Kazakhstan 2014 | ENERGY | REVIEW: ENERGY

Kazakhstan will have to wait a while longer to join the leading ranks of oil producers, as delays hit the Kashagan oil project. The long term, however, is looking bright in revenue terms.

Flows from the $50 billion offshore Kashagan oil field project, originally due in 2014, could now be delayed until as late as 2016 as vital works are carried out. The oil and gas sector's contribution to the economy remains significant; however, the government will have to remain patient before it can factor Kashagan proceeds into its budget.

The oil and gas sector represented around one-quarter of GDP in 2012, up from just 11.9% in 2001, according to Ernst & Young (EY). The sector is also responsible for a sizable chunk of the country's FDI inflows, with 21% of the total haul heading for production and 25% for exploration over 2012.

According to BP's Statistical Review of World Energy June 2013, the country has proven oil reserves of 30 billion barrels of oil and 45.7 trillion cubic feet of natural gas, or 1.8% and 0.7% of total global reserves, respectively. Those reserves account for roughly half of total government revenues, making public consumption susceptible to falls in production or international price fluctuations. But production is currently on the up, with total oil and gas condensate output in 2013 up 3.2% YoY to 81.8 million tons, of which 72.1 million tons were destined for export, a figure also up 5.1% YoY. Forward predictions from the government suggest production could reach 90 million tons in 2015 and as much as 110 million tons in 2018. That pace would place Kazakhstan, according to the International Energy Agency's World Energy Outlook 2010, among the world's top-10 hydrocarbon exporters. In terms of the future, the Kashagan oil field project looms large, and its failure to begin pumping in 2014 could cost the economy 0.5 percentage points in growth over the year. When things do begin to flow, however, the state will be at the forefront—the government has gradually ramped up its participation in the oil and gas sector over recent years, with state-owned KazMunayGas controlling 20% of total proven oil and gas reserves, 27% of oil production, and 14% of gas production. It also has a 16.88% stake in the Kashagan consortium, the North Caspian Operating Company (NCOC).


According to EY's Kazakhstan oil and gas tax guide 2014, there are 172 oil and 42 gas condensate fields, including 80 that are under development. However, the sector is dominated by 15 larger fields, among which are the illustrious Tengiz oil and the Karachaganak oil and gas fields, as well as the Kashagan oil field, with the three together representing 50% of the country's reserves. Tengiz is operated by Tengizchevroil, a joint venture between Chevron (50%), ExxonMobil (25%), KazMunayGas (20%), and LukArco (5%). It has recoverable oil reserves of up to 1.1 billion tons and has been under development since 1993. In 2013, Tengizchevroil reported the production of 27.1 million tons of oil, up 11.8% YoY. The field is about to undergo significant development, however, following the approval, by Kazakhstani authorities, of the Future Growth Project. Expansion, set to be complete by 2018, will see its production ramped up to 38 million tons in works that will cost $23 billion. The Karachaganak field is operated by the Karachaganak Petroleum Operating B.V. (KPO), owned by BG Group (29.25%), Eni (29.25%), Chevron (18%), Lukoil (13.5%), and KazMunayGas (10%). It has recoverable oil and gas condensate reserves of 1.2 billion tons, in addition to 1.35 trillion cubic meters of natural gas reserves. KPO reported production of 10.2 million tons in 2012, a year in which KazMunayGas purchased its 10% stake in the company, ending the field's run as the last large hydrocarbon project without state participation.


The offshore Kashagan oil field was discovered in 2000 and has proven recoverable reserves of 761.1 million tons. The NCOC consists of KazMunayGas (16.88%), Eni (16.81%), ExxonMobil (16.81%), Shell (16.81%), Total (16.81%), CNPC (8.33%), and INPEX (7.56%). China-based CNPC joined in 2013, buying out a stake formerly owned by ConocoPhillips. But in 2014, cracks found in a pipeline led to a decision to replace a 200-kilometer section, which could see production delayed until 2015 or even 2016. Oil output briefly started in September 2013, but a gas leak quickly shut down production. The project's total cost is $50 billion, and, when fully operational, could see the country producing as much oil per year as Libya.


Kazakhstan gets its hydrocarbons to market via the Caspian Sea, rail links, and pipelines. In 2013, the country exported 72.1 million tons of oil and gas, up 5.1% YoY. The most significant export route is the Tengiz-Novorossiysk pipeline, operated by the Caspian Pipeline Consortium (CPC). It connects the significant Tengiz oil field with Russia's Black Sea coast at a length of 1,510 kilometers. Work is now underway to expand the pipeline's capacity to up to 67 million tons per year. The ground is also being paved for Kashagan, with construction on the Kazakhstan Caspian Transportation System underway to develop oil tankers and terminals and related infrastructure to connect Kazakhstan and Azerbaijan across the Caspian Sea, as well as infrastructure to link up the Tengiz and Kashagan fields. When Kashagan finally starts to pump, the route will be crucial if Kazakhstan wants to ensure a diverse base of international buyers.


Kazakhstan's three main refineries are located in Pavlodar, Atyrau, and Shymkent, with Pavlodar using imported crude oil from Siberia and the others relying on domestic supplies. According to EY, total refining output was 14.3 million tons in 2013, up 0.7% YoY. The largest refinery is Pavlodar, at 5.09 million tons, Shymkent, at 4.9 million, and Atyrau, at 4.4 million tons. In 2014, officials predict that 14.65 million tons will be produced.


Kazakhstan has proven gas reserves of 45.7 trillion cubic feet, with 23% located at the Karachaganak field. Total production of natural and associated petroleum gas was 42.3 billion cubic meters (bcm) in 2013, up 5.5% YoY. Of that total, 22.8 bcm was marketable gas, according to EY. The country now hopes to boost the overall figure to 41 bcm in 2014 and 45 bcm in 2015.


Kazakhstan's electricity sector has been transformed over the last 20 years, having undergone a process of privatization and reforms aimed at unbundling activities. According to the US Commercial Service, power generation was estimated at 93.76 billion kWh in 2013 versus a forecast of 97.91 billion kWh in 2013. The 2013 figure was up 4.6% on 90.5 billion kWh in 2012. Generation capacity is now expected to grow to 124.5 billion kWh by 2015, at an average annual growth rate of 4.4%. To make that a reality, officials are hoping to pull in $21 billion in investment by the big year. Kazakhstan's significant industrial matrix, including its mining and hydrocarbon activities, consume 75% of the power in the country, followed by households with 11% and transportation on 2%. Renewables are still in their infancy in the country, representing just 0.5% of capacity currently. By 2016, the government, through the Electric Power Industry Development Program, requires this figure to reach 1%, with wind power and hydropower highlighted as the most promising areas for development.

The energy sector's significance to government revenues continued in 2013, with delays at Kashagan a blow to the public investment program. Crucial for the construction industry especially, the boost to government revenues Kashagan will bring will likely be a spark for faster growth across the economy. Until then, works on infrastructure will continue to prepare Kazakhstan as it gets ready to become a more important global oil producer.