Kazakhstan - TengizChevrOil.

Kazakhstan's first big E&P deal was the one signed in 1993 with the US major Chevron to develop the Tengiz field and the nearby Korolyevsky structure in the west. Tengiz is one of the five biggest fields in the world. Found in 1979 by Soviet geologists, it is said to contain 25 bn barrels of high quality oil but with sour gas in place. Of these, 6-9 bn barrels are recoverable. The fields lie in a depression, on the north-eastern shore of the Caspian Sea, in a Palaeozoic Pre-Caspian reservoir - the same as Kashagan's.

The JV developing Tengiz and Korolyevsky, TengizChevrOil (TCO), produces over 300,000 b/d, from 285,000 b/d in mid-2004, 210,000 b/d in June 2000 and 200,000 b/d in mid-1998. Under a $3.6 bn expansion and gas-based EOR programme, this will be raised to 450,000 b/d in 2006, with the increase to begin from August 2005, and to 530,000 b/d by 2007. TCO also produces 2,500 tons/day of low quality LPG and can produce 2.5 BCM/year of gas.

TCO's plateau output is set at 700,000 b/d by 2010 and peak at 800,000 b/d by 2012. But Chevron says it could easily boost output to 1.4m b/d by around 2012 if crude oil prices remain high enough to justify investment in expensive processing plants to separate the sour gas from the oil. The JV is owned as follows:

50% by Chevron Overseas, operator and JV leader, which signed the PSA on April 6, 1993. Originally, Chevron turned down offers to sell any part of its 50% equity. But in January 1997, the US major sold 5% of its stake to LUKoil for about $200m in return for Moscow allowing the use of Russia's pipeline system for TCO exports. Chevron also has 15% in the Caspian Pipeline Consortium (CPC), which has a pipeline transporting Tengiz crude to Russia's Black Sea port of Novorossiysk (see Part 3). In May 2000 Chevron bought a 5% stake in TCO from TengizNefteGaz (TNG, thus raising its equity back to 50% and is said to have paid $450m for this.

25% by ExxonMobil, with Mobil having joined the JV in early May 1996. This US major got the stake in May 1996 from TNG for $1 bn as the JV's assets in the autumn of 1995 were valued at $4 bn. Mobil also got 7.5% in CPC and paid $6m to cover a 1.75% CPC stake bought by MunaiGaz. Exxon acquired Mobil in 1999.

20% by TengizNefteGaz (TNG). Originally it held 50% in the JV. It sold half its equity to Mobil in order to cover debts owed by itself and by the Kazakh government as well as pay for the latter's 19% share in CPC. It sold 5% to Chevron in May 2000 (see background in Vol. 55, No. 4).

5% by LukArco, a JV of LUKoil and BP. LUKoil is the biggest among the integrated oil groups of Russia. LUKoil President Vakit Alekperov had approached Chevron and the Kazakhs before the 1993 E&P deal and PSA were signed, having advised that unless they had a strong lobby in Moscow they would not be able to export oil from the landlocked country.

Alekperov, an Azeri-born oilman moulded by the Russians, belongs to an oil lobby in Moscow which until Vladimir Putin came to power in March 2000 used to be quite powerful. But he remains on excellent terms with the Kremlin. It was thanks to Alekperov - and to other Russian lobbyists courted by Chevron and the Kazakhs - that Moscow gave the green light for the CPC pipeline to be built. LukArco also acquired a 12.5% share in the CPC. (Arco in 1999 was taken over by BP).

Chevron announced in June 1993 that its share of Tengiz and Korolyevsky reserves in the initial phases were 1.1 bn barrels of oil and 1.5 TCF of gas. Its final share of oil reserves may reach 3-4.5 bn barrels, in view of the $25 bn PSA's 40-year production life. TCO's oil production has increased with the coming on stream of Korolyevsky in 2001. Korolyevsky's oil is similar in quality to Tengiz.

With WTI crude now in the $70-75/b range and Chevron having brought operating costs down to $2.5-3/b and raised oil production to more than 300,000 b/d, the TCO partners are enjoying a huge return on every barrel sold. To compare, during 1996 (when prices were not low) they had a return of $4 on every barrel sold. The total cost of producing, processing and transporting Tengiz crude, after having separated the high content of sour gas, is said to have come down to less than $9/b, compared to more than $10/b in 1997/98.

Most of TCO's production is being exported through the CPC pipeline. A part of the output is being exported through a pipeline from Tengiz to Samara, which only can handle 200,000 b/d for Russian and Kazakh crude oils. TCO also exports LPG and sulphur by rail, selling sulphur pellets to China. It markets some of the LPG locally (see background in Vol. 55, No. 4).

