KAZAKHSTAN - The Challenge Of Finding Export Outlets.

In his interview with Dow Jones, Minister Izmukhambetov said the Kazakh government and companies working in the vast Central Asian republic were trying to expand current oil export routes through Russia and China, as well as considering alternative outlets for natural gas through China and oil through Azerbaijan oil hub Baku. There is also the possibility of having a natural gas export pipeline across the Caspian Sea to Baku, and from there the pipe would run parallel to the Southern Caucasus Gas Pipeline to Turkey and Europe (see Part 3 in OMT 6).

Analysts, however, say export plans may not be moving fast enough to accommodate the additional output. Dow Jones on June 29 quoted Julian Lee, senior energy analyst at the London-based Centre for Global Energy Studies (CGES) as saying: "It's critical that the export routes are developed in time for the projects to go ahead. But there's still a serious question about whether the routes will be ready in time".

At stake are expansion plans for Kazakhstan's multi-billion-dollar oil and gas ventures run by the world's leading energy companies including Chevron, BG Group, Agip/ENI, ExxonMobil, Royal Dutch Shell, Total and ConocoPhillips. BG Kazakhstan's President Lewis Affleck recently told an industry conference in London: "Access and export routes are critical for expansion and new pipeline infrastructure will be key for Kazakhstan to realize its potential".

BG, in partnership with Agip and other companies, operates Karachaganak oil and gas/condensate field and is planning to double gas output by between 2011-2012 to 16 BCM/year and raise its liquids production. Karachaganak gas is exported through Russia and liquids are shipped via the Caspian Pipeline Consortium (CPC) crude oil pipe through Russia to its Black Sea outlet Novorossiysk. Affleck later told reporters that BG was looking at other alternative routes, including rail, to take new output from the next stage of Karachaganak's development. "It seems reasonable and prudent for us to look at other options", Affleck said, adding: "The rail route for our oil and the gas route to China are among the options we're working on now to allow us to sanction Train 4 on our project".

The Kazakh government is currently conducting a feasibility study on a proposed gas export pipeline to China. For the moment though, companies operating in Kazakhstan are mostly dependent on exporting their crude oil through the CPC line via Russia. The CPC line has a capacity of 35m tons/year, taking crude from Tengiz and liquids from Karachaganak. Although companies have been lobbying hard to almost double the CPC's capacity to 67m t/y by 2010, CPC's biggest shareholder Russia has resisted the move and a concrete agreement still has not been reached and has put plans in doubt.

The recently commissioned crude oil line which takes around 10m t/y to China has added some flexibility. But additional infrastructure is needed to link the giant oilfields in western Kazakhstan with the part of the pipeline which is already in operation for it to be of significant value in the future. The Kazakh government is also working on a major expansion of the new pipeline to China.

Minister Izmukhambetov told Dow Jones: "It should take about two years to complete (the pipeline's expansion) - investment isn't a problem, we can pay for it ourselves", adding that talks were underway to build the final section.

Earlier in June 2006, Astana expanded its options as it signed a governmental deal with Azerbaijan to join the BP-led Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline, which ships Caspian crude oil to European markets via a link across the Caucasus and through Turkey, bypassing Russia. Officially inaugurated at Ceyhan on July 13, the BTC line will eventually have a throughput of 1m b/d, thus giving room for crude oils from Kazakhstan.

Kazakhstan will start pumping its crude into the BTC pipeline from late 2009 or early 2010 as the giant Kashagan oilfield comes on stream and other E&P projects boost output. Izmukhambetov said: "As was agreed we'll be using Azeri and Kazakh tankers to ship the [crude] oil across the Caspian to Baku".

Kazakh volumes of crude oil will increase in 2012 once Azeri production from the Azeri-Chirag-Guneshli complex of offshore oilfield starts to decline and Kazakh output starts to peak. Izmukhambetov said the Baku link will also be used as a potential jumping-off point into other export options, including rail, although he did not elaborate or name any specific routes.

Lee of the CGES said the tanker route across the Caspian Sea from Kazakhstan to Azerbaijan was better suited for smaller shipments. For that route to function well and be commercially viable, tankers would need to be bigger. Lee said: "Small volumes can be moved very easily by tankers, but if you're looking at moving 400,000 to 500,000 barrels a day, you need much bigger vessels and there's no sign that they're being built".

Securing approval from other Caspian states - mainly Russia and Iran - for a pipeline system for oil and gas to run across the sea would be difficult. Russia and Iran do not want to encourage alternative routes which will bypass them.