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KAZAKHSTAN - Part 3 - Oil Exports Keep Rising.

Kazakhstan has become an important supplier of high quality oil. It exports of crude oil and condensate have risen to 1.1m b/d, up from 810,000 b/d in mid-2002, and 473,000 b/d in 2000. Exports will be higher later this year.

Kazakh exports of petroleum liquids may reach anywhere between independent forecasts of 3.6m b/d and a local prediction of 7.5m b/d by 2020. The country's exports of natural gas would rise from 1 BCM/year in 2000 to about 29-35 BCM/year by 2020.

The rise in Kazakh exports is due to a big increase in production since world oil prices firmed up in March 1999 (see OMT & Gas Market Trends No. 5) and the coming on stream in 2001 of the country's main export pipeline from the Tengiz field to Russia's Black Sea port of Novorossiysk. This outlet is run by the Caspian Pipeline Consortium (CPC).

The Russian pipeline system delivers 50 million tons/year of Kazakh crude oil to Novorossiysk, compared to the 30 million tons/year carried by the CPC system. The CPC pipeline can run at almost 700,000 b/d, having reached that peak once in 2005.

The Russian business daily Kommersant on July 26 said Moscow had frozen the accounts of the CPC over a back tax claim. It quoted sources at Chevron, which operates the CPC, as saying Russia's Federal Tax Service froze CPC's accounts at the Russian subsidiary of ABN AMRO bank over back tax claims of 4.7 bn roubles (US$174.7m). It operates the only oil pipeline route in Russia not controlled by Russian state oil pipeline monopoly Transneft. CPC handles a major part of the crude oil exports from Kazakhstan via Russia to the Black Sea. The CPC is managed by Chevron, which operates the Tengiz oilfield.

Kommersant said CPC had stopped loan payments to shareholders and was expecting fresh tax claims, with the US$174.7m said to be owed to Transneft. Chevron is a 15% shareholder in CPC, while Russia holds 24% in the consortium and the state of Kazakhstan (KMG) holds another 19%. The integrated Russian oil major LUKoil holds 12.5% and Oman 7% in the CPC. Kommersant said Transneft wanted to reclaim shares in the CPC, which would transfer to it the Russian state's 24% stake. Other partners in the CPC include ExxonMobil, Shell and BP. It is not yet clear how this will affect CPC's export operations.

Last March the CPC expressed concern that plans to double its capacity to about 1.2m b/d may stall unless shareholders approved the proposals by June. The last year asked shareholders to approve its expansion by January so it could reach full capacity three years earlier than planned.

CPC's Chief Executive Officer Ian Macdonald then said in Moscow: "It has to be agreed in the next two or three months. If it is not, then you have to stop negotiating; you can't keep talking forever". He was speaking at an energy security conference in the Russian capital, adding: "It just needs someone with a little bit of leadership to stand up".

Kazakhstan officially joined the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline venture on July 14, an important artery transporting Azerbaijan's Caspian oil to Mediterranean markets while sidestepping Russia. The pipeline, backed by the US, is a key venture aimed at reducing Western dependence on Middle East oil. It bypasses the shipping bottlenecks at the Turkish straits where in winter oil crude shipments can be held up for weeks.

"We've now secured a third alternative way of selling our [crude] oil", Kazakh President Nursultan Nazarbayev said after signing an agreement alongside his visiting Azeri counterpart, President Ilham Aliyev. (The second alternative outlet for Kazakhstan is a pipeline now carrying a crude oil to China - see following pages).

But shipments of Kazakh crude oil through the BTC system are likely to stay limited until the $29 bn Kashagan oilfield development venture starts produc-ing in 2009. BP, the main partner in the BTC consortium running the pipeline, expects its capacity to reach 1m b/d by 2008, mainly on Azerbaijani shipments.

The state-owned KazMunaiGaz (KMG), whose Trade House KMG was set up in March 2002 to oversee the country's oil and gas sales, marketing and transport, last month indicated that Astana planned to send its crude oil to Baku (Azerbaijan's coastal capital) by tankers across the Caspian from its western oilfields. Bigger volumes will be carried by tankers from the Kashagan field, being developed by a group of foreign majors led by Agip of Italy's ENI.

