ANALYSIS: Kashagan leads Kazakhstan to increase trans-Caspian oil exports

analysis

ANALYSIS: Kashagan leads Kazakhstan to increase trans-Caspian oil exports

By SRI ⋅ July 10, 2008 ⋅

Kazakhstan and Azerbaijan have culminated years-long negotiations with agreements that increase the amounts of Kazakhstani oil to be shipped across the Caspian Sea, supplementing Azerbaijani crude in the Baku-Tbilisi-Ceyhan (BTC) pipeline.

Still more significant, redevelopment and expansion of ports on Georgia’s Black Sea coast now prepare the way for Kazakhstani crude to enter the Odessa-Brody pipeline (OBP), which will be reversed again so as to flow east-to-west, and so to reach world markets by way of Gdansk. This oil will come from the massive offshore Kashagan field or even the onshore Tengiz field itself.

The Kashagan field in the Kazakhstani sector of the Caspian Sea remains the largest oilfield discovered since Prudhoe Bay, Alaska, in 1968. Measuring 25 by 45 miles, two and a half times the size of the nearby and better-known onshore Tengiz field, it is routinely ranked as the fifth or sixth biggest in the world and has the largest reserves of any oilfield outside the Middle East. These reserves are currently estimated at 38 billion barrels, of which up to 13 billion are judged recoverable. However, a combination of formidable technical obstacles has delayed the field’s entry into production.

For example, temperature extremes range from -25 to +100 degrees Fahrenheit (-30 to +40 Celsius). The waters are shallow, generally no more than 10-12 feet deep, and freeze over for at least four months of the year on average. Also, the reservoir itself is rather deep and under very high pressure. Moreover, the sulfur content is estimated to be between 16 and 20 per cent, and would corrode pipelines if not treated and removed beforehand. Finally, Kazakhstani law requires that the associated natural gas be captured rather than flared, and it also has provisions requiring appropriate care be taken not to damage the environment, including delicate, protected plants and animals.

About 80 percent of Kazakhstan’s oil has nowhere to go today, other than through Russia’s pipeline system. Half the remainder is exported through the Georgian Black Sea port of Batumi, the seaside capital of the Georgian autonomous province of Ajaria; the rest goes to China. So Kazakhstan has now decided to construct a 590-mile pipeline, for Kashagan oil in particular, running from Eskene, where Kashagan’s onshore processing facility will be located once full-field development gets under way, to the port of Kuryk, near Aqtau. Starting at 500,000 barrels per day (bpd), its volume would later be increased to 750,000 bpd; to this, another 400,000 bpd may be added by doubling the capacity of the Aqtau port itself.

This pipeline, provisionally estimated to cost US$3 billion, will be the main section of a projected Kazakhstan-Caspian Transportation System (KCTS) that will include expanded and upgraded ports as well as construction of tanker fleets and, if necessary, additional pipelines within Kazakhstan itself. Parties to this agreement are the national energy trust KazMunaiGaz, TengizChevrOil (the consortium developing the Tengiz field, led by Chevron), and Agip KCO (the consortium developing the Kashagan field, formerly led by Eni: comprising the national company KazMunaiGaz, holding 16.81%; Eni, Total, and ExxonMobil, and Shell, each holding 16.66%; and ConocoPhillips and Inpex, each holding 8.28%).

By Robert M. Cutler (CACI Analyst)