ANALYSIS: Lack of export infrastructure hinders Kazakhstan’s bid to become oil power

analysis

ANALYSIS: Lack of export infrastructure hinders Kazakhstan’s bid to become oil power

By SRI ⋅ July 9, 2008 ⋅

Kazakhstan, with its vast reserves of hydrocarbons, is on a path to become a petro-power on a global scale. That, at least, is the plan of the Kazakh government, oil companies with access to the rich oil fields of Kazakhstan, and those seeking alternatives to OPEC oil.

However, as oil production in the landlocked country increases in the years ahead, Kazakhstan could find itself without viable export routes to bring its hydrocarbon wealth to market.

In 2007, Kazakhstan produced approximately 1.45 million barrels of oil per day (bpd), of which it exported around 1.2 million bpd. Kazakhstan’s production has steadily risen since the mid-1990s, and the government plans to double today’s output by 2015, when the giant Kashagan field starts to produce and other projects reach peak capacity.

Kazakhstan’s oil flows to the world market mainly through Russia, and to a lesser extent through Azerbaijan, Iran and China. The dominating position of the Russian connection is the consequence of Kazakhstan’s Soviet legacy and the international isolation of Iran, which would offer the most direct and logical export path.

Export options

There are two major pipelines crossing Russian territory and, together, they transport more than three-fourths of Kazakh oil to the world market.

The Caspian Pipeline Consortium (CPC) pipeline was built in 2001 and runs between the Chevron-operated Tengiz oil field and the Russian Black Sea port of Novorossiysk. The pipeline, jointly owned by the Russian, Kazakh, and Omani governments and major oil companies operating in Kazakhstan, is not part of the Russian Transneft system and technically not subject to Russia’s control. Despite this, a continuous struggle over tariffs, structure, and expansion plans between Russia and the other shareholders has accompanied the project from the start.

Kazakhstan is also connected to the Russian pipeline network - Transneft — via the Atyrau-Samara pipeline, the original pipeline that linked Kazakh oil fields to the Soviet energy infrastructure. Before the completion of the CPC pipeline, Kazakhstan exported almost all of its oil through this system.

Currently, both pipelines run at or near full capacity. The CPC pipeline transported around 620,000 bpd in 2007, while the Atyrau-Samara pipeline carried around 340,000 bpd the same year. Expansion plans for both pipelines are in the works but both projects are subject pressure from Russia, which is determined to maintain its position as the gatekeeper of Caspian oil.

CPC’s shareholders are currently in talks to more than double the pipeline’s current capacity to 1.34 million bpd by 2013, when the Tengiz oil field reaches its peak and the Kashagan oil field begins pumping oil. However, key differences among Russia and other shareholders over financing of the expansion and the unsolved issue of how to bypass the congested Bosporus Straits — the link between the Black and the Mediterranean Seas — do not bode well for quick conclusion of the negotiations.

The Atyrau-Samara pipeline is Russia’s preferred export option because it is part of the Transneft network and directly under the government’s control. Transneft recently upgraded the pipeline’s potential capacity, but its usage is subject to Russia’s approval. The Transneft system also lacks a quality bank, and-high quality oil from Kazakh fields sent through the Atyrau-Samara pipeline is mixed with the inferior Urals Blend, making it an unattractive option for Kazakhstan’s producers.

In addition to these two links, the Atasu-Alashankou pipeline exports oil from Chinese-operated oil fields in northwestern Kazakhstan to the Dushanzi refinery in western China. Last year, the exports on this route, operated jointly by PetroChina and Kaztransoil, counted for only 85,000 bpd, but the projected capacity of the pipeline could reach 400,000 bpd.

The remainder of all Kazakhstan oil exports leave the country via rail through Russia, tanker shipments to Azerbaijan, and swap agreements with Iran.

Current capacity insufficient

As the two major Kazakh oil fields, Tengiz and Karachaganak, are about to reach peak production at the beginning of the next decade, and the Kashagan oil field is expected to begin commercial production in 2013, it is clear that current pipeline capacity will be insufficient. This has been a concern for quite a while, as Kazakhstan’s unique geography as the largest land-locked country in the world, surrounded by a potentially unstable mix of neighbors like Russia, Iran and Uzbekistan, clearly leaves exporters with limited options.

Exporting oil from Kazakhstan is enormously expensive and only profitable when oil prices are high, but the cost factor is dwarfed by geopolitical considerations in the Caspian region. It is difficult to overestimate the importance of Russia in shaping Kazakhstan’s export policies, as it competes fiercely with the United States and China for influence over Kazakhstan’s oil. Furthermore, Iran’s international pariah status makes the construction of any major project through Iran’s territory a difficult proposition.

Ever since the discovery of Kashagan in 2000, numerous projects have been proposed to solve the Kazakh export conundrum. The ideas have ranged from a pipeline running to Pakistan and India through Afghanistan to a trans-Caspian underwater pipeline to the more realistic, at least under current conditions, Kazakhstan Caspian Transport System (KCTS), which would link Kazakhstan to the BP-run Baku-Tbilisi-Ceyhan pipeline.

It appears highly unlikely that Kazakh oil will ever flow directly to India or Pakistan as to do so it would have to cross Afghanistan, which is plagued by civil strife and insurgency. The trans-Caspian pipeline option, on the other hand, is hindered by disagreement among Caspian littoral states on how to divide resources under the Caspian Sea.

KCTS, however, appears to be a viable option that would enable Kazakhstan to diversify is export routes away from Russia and relieve some infrastructure constraints on the current system. An energy export treaty between Kazakhstan and Azerbaijan, which gives the project a legal framework, was approved by the parliament and signed by President Nazarbayev last month.

The KCTS project, once constructed, will allow Kazakhstan’s producers to connect to the BTC pipeline via a shuttle system of sea tankers. On the Kazakh side, a new oil port will be built in Kuryk, a Caspian town with a natural harbor, and pipelines will connect it to the participating Kazakh fields. A fleet of tankers will then transport Kazakh oil to a new loading facility near Baku, which will link to the BTC pipeline. The KCTS would be capable of transporting up to 500,000 bpd in its initial stage, with further increases to as much as 1.2 million bpd possible. However, the project is still in a very early stage, with numerous questions lingering concerning everything from BTC’s capacity to which oil companies will be allowed to participate. These questions must be answered before the construction can begin.