Reuters in July quoted a "source in Kazakhstan's oil industry" as saying: "It's possible that Kazakhstan would ship three million tons via Azerbaijan before the end of the year. It's technically possible". BP and the government of Azerbaijan have been optimistic about Kazakh crude oil shipments, expecting them to gradually reach 35m tons/year.

Reuters quoted the same source as saying: "The ceiling is 25-30 million tons [a year], and that's no sooner than Kashagan comes on stream". The agency said Kazakhstan planned to raise crude oil production to 64-65m tons in 2007.

In the first half of 2005, according to official data released recently, Kazakhstan's oil and condensate exports averaged 1.1m b/d and went in three directions: northwards (via the Russian pipeline system and rail network); westwards (via the CPC system and barge to Azerbaijan); and southwards (via swaps with Iran). Kazakhstan also exported about 30,000 b/d eastwards to China via the Alashankoy rail crossing in 2005. The volume and pattern of exports in the first half of 2006 were roughly the same.

The connection to the Persian Gulf has allowed some Kazakh crude oil (or proxy crude from Iran) to be traded on the world market as well. Efforts are underway to expand the country's export infrastructure, especially to the east, over the next decade as Kazakhstan's oil production increases.

The Kazakh energy minister has stated that, despite the Russian and CPC systems and the Kazakhstan-China and BTC pipelines, Kazakhstan will still have a need for additional export routes for about 300,000-400,000 b/d by 2011. During a visit to Astana on May 5, 2006, US Vice President Dick Cheney encouraged President Nazarbayev to speed up work on having oil and gas export pipelines built across the Caspian Sea to Baku so that major volumes reach the Western markets through Azerbaijan and Turkey. But Russia and Iran are strongly opposed to the idea of having pipelines built across the Caspian.

In May 2005, Astana announced that it would agree to increase export shipments on the Caspian to Baku from 145,000 b/d in the short term to about 760,000 b/d by 2016. Later it was said that the volume in the short term could exceed 450,000 b/d by 2010, on the assumption that Kashagan's second phase of development would have gone on stream by then. But now it is said this target would not be attained by 2010, as Kashagan's first phase (to produce 75,000 b/d) may not be on stream before mid-2009 (see OMT No. 5).

There is a proposal to build an export pipeline from Kazakhstan to Iran via Turkmenistan, for crude oil, but the proposal has yet to gain support from Western investors. The main obstacle is strong Washington opposition to the use of Iran as a transit route for any energy export project as long as the Shi'ite theocracy of Tehran maintains policies and projects not acceptable to the US, such as Iran's nuclear ambitions (see this week's APS Diplomat in news6-LebanonIranUSAug7-06).

Kazakhstan has also taken a heightened interest in sending crude oil over the Black Sea to the reversed Odessa-Brody pipeline. The state of Ukraine had built a 280,000 b/d crude oil pipeline running from Odessa to Brody, on the Polish border, for $500m. Kazakhstan has proposed using this line if it extends to Poland's Baltic terminal of Gdanzk. But because talks have been dragging on inconclusively, the Russian-British JV, TNK-BP, in mid-2004 decided to have the pipeline's direction reversed to boost its crude oil exports to Europe. TNK-BP then said the controversial deal, announced in mid-2004, was to take pressure off world oil prices by making room for increased Russian oil exports. This was in the face of strong opposition from the US, the European Union and Turkey, as TNK-BP agreed to pump at least 9m tons of crude oil for a period of three years, or about 200,000 b/d, through Odessa-Brody, which links an oil pipeline hub in western Ukraine with an oil terminal near Odessa (see Vol. 63, OMT No. 6).
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Publication:APS Review Oil Market Trends
Date:Aug 7, 2006
Previous Article:TURKMENISTAN - Burren Energy.
Next Article:KAZAKHSTAN - Export Tax.

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