Oil and gas in Kazakhstan: dancing the night away

Last week, it was annual party time in Almaty, with oil and gas people from around the globe gathering in a part of Kazakhstan that has little oil and gas to speak of. But for contractors and subcontractors, who pin their hopes on such events to sell products and services, the mood was different from what it had been before. Recent dramatic ups and downs in oil market prices seem to have made people realise that the end of oil as the world’s main energy resource may be one, two or even three decades away, but it is definitely looming.

by Charles van der Leeuw, KZW senior contributor

Oil and gas in Kazakhstan: dancing the night awayThe co-founder of OPEC Sheikh Ahmed Yamani, at the time Saudi Arabia’s almighty oil minister under King Feycal, was to become famous for his blunt statements, one of which has been: “The stone age came to an end not because there was a lack of stone; in the same way the oil age will come to an end not because there will be a lack of oil.” Many a representative at the Kazakhstan International Oil and Gas Exhibition (KIOGE) last week in Almaty could hardly agree more. For the thousands of companies in the world, including oil companies, drilling services and suppliers of equipment, it means clinging on to dear life. “We are already realising that most of us will have to diversify very soon indeed,” one stand-holder admitted.

Most of his colleagues tended to agree. But none of them could – or would – give a clear hint in which direction companies are thinking where it comes to take action. One remarkable exception is the organizer of the event, ITE Caspian (Iteca) of the UK, whose Almaty head office’s Edward Straugh observed: “We are already spreading our activities, both geographically and sector-wise. China is a market where trade events are rapidly developing. We are in the race over there and elsewhere in the world.”

The world’s leading upstream oil and gas contractors such as Schlumberger, Halliburton and Ray McDermott have not performed as badly as most of the oil multinationals so far this year. Thus, Halliburton, though still haunted by Dick Cheney’s dirty image and its asbestos blunders, has seen its overall revenue go up steadily from 10.1 billion US dollar in 2005 to $18.279 billion in 2008. Even though net income has dropped from 2007 to 2008 from $3.486 billion to $2.224 billion mainly due to asbestos claims and lawsuits concerning the company’s dealings in Iraq, capital expenditure has been boosted from $575 million in 2005 to $1.824 billion last year.

Halliburton’s rivals have hardly more reasons to complain. Thus, Saipem of Italy, Kazakhstan’s leading contractor thanks to its ownership by Eni which is a partner in the Kashagan offshore project and a fellow operator in the onshore area of Karachaganak, saw its revenue over the first half of 2009 up to 5.158 billion euro from €4.619 billion in the first six months of 2008. Operating profit and adjusted net profit rose from €492 million and €321 million respectively in the first half of 2008 to €582 million and 374 million in the first half of the current year. However, the breakdown of income explains a lot – in line with overall trends these days.

“The offshore sector accounted for 42 per cent of revenues and 54 per cent of overall operating profits,” the press release accompanying the H1-results reads. “The onshore sector contributed 47 per cent of revenues and 24 per cent of overall operating profits, the offshore drilling sector 6 per cent of revenues and 17 per cent of overall operating profits and the onshore drilling sector generated 5 per cent of revenues and 5 per cent of overall operating profits.” The message is clear: there is a lot more money in development than in exploration these days, and contractors hardly see the need to push for much more business in discovering new reserves.

Oil prices have gained in the order of one-third on top of their long-time lows at the end of last year through the first nine months of the current year. During the third quarter of the year, prices remained stable narrowly oscillating around 70 US dollar per barrel. Natural gas on the FOB spot market at Zeebrugge, Belgium, which is its main outlet to Britain and Ireland, lost half of its sales price in the first six months of this year but also remained stable through the third quarter, oscillating between 24 and 27 pence per British thermal unit. But both oil and gas have closed the first three quarters of 2009 with year-on-year losses in the order of 30 per cent.

