atyrau to Hurricane's oilfields. Work on the first stage of the project was scheduled to begin in late 2002. The entire pipeline was expected to be completed within three years of the start date.
Principal Subsidiaries: OJSC Hurricane Kumkol Munai (Kazakhstan); Ascot Petroleum Consulting Ltd. (U.K.); Valsera Holdings B.V. (Netherlands); Hurricane Overseas Services Inc.; Hurricane Overseas Limited (Cyprus); Hurricane Kumkol Limited (Cyprus); OJSC Shymkentnefteorsyntez (Kazakhstan; 91.4%); CJSC Hurricane Investments (Kazakhstan); CJSC Turgai Petroleum (Kazakhstan; 50%); Kazgermunai LLP (Kazakhstan; 50%).
Principal Competitors: American International Petroleum Corporation; Kerr-McGee Corporation; Royal Dutch/Shell Group of Companies.
Last edited by netrashetty; January 10th, 2011 at 02:45 PM..