Clare Nuttall in Aktau, Kazakhstan -

KazMunaiGas Exploration Production is making a big push to acquire new oil and gas prospects both in Kazakhstan and abroad in order to maintain production levels as its main fields mature.

One of those major ageing assets of KMG EP, the London-listed subsidiary of state-owned NC KazMunaiGas, is the Uzen mega-field in the western Mangystau region. Drillers first struck oil there back in 1960, long before international consortia arrived in Kazakhstan to develop the massive offshore Tengiz and Kashagan oilfields, and the field has been producing ever since.

Conditions are tough at the field, where some 6,000 nodding donkey wells, 3,400 currently in operation, are spread across 60 square kilometres of desert. Temperatures soar to 60°Celsius in summer and fall to -30°C in winter, when oil has to be heated to stop it from solidifying. Since fresh water is scarce in this part of west Kazakhstan, the Soviets decided to extract oil using sea water pumped from the Caspian, which adds to the complexity of the process. "This is a complicated oilfield and lifting costs are high compared to other fields. In Soviet times, Uzen engineers were in high demand because of their experience here," says Vladimir Miroshnikov, KMG EP deputy general director, who started his 40-year career at Uzen. "When a field is close to 50 years old, there are also many difficulties."

Although salaries are relatively high for Kazakhstan - averaging KZT240,000-290,000 a month ($1,600-$2,000) for an operator - life is also tough in nearby Zhanaozen, a one-time workers camp that has now grown into a town of 120,000 people. Due to the town's isolation, food prices are well above average. Crops only grow in irrigated areas, and workers in the fields have to bandage their faces with scarves to stop the sun scorching their skin.

Like Kazakhstan's other oil towns, Zhanaozen sees periodic strikes over pay and conditions. One KMG EP official claims these are being secretly funded by ex-BTA chief and billionaire opposition supporter Mukhtar Ablyazov, who is now in exile in London.

Life after depletion

But by far the biggest fear in Zhanozen is what will happen when the Uzen oilfield is exhausted. Although the Kazakh government is trying to turn Mangystau into a logistics hub, with the construction of the Kazakhstan-Turkmenistan-Iran railway (which runs to Zhanaozen and is due to open later this year) and the Kenderly resort and special economic zone on the Turkmen border, the region is still heavily dependent on the oil industry.

Production at Uzen has fallen somewhat since 2008, and KMG EP says that it is investing into new seismic monitoring technologies that will allow it to detect new wells, extending the life of the field and raising - or at least maintaining - production. Miroshnikov describes the field, which has recoverable reserves of 150m barrels, as still "quite prospective". The company has also bought up neighbouring blocks for exploration work. "Even within Kazakhstan, we are competing with multinational companies, so we can't rest on our laurels, we must maintain our production level and market position," chairman of KMG EP's management board, Askar Balzhanov, told journalists on May 18. "Our 10-year strategy is to become one of the top-30 largest oil and gas companies in the world."

In 2010, KMG EP formulated a strategy through to 2020 that aims to reduce the average maturity of its assets through exploration and new acquisitions both at home and abroad. It is aiming for at least a 120% average annual reserves replacement ratio. In February, the firm said that its reserves replacement ratio for the five years since the IPO reached 178%.

KMG EP has acquired several new exploration assets within Kazakhstan, most recently the Fydorovskiy block through its purchase of 50% in Ural Group on April 19. A week earlier, the company bought up four exploration contracts. However, according to Dastan Abdulgafarav, managing director for new business development, there are limited acquisitions prospects onshore in Kazakhstan. "Our assets are mostly mature and we need to bring down the maturity of our assets because investors are not interested in stakes in a company whose productivity level is decreasing," Abdulgafarav says. "We need to increase our level of reserves. We have high hopes of offshore, and are also looking at exploration and production assets abroad."

KMG EP denies the company, which raised over $2bn through its IPO, will be used to fund parent company NC KazMunaiGas's acquisition agenda. "KMG EP is publicly traded, and is not a cash cow for anybody," Balzhanov said.

Internationally, KMG EP is looking for acquisitions in the $500m to $1bn range. However, though it has looked at 30-40 potential targets in Russia, it hasn't so far found a suitable one to buy. "We have been looking for four years, but so far have not been able to bring a single deal to fruition. The specifics of the Russian market make it difficult to invest there for the time being. If we go into Russia in the future, we would form a joint venture to minimise the risks," Balzhanov told journalists.

KMG EP has also been unsuccessful in Turkmenistan, another potential market, but one where the onshore blocks are reserved for domestic state-owned companies. Offshore, the most promising areas lie in areas of the Caspian Sea that are disputed with Azerbaijan.

KMG EP said its deal with the Iraqi authorities over the Akkas gasfield fell through in May mainly because the terms offered by the Iraqi side were unacceptable. Balzhanov said KMG EP's decision to withdraw from negotiations was not political, but added that "the political realities do determine the willingness of any company to invest in Iraq."

"The events in the Middle East did not tend to make Iraq more attractive," he said. "For us, one condition for going into Iraq was that we would be able to export via Syria, as Akkas is near the Syrian border. With Syria now in upheaval, even if we could produce gas, selling it would be difficult."

However, the company has signed a cooperation agreement with BG Group and is now working on its first international project in the North Sea alongside BG and Maersk Oil, and it recently signed a similar deal with Malaysia's Petronas.