Kashagan to Feed CPC. Kazakhstan’s giant oilfield set to become a new resource base for the ever-growing pipe

Jan 28. Oil and Gas Industry

By Aider Kurtmulayev

Kashagan to Feed CPC. Kazakhstan’s giant oilfield set to become a new resource base for the ever-growing pipeAn outstanding event took place on Dec. 15 in Moscow: the paperwork set to more than double the capacity of the Caspian Pipeline Consortium (CPC) pipeline from 33 to 67 million tons per year was signed by Russia’s Energy Minister Sergei Shmatko, Kazakhstan’s Oil and Gas Deputy Minister Lyazzat Kiinov, Transneft President Nikolai Tokarev, KazMunaiGaz President Kairgeldy Kabyldin and CPC general director Nikolai Platonov.

Signing this document essentially means launching 10 more oil-pumping stations (two in Kazakhstan and eight in Russia), installing six oil storage reservoirs near Novorossiysk, creating a third offshore mooring at the CPC sea terminal, and upgrading Kazakhstan’s 88-kilometer segment of the pipeline. The $5.4-billion project will run in three stages and is planned for completion for 2014.

“The Caspian Pipeline Consortium is a cutting-edge project, fully in line with Russian national interests,” said Shmatko at the signing ceremony. “Russia retains its status as the largest energy partner and carrier of Kazakhstan-mined hydrocarbons, while Kazakhstan gains an opportunity to export some extra oil, increasing its domestic production.”

The Tengiz-Novorossiysk pipeline is crucial for the development of large deposits in the Caspian region, including projects managed by Russian companies, the minister said. “Producers in Kazakhstan and Russia get full value for their oil while cutting the transportation cost to alternative export routes. Therefore, I want to emphasize the importance of this project for the two economies. Its implementation will actively contribute to the development of energy-related cooperation between Russia and Kazakhstan in future,” added Shmatko.

So, Where’s the Oil?

The project’s financing and profitability are guaranteed by a “pump or pay” agreement which binds the shareholders (production companies) to certain obligations on loading the pipeline with crude to pump. A company that fails to supply the specified volume of crude will have to pay the CPC a sum equal to the amount of uncollected revenue.

Currently the CPC ships over 30 million tons of crude per year. This essentially means that the current project is set to double the pipeline’s capacity. The modernized CPC pipeline will get its oil from the traditional old fields like Tengiz and Karachaganak (over the recent years these projects continue to add up in production volumes), as well as from the recently added fields – Kashagan (Kazakhstan), and Filanovsky (Russia).

Analysts have no issues about the Russian field in question, but do scratch their heads over the inclusion of Kashagan in the project. The key stumbling block regarding this this field (Kashagan holds 0.96-1.23 billion tons of recoverable reserves, and 4.92 billion tons of estimated resources) is the choice of the direction in which its crude will ultimately go. Kashagan is the focal point not only for regional energy-field competitors and transit states (Azerbaijan, Georgia, Iran, Kazakhstan, Russia, Turkmenistan and Turkey), but also for the key energy consumers – the United States, the European Union and China. We are now seeing the grand-total of large-scale geopolitics with billions of dollars at stake; and here, Russia has come out the victor.

BP Walks Out

The topic of expanding the capacity of the CPC has been in the air since the pipeline was initially commissioned over 10 years ago. The partners who objected the expansion, such as BP and Oman, eventually quit the project disillusioned. Today CPC stake-holders are: Russia (Transneft – 24 percent, KTK Kompaniya – 7 percent) – 31 percent; Kazakhstan Republic (KMG – 19 percent, Kazakhstan Pipeline Ventures LLC – 1.75 percent) – 20.75 percent; Chevron Caspian Pipeline Consortium Company – 15 percent, LUKARCO BV – 12.5 percent, Mobil Caspian Pipeline Company – 7.5 percent, Rosneft-Shell Caspian Ventures Limited – 7.5 percent, BG Overseas Holding Limited – 2 percent, Eni International NA N.V. – 2 percent, and Oryx Caspian Pipeline LLC – 1.75 percent. Still, the battle could have been interesting – CPC members include national mouthpieces, joint ventures and transnationals alike.

