Kazakhstan 2018 | ENERGY & MINING | REVIEW

Kazakhstan is significantly increasing oil production in order to meet economic needs and generate revenue.

An oil producer for more than a century, Kazakhstan's energy sector has long been one of the nation's core industries. One of the world's largest non-OPEC producers, the nation has an estimated 30 billion barrels of oil reserves as well as 85 trillion cubic feet (tcf) of natural gas reserves. The oil boom of the first decade of the 21st century saw Kazakhstan more than double oil production by opening up the market to foreign investment, which allowed it to take advantage of previously underdeveloped fields. After producing fewer than 800,000bpd at the turn of the 21st century, Kazakhstan's oil output reached 1.6 million bpd in 2016, making it a significant player in the global energy sector. With sky-high oil prices for the larger part of a decade, Kazakhstan's economy mirrored the increase in oil revenues.

Today, however, the country finds itself in a more complex situation. A fall in oil prices beginning in late 2014 means that oil production is no longer an easy path to explosive growth. While Kazakhstan has embarked on economic diversification programs, the oil sector will remain at the center of its economy for the near future. To better manage a shifting landscape, the Kazakh oil industry has focused on increasing output. Increased investment and technological advancements have allowed for production at the Kashagan offshore field again, and in 2018 Kazakhstan expects to produce at levels close to historic highs. In the natural gas sector, Kazakhstan expects to increase production as well. Finally, Kazakhstan's position at the intersection of Europe and Asia gives it unique influence over oil and natural gas pipelines, and it expects this to play a role in its future ambitions.

Kazakhstan's proven oil reserves are the 12th largest in the world and the second largest in Eurasia behind only Russia. Historically, production has been concentrated in the Tengiz and Karachaganak, onshore fields in the northwest. Tengiz, first discovered in 1979, is the world's deepest super giant oil field. After the fall of the Soviet Union, Kazakhstan formed the Tengizchevroil (TCO) partnership to operate the field; originally majority owned by the government, today Chevron owns a controlling stake in the field while ExxonMobil and state-owned KazMunayGas (KMG) hold minority shares. Karachaganak is operated by a consortium headed by joint operators Shell and Italian firm ENI. In 2000, Kazakhstan made the largest new oil discovery in 30 years when the Kashagan field in the Caspian Sea was discovered. With estimated reserves of more than 13 billion barrels, the field was expected to become the new centerpiece of the Kazakhstani oil industry, but a combination of ownership disputes and project issues due to the harsh conditions of the Caspian Sea resulted in more than a decade of delays. Production finally began in 2013 under a consortium that features ENI, ExxonMobil, Shell, and French oil giant Total equal partners with KMG, with China National Petroleum Corporation (CNPC) a minority shareholder.

The opening of the Kashagan field marked the next step in oil production. In the first 11 months of 2017, 7.3 million tons of oil were produced at Kashagan, above initial projections of 5 million tons. For 2018, capacity is expected to reach 370,000bpd, and this could reach 450,000bpd if a proposed USD2-billion expansion plan is implemented. Tengiz and Karachaganak are both in the midst their own expansion projects; after a 2008 expansion brought Tengiz's capacity to just under 600,000bpd, the TCO partnership announced that an additional expansion will add 260,000bpd of capacity. Once completed in 2022, the expansion will solidify Tengiz's place at the core of the Kazakh oil industry. Karachaganak's current production capacity is just over 200,000bpd, with an expansion plan still in the early stages. All told, Kazakhstan expects to produce 87 million tons of oil in 2018, equal to more than 1.8 million bpd, and increasing to 88 million tons by 2020.

This increase comes at a time when several other oil-producing nations are enacting production cuts in order to better control prices. In November 2016, a consortium of OPEC and other oil-producing nations came to an agreement to collectively reduce output by 1.8 million barrels in order to put upward pressure on prices. Kazakhstan's part of the agreement called for it to reduce output by 20,000bpd, but data from 2017 showed that the nation was exceeding this target by 130,000bpd by the end of 2017. Kazakhstan remained a part of OPEC's pact, however, because the organization as a whole was able to meet its output goals. In light of Kazakhstan's economic situation and the recent start of operations at Kashagan, the two parties came to an agreement to exempt the oil industry from production cuts. OPEC's oil cuts, which are expected to last at least through the end of 2018, have led to moderate gains in the price of oil. This has been a welcome sign for an industry gearing up to install new capacity.

Kazakhstan has estimated natural gas reserves of 85tcf, with most of these in its crude oil fields; more than 30% of the natural gas it produced in 2015 was re-injected to increase oil production. The Tengiz field has a natural gas processing plant that produced 274bcf in 2016 to be sold in local markets. Kashagan's natural gas production has been slower to develop than its oil, but it is projected to produce 100bcf per year once fully operational. The natural gas at the Tengiz and Kashagan fields is difficult to process because it is high in sulfur, mandating the usage of expensive additional processes to handle and store this waste; the issue of dealing with the high levels of sulfur at the Kashagan field was one of the causes of its production delays. Karachaganak's natural gas is less difficult but the site lacks the facilities needed to process all of its natural gas. As such, most of its natural gas is exported to Russia for processing.

Kazakhstan has been in talks with international hydrocarbon firms to build a new natural gas processing center at the Karachaganak field for several years, but disputes over tax payments and ownership obligations have led to delays. As of late 2017, Kazakhstan's energy minister was optimistic about an imminent resolution to the issue, but no additional progress has been announced. Expansion work in the Kazakhstan-China pipeline has increased capacity to 55bcm per year, and Kazakh officials are optimistic that by working with neighboring countries they can ultimately send more than 100bcm per year to China. A bilateral agreement signed in 2018 solidified this relationship, establishing an export deal of up to 10bcf per year and a joint commitment to improve transport infrastructure. If further developed, this would be a significant source of revenue and stability for the Kazakh natural gas industry. With output projected to increase an average of 4% per year until 2040, a consistent source of external demand would be much appreciated.