Chevron and the other foreign partners have had a turbulent relationship with the Kazakh government. A government fine of $73m/year for three years imposed on TCO for stocking polluting sulphur has compelled Chevron and its partners to have a plant built at Tengiz which turns the sulphur into pellets. The pellets are being exported to China and the Mediterranean.

A bigger problem occurred in November 2002 when the government wanted TCO's PSA terms re-negotiated. The response of Chevron and ExxonMobil was an announcement that TCO's $3.6 bn expansion programme was postponed indefinitely. The Finance Ministry reacted angrily. A subsequent compromise deal is said to have netted the government about $810m in additional income over three years. Before the compromise deal and resumption of work on the $3.6 bn expansion, the government complained that when the US major moved to Kazakhstan in the early 1990s it was dealing with a state that had no experience but had suddently found itself running an independent country. The PSA terms, the state said, were too generous as the US major was seeking to invest out of the field's revenue stream rather than from Chevron's treasury (see background in Vol. 59, No. 7 & Vol. 63, No. 5).

The expansion programme, launched after the government and TCO sealed their $810m compromise deal in early 2003, involves second-generation and sour gas injection projects. The engineering, procurement and construction management (EPCM) contractor for the programme is a US JV of Parsons and Fluor Daniel.

Karachaganak Integrated Organisation (KIO) is a consortium led by BG and Agip which operates the onshore Karachaganak oil and gas/condensate field near the border with Russia's Orenburg field. BG says the field contains more than 2.4 bn barrels of oil and 16 TCF of gas, recoverable over the 40-year life of the PSA. Oil and condensate output averaged 230,000 b/d during the first half of 2005, representing 18% of total Kazakh production. But in recent months the average was 210,000 b/d. KIO has said its output of liquids will reach 230,000 b/d during the second half of 2006 and will be maintained at that level through 2007. This should be raised to 500,000 b/d by 2010.

In previous years, almost all of Karachaganak's crude oil production was processed at Russian facilities associated with the Orenburg field located just across the border. In April 2003, a pipeline spur southward to Atyrau was completed which now connects Karachaganak to Kazakhstan's primary export pipeline, the CPC line. The new connection has enabled increased exports from Karachaganak, and has reduced the consortium members' dependence on Russian buyers.

Karachaganak, a huge 300 sq km structure in north-western Kazakhstan near the Russian border which is an extension of the nearby Russian field, Orenburg, is also producing the average of 7.5 BCM/year of natural gas, up from 7 BCM/year in mid-2005 and 4.8 BCM/year in mid-2002.

BG and Agip are each holding 32.5% in KIO. The other partners are Texaco which is now part of Chevron (20%) and LUKoil (15%). The field is connected to the Orenburg processing system by pipeline.

Oil and condensate exports from Karachaganak began in June 2004, after a delay of nearly a year, through the CPC pipeline and the new offshore South Ozereyka terminal near Novorossiysk, on Russia's Black Sea coast. That was when the first shipments for BG, Agip and Chevron were loaded at the terminal.

KIO suffered production setbacks in 2003 because of oil contamination and improper welds in the pipeline link to CPC - a 635-km Karachaganak-Bolshoy/Chagan-Atyrau pipeline. Oil and condensate production resumed in mid-May 2004 after repairs to the latter pipeline. The oil and condensate are blended with other light/sweet crudes through the CPC system, and sold as Light CPC Blend. Agip and BG each have a 2% stake in CPC.

The first phase of the field's development by end-2000 had cost KIO $2.6 bn. For the second phase, launched in early 2001, KIO has invested another $2.434 bn - with $1.023 bn spent in 2001, $964.7m spent in 2002 and $446.9m spent in 2003. KIO's plan is for peak production by 2010 to reach 500,000 b/d of liquids and up to 27-28 BCM/year of gas, mostly for export.

Projects in the second phase completed in 2003 included the 635-km pipeline from Karachaganak to Atyrau, linked to CPC's Tengiz-Novorossyisk export pipeline through spurs to Bolshoy and Chagan.

Gazprom and KMG have set up a JV to modernise the Orenburg gas processing plant, supplied by KIO. Its capacity will rise from 7 BCM/year to 15 BCM/year. The acquisition, processing and commercialisation of the gas will remain the responsibility of KazRosGaz, a Russian-Kazakh JV created in 2002.

Gazprom and KMG in 2005 signed a long-term agreement for the transit of Russian gas via Kazakhstan. The two groups have made plans for the creation of a new JV, to be in charge of modernisation of the Kazakh gas transmission network, which now is in a very bad condition. This would enable Russia to boost its imports of Turkmen and Uzbek gas, and as a result, its re-exports to Western Europe and the CIS (see background in Vol. 63, Gas Market Trends No. 5).