Also, the biggest geopolitical player, the United States, has always favored diversifying hydrocarbon export routes in the Caspian, as confirmed by the Baku-Tbilisi-Ceyhan oil pipeline (launched in 2006). This status quo has been criticized by many independent experts, who argue that the United States following its political/economic interests has always been able to pressure the multinationals and national companies in the “right” direction. Examples abound.

From this pint of view, the position of U.S.-based Chevron and other transnationals looks increasingly interesting, experts say. “This important achievement was made possible by the leadership and support of the governments of Russia and Kazakhstan. Chevron appreciates the valuable contributions of our partners, Transneft and KazMunaiGaz, toward sanctioning of the CPC expansion project,” said Chevron Chairman and CEO John Watson.

Chevron’s top man is echoed by KazMunaiGaz head Kairgeldy Kabyldin, who emphasized the importance of CPC expansion for delivering the growing supply of Kazakh crude to international markets. “The decision made today is especially relevant within the context of decisions to further increase production at fields like Tengiz and several others. It also yet again confirms the importance of the project as one of the vectors of Kazakhstan oil industry development. We are pleased to be able to attain this challenging objective together with our Russian partners and international oil and gas companies,” Kabyldin said.

So, what exactly had happened?

CPC Tops Kazakhstan Caspian Transportation System

Kazakhstan has always stated its commitment to growing exports of hydrocarbons (this is written in the county’s national security doctrine, too). Examples include trunk oil&gas pipelines to China, marine exports over the Caspian (Aktau-Baku and on by rail to Batumi), Aktau-Makhachkala (and on by pipeline to Novorossiysk), Aktau-Neka (Iran), the acquisition of the Batumi Oil Terminal and the Rompetrol Group NV (TRG), owners of the Romania-based Petromidia refinery, etc.

But the KazMunaiGaz CEO’s speech does not mention Kashagan. It was Kashagan oil that Astana planned to export using an alternative to the CPC – the Kazakh-Caspian Transportation System (KCTS) pipeline. The pipeline was conceived as an export route to allow Kazakh crude to bypass Russia on it way to the West. The agreement on oil transportation through the Baku-Tbilisi-Ceyhan (BTC) pipeline (and through Azerbaijan) was signed back in 2006, by Kazakh President Nursultan Nazarbayev and Azerbaijan President Ilham Aliyev. The project received support from the then foreign members of the Consortium: Agip KCO and Tengizchevroil JV (owned by ChevronTexaco Overseas – 50 percent, ExxonMobil Kazakhstan Ventures Inc. – 25 percent, KazMunaiGaz – 20 percent, Russian-American JV LUKArco – 5 percent). Within this $3 billion project the sides planned to install the Eskene-Kuryk pipeline (for Tengiz-produced oil) and oil terminals in Kuryk for blending Tengiz oil and Kashagan oil. The blend was to be exported by tankers (and subsequently by undersea Caspian pipeline) to Azeri coast and into the Baku-Tbilisi-Ceyhan pipeline. Initial planned capacity of 23 million tons per year was to be expanded in line with growing production to 35-56 million tons per year.

A number of reasons marred this scenario: first, the launch of the field was deferred by almost 7-10 years; second, a significant growth of the project costs – from $50-60 billion to $130-150 billion due to difficult environment. Third, a jungle of red tape surrounding the PSA. Fourth, the technical unreadiness of the BTC pipeline to ship the full volume of Kazakhstan oil exports (the pipeline’s capacity had to be increased in light of growing Azerbaijan production). Fifth, good relations with Russia. Sixth, a simple lack of money to finance the project. Seventh, the impact of the economic crisis, volatile oil prices on the global markets, and so on.

Kazakhstan had to adapt a real-life approach to the CPC pipeline development. The decision was an uneasy one – but, as the saying goes, “a bird in the hand is worth two in the bush.”