While the Organisation of Petroleum Exporting Countries has reacted to plummeting prices last winter by curbing its output, non-OPEC states have done the opposite and keep putting their taps wide open to compensate for losses in sales prices by maximising their productivity. Thus, Kazakhstan’s deputy natural resources minister Lyazzat Kiinov in his opening address to the KIOGE conference last week left little to guess: Kazakhstan pumps up what it can.

For this year, total crude oil output has been “planned” at 75 million tonne, up by 5 million from 2008. From there on, existing fields will have to secure output increase of another 5 million tonne each year, Kiinov noted. This puts a heavy leverage on Kazakhstan’s main producing fields Tengiz, operated by Chevron, and Karachaganak, jointly operated by Eni of Italy and British Gas. Whereas the former mainly produces oil, the latter’s core output consists of gas and gas condensate with limited amounts of associated crude oil.

Karachaganak is exceptional in so far that the gas and liquids are not, as usual, of Cretaceous and Jurassic origin, but date from Lower Permian and Upper Devonian times. Together, gas and liquids account for reserves of 17.78 billion barrels of oil equivalent, including 1.371 trillion cubic metre of natural gas. Add to this the roughly seven billion barrels left in the deposits of Tengiz, and Kazakhstan has still in the order of 25 billion barrels of oil equivalent under its soil without accounting for the 7 billion-or-so to be recovered from Kashagan and adjacent blocks.

Together, the Kazakhs are thus soon to be able to grant the world almost a year-and-a-half of its current level of daily oil consumption. Tengiz hopes to be producing up to 42 million tonne as of 2016, up from this year’s expected 22.5 million tonne, Tengizchevroil’s general director Todds Levy told the KIOGE conference. By that time, the Khvalynskoye gas and gas condensate field, another offshore venture shared by Russia and Kazakhstan and co-owned by operator Lukoil (50%), Kazmunaygaz and Total of France (25% each) is poised to produce 9 billion cubic metre per annum. 2016 is also the year when after more than a decade of eternal delays, Kashagan should finally end up coming on stream.

The big risk for everyone involved, however, is on the demand side. This is where a report that came out last week from the United Kingdom Energy Research Centre (UKERC) under the title Global oil depletion: an assessment of the evidence for a near-term peak in global oil production may have it right and wrong at the same time. “A peak in conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020,” the report reads. “Given the lead times required to both develop substitute fuels and improve energy efficiency, this risk is to be given serious consideration.”

But the UKERC fails to provide a proper demand versus supply matrix and confines itself to stating: “The rate of decline of production is accelerating. More than two-thirds of existing capacity may need to be replaced by 2030 solely to prevent production from falling. While large resources of conventional oil may be available, these are unlikely to be accessed quickly and may make little difference to the timing of the global peak.” Does this thereby mean that upstream operators and their contractors and suppliers have to fear for their jobs? The first argument hints at no, but further argumentation could imply a different answer.

The reason is that the game is a lot more complex than the report’s authors suggest. Global warming and the need for “clean and cool” energy resources are increasing to incredible proportions. And then, the question arises: does the world really need the amounts of energy it absorbs today? Probably not. Growth in populations on most of the northern hemisphere is slowing down and expected to shift to a net decline before the end of the current decade. And since the financial slump has made life a lot more expensive for a lot of people, there is no escape for fuel where it comes to tightening belts. Participants in next year’s KIOGE may well give it a thought: the current task of oil- and (to lesser extents) gas technology providers is to broaden scopes rather than narrowing them as the oil industry has done for too long.

(in US dollar cent per barrel unless otherwise indicated)

date 30/09’08 31/12’08 31/03’09 30/06’09 30/09’09
Brent 1-m ICE 9817 4559 4923 6930 6907
Brent spot 9747 4373 4615 6813 6584
WTI 1-m NYMEX 10054 4460 4966 6989 7061
WTI spot 10072 3927 4969 6984 7048
Euro gas spot*) 68.90 65.50 32.00 25.80 25.60
HH gas 1-m NYMEX**) 743.8 562.2 377.6 383.5 484.1

*) in pence per British thermal unit
**) in US dollar cent per 1000 British thermal Unit
source: FT/Reuters