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Kazakhstan 2015 | MINING & ENERGY | REVIEW

The oil and gas sector has long been the workhorse of Kazakhstan, with some of the largest reserves in the world; however, a number of delays to major projects have postponed the country's step to the next level.

Kazakhstan has the potential to be one of the largest producers of oil, ranking second among the oil Soviet republics after Russia and 12th globally in proven oil reserves with 30 billion barrels locked underground. The country's three largest fields are Tengiz, Karachaganak, and Kashagan. However, delays in exploiting the Kashagan field and the distance of the landlocked country from the international oil markets have hampered growth in the sector; however, in 2014 Kazakhstan still produced 1.7 million barrels per day. “The Republic of Kazakhstan occupies 18th place in the world in terms of the production of primary energy resources," according to Vladimir Shkolnik, the Minister of Energy. This puts the country in the company of Qatar and Angola in terms of production size. The oil and gas sector plays a major role in the economy of Kazakhstan representing 25.2% of GDP according to the latest figures from the Ministry of Economy and Budget Planning in 2012. This number has been falling slightly since 2010 when it was 28.3% of GDP. This decline is in line with the country's efforts to diversify its economy away from oil and gas. Still, the sector is very dominant and a major source of FDI, taking in 21% of all incoming FDI in 2012 according to the National Bank of Kazakhstan. This was only beaten slightly by geology and exploration works that accounted for 25%. However, exploration and geology FDI has been falling since 2005 when it accounted for 52% of FDI while the oil and gas sector still represent 20%. While FDI inflows remain steady, production is increasing. In 2013, Kazakhstan produced 81.8 million tons of oil, a 3.2% increase on the year before of 79.2 million tons. In 2014, production levels were expected to increase to 83 million tons, 1.4% increase while by 2018 levels should top the 100 million mark and hit 110 million tons per annum, representing a 34.5% on the 2013 production value. In 2013, the top five fields in terms of production were Tengiz (27.1 million tons), Uzen and Emba (12.4 million tons), Karachaganak (11.7 million tons), Kalamkas and Zhetybai (6.1 million tons), and finally Zhanazhol and Kenkiyak (5.9 million tons). Kazakhstan also wants to increase it gas production to 45 billion cubic meters (bcm) by the end of 2015 up from 42.3 bcm in 2013 according to BP's latest Statistical Review of World Energy. There are 172 oil and 42 gas condensate fields in Kazakhstan, of which 80 are being developed and have been registered in Kazakhstan. While there are many fields in Kazakhstan, over 90% of the country's oil and gas resources are concentrated in the top 15 largest fields, with Tengiz, Kashagan, and Karachganak begin the top three.

KASHAGAN

To meet its targets of 110 million tons by 2018, Kashagan coming online and fully operational will play a major role; however, it won't be producing anything until late 2016 as the hostile Caspian Sea continually damages and hampers one of the world's largest industrial projects. The main problem stopping production is with two pipelines connecting the offshore island to an onshore facility. The project is run by Eni SpA, Total, Shell, and ExxonMobil, and in a recent statement to the press acknowledged that the two pipelines would have to be completely replaced, something that would cost around $4 billion to repair. The icy cold conditions and violent nature of the north Caspian Sea make it difficult for workers and even harder the equipment. The delay is a major blow to the government, which expected the project to be producing 370,000 barrels a day by now from an initial 180,000. Surveys suggest there are 13 billion barrels of recoverable oil locked under the sea waiting to be exploited. Still, this could be a blessing in disguise as oil prices have plummeted recently hitting record lows and putting significant strains many oil producing nations. This delay in production may well be long enough to see prices recover and allow Kazakhstan to bypass some of the struggles in national budgets other nations are experiencing due to unpredictable prices. And with over $50 billion invested in the project over the last 17 years, the oil companies and the government need the best price possible when the oil eventually starts flowing if they are to recoup any of the money invested. Of the projects current investors, KazMunayGas NC is the largest with a 16.88% interest, followed by Eni (16.81%), ExxonMobil (16.81%), Royal Dutch Shell (16.81%), Total (16.81%), CNPC (8.33%), and INPEX (7.56%).

TENGIZ & KARACHAGANAK

One field that is up and running is Tengiz. A 40–year joint venture started in 1993 by Chevron Texaco (50%), KazMunaiGaz (20%), ExxonMobil (25%), and LUKArco (5%) is operated by Chevron and known as TengizChevrOil (TCO). Oil was first discovered in the field in 1979 and has recoverable reserves of between 6 billion and 9 billion barrels. Production began in 2H2008 after $7.4 billion of investment was pumped into the field with a total of $20 billion expected over the 40-year life of the contract. The production capacity for TCO is up to 540,000 barrels of oil, 46,000 barrels of natural gas liquids, and 760 million cubic feet. In addition to its oil reserves, TCO also holds an impressive amount of natural gas, with the latest estimated putting it around 1.8 trillion cubic meters (tcm). This is a part of the country's total reserves of over 3.1 tcm, which are largely located in TCO and Karachaganak field. The Karachaganak field is an onshore deposit and covers 280 sqkm. Reserves of gas are estimated to come in at around 1.35 tcm and its oil reserves at 9 billion barrels. Eni and BG Group are joint operators of the field with each a 29.25% share in the project. Other partners include Chevron (18%), LUKOIL (13.5%), and KazMunaiGas (10%). KazMunaiGas only came on board in 2012 when it acquired its 10% from the other shareholders. The field was the last large oil and gas development not to have government participation.

EXPORTS

Being a landlocked country can cause problems and raise prices when it comes to exports, especially over long distances. If the sector wants to develop its production, it will have to address certain bottlenecks in regard to exports. Oil and gas is mainly exported via the Caspian Sea, rail cars, and pipelines. The main avenue of exports is through the Tengiz-Novorossiysk Caspian Pipe Consortium (CPC), which connects the Tengiz field with the Novorossiysk oil terminal 1,510 km away on the coast of the Black Sea. In 2013, the CPC exported 28.7 million tons to the refinery. In 2010, shareholders agreed to expand the pipeline's capacity from 28.7 million tons to 67 million tons a year. This expansion would then transfer 52.5 million tons of Kazak oil per year. Work began in 2011, but in 2013 shareholders announced the project was running behind by up to a year. Another significant pipeline is the one heading east to China. The Atasu-Alashankou pipeline has an annual capacity of 10 million tons and first came online in 2006. The project was split into two phases with the second being the Kenkiyak-Kumkol oil pipeline, again with a capacity of 10 million tons per year. Work began on Phase II in 2007 and was completed in 2009. Phase II allowed the connection of the Kenkiyak-Atyrau pipeline to the Kumkol-Atasu pipeline, which secured the safe and easy transport of oil from the Aktobe region and Western Kazakh fields to China.

REFINING

There are three main oil refineries in Pavlodar, Atyrau, and Shymkent. Pavlodar is supplied by West Siberia's crude oil, which in the future should hopefully switch to Kazakh oil instead. Atyrau is supplied solely by domestic crude from the northwest of the country while Shymkent is largely supplied by the Kumkol fields. Kazakhstan is undergoing a modernization program in its refineries in an effort to add value to its product. The sector has set a goal of reaching an average of 10.2 on the Nelson Complexity Index, an average of 89% refining depth, and the ability to produce high-quality motor fuels of Euro-4 and 5 class. In 2013, Kazakhstani refineries increased production by 0.7% compared to the year before by refining 14.3 million tons of oil. Pavlodar performed the best with 5.09 million tons, Shymkent at 4.9 million tons, and Atyrau at 4.4 million tons. In 2014, production is expected to increase by 2.45% to 14.65 million tons.

The harsh environment of the Kazakhstani winter is taking its toll on development in the country and delaying projects. The falling oil price is also making many oil companies think twice before investing large sums of money. However, prices are sure to increase again one day and by that time Kazakhstan should have a number of viable export routes and fully operational oil and gas fields.

Elvis Roberts
ELVIS ROBERTS
Managing Partner, CRUZ Logistics LLP
The traditional conception of logistics is moving cargo from one place to another, but we aim to give local people and foreign investors a deeper understanding of what goes on, because many people have no concept of what logistics is. Infrastructure development is in its early stages here; they are building new electric lines according to international standards. But the existing infrastructure needs significant upgrades.