Kazakhstan’s oil mega-operators: pumping up, drilling down – in search for savings

With global market prices for oil, and more recently natural gas as well, having stabilised, global major players in the oil arena operating in Kazakhstan are currently looking for ways to avoid fresh hickups in their marketing schemes. Kazakhstan’s two major oil and gas resources now witness fresh attempts to maximise output from their reserves, while the oil-multis seem to be in no rush to boost reserves beyond existing ones in the world to significant proportions. This will require extra efforts for world-scale producers such as Kazakhstan to secure, let alone expand, their market shares in times to come. But caution remains the key word throughout the process. Bets in this regard should be placed there where costs are limited and benefits secured in the best possible manner. After all, the world is heading for a time in which hydrocarbon will gradually lose its importance as an energy resource. The only wild card in the process is its timing.

by Charles van der Leeuw, KZW senior contributor

Kazakhstan's oil mega-operators: pumping up, drilling down - in search for savingsWhen numbers talk – or people talk numbers, they often talk in riddles, leaving their interpretation open to intelligence not unlike attempts to explain dreams. Company executives tend to make their audiences, meaning shareholders in particular and the public at large – meaning their customers – in general. There is a balance between the two: too bad results make shareholders angry but too good results make customers suspicious while they also raise eyebrows in communities living in the host countries where they operate. Major global oil and gas companies with significant assets in Kazakhstan such as US Chevron, Eni of Italy, the Royal Dutch Shell and British Gas, recently publicised their corporate results over the first three quarters of the current year. Their executives have sent upbeat signals into the world, trying to convice their audiences that amidst the storm their ships remained afloat the best way they possibly could.

Results over the first nine months of this year prompted Eni CEO Paolo to state, as quoted in the company’s third-quarter report, as stating: “Eni has delivered solid results in the quarter despite significantly reduced demand and lower hydrocarbon prices. The company’s recent achievements […] mark decisive progress in our strategy to build leading positions in the world’s fastest-growing production areas.” Eni, which has two major assets in Kazakhstan in the form of its stakes in the gas- and gas condensate field of Karachaganak and the prospective offshore project of Karachaganak, saw its revenue and profits go down to similar proportions, but because it mainly operates in Europe’s downstream oil markets it lacks the margin to compensate lower prices with increased crude output. The company’s overall oil production decreased by 2.6 per cent on-year in the first three quarters of 2009 while gas output increased by 2.9 billion cubic metre. In the third quarter, Eni produced 1.68 million barrels of crude per day, with total gas output amounting to 22.52 billion cubic metre.

But the good tidings of joy by one top executive are countered by a more cautious attitude by others. Thus, the Royal Dutch’s CEO Peter Voser was quoted in his company’s quarterly report as follows: “Our third quarter results were affected by the weak global economy. Upstream- and downstream profitability has been sharply reduced compared to year-ago level. We see some indications that energy demand and pricing are improving, but the outlook remains very uncertain, and we are not expecting a quick recovery.” The results are harsh, including 5,000 lay-offs on all levels. According to Voser, operating costs have been recuded by around one billion US dollar in the first nine months of this year in order to keep share prices up in spite of the fact that cost reductions also reduce tax deductions.

What large-size companies pursue in terms of operating cost reductions is reflected by similar restraint in terms of capital expenditure, the bulk of which normally goes to exploration and development in order to keep deposit reserves at credible levels. Not much more, though, since boosting reserves in the midst of stagnating demand would not bring in the risk of drops in sales prices once more. Thus, Chevron upped its overall capital expenditure in the first three quarters this year only by a marginal 1.25 per cent, to $16 billion from $15.8 billion in the first nine months of 2008. As for Eni, its report reads: “Capital expenditure was 2.96 euro for the [third] quarter and 9.8 billion euro for the first nine months of 2009 mainly related to continuing development of oil and gas reserves, the upgrading of gas transport infrastructure and the construction of rigs and offshore vessels in the engineering and construction department.”

Benchmark prices for one-month crude oil contracts held firm through the third quarter of the year, oscillating around $70 per barrel. Only the spot price for Brent at the Rotterdam market saw a mild decline in the order of 3 per cent and about 5 per cent below its one-month future on the London InterContinental Exchange. Oil executives see little significant change occurring in the rest of the year – as Eni’s statement puts it: “Eni assumes Brent oil prices of approximately $60 per barrel for the full year 2009 considering ongoing upward trends in the crude oil market prices. Management expects that European demand for natural gas and fuels will continue to shrink.”

It means that the drop in overall net earnings by global corporations roughly represents the drop in the price of a barrel of crude oil if one looks at the closing price as of December 31 last year (see table) to that of September 30 this year. But certain discrepancies pop up here. Thus, Chevron’s revenue fall’s breakdown shows a decline in upstream cash flow of hearly two-thirds – from 18.550 billion in the first nine months of 2008 to $6.428 billion a year later. Overall losses, however are in the order of 46 per cent, which is clarified by a relatively mild drop in earnings on mid- and downstream activity, from $1.349 billion to $1.178 billion. A decline in the value of the greenback on international currency markets, making the US dollar more competitive as an investment instrument, also contributed to the consolation.

Chevron’s boosted its overall output by around 9 per cent, or in the order of 16,000 barrels of oil equivalent, on-year in the third quarter of 2009, according to its latest quarterly report. “The net liquids component of production increased about 15 per cent from a year ago to 1.38 million barrels per day, while net natural gas production declined about 4 per cent to 3.48 billion cubic feet per day,” the report reads. The boost in oil production is clearly meant as an attempt to prevent over-speculative surpluses on sales prices driving demand down – which looks very much like a lesson learnt from the global subprime burst and its consequences for global banking and finance as a whole. Similar trends appear with Chevron’s two main US rivals both of which also have substantial assets in the former USSR including Kazakhstgan. World leader ExxonMobil increased its output by 1 per cent on-year in the first three quarters and by 5 per cent on-year in the third quarter of 2009, whereas ConocoPhillips, a major stockholder in Lukoil, posted a 2.5 per cent increase over the first nine months.

As for the decline in gas output, can be explained by saturated regional markets on both sides of the Atlantic. Gas prices have stabilised in the third quarter of this year following a steady but severe decline (see table) ever since fall last year. In various news reports, Gazprom was quoted as pushing backward further development of its untapped fields in eastern Siberia and Russia’s Arctic – which, ironically, means good news for Kazakhstan and its gas-generating neighbours to the south, Uzbekistan and Turkmenistan in particular. They can obviously sell more gas through Gazprom’s trunk transportaiton network now – even though the gains in sales volumes will have to compensate for low CIF prices to yonder end of the line.

If life were but that simple – surviving on relatively low sales prices would be all too feasible for it. But a complicating factor is that the good news for the former Soviet partners automatically means bad news for those, mainly political, forces trying to wrench them apart through plans for mega-networks of gas transportation across areas south of the Russian Federation, and they are unlikekly to sit back. Should such plans materialise, though, it will not only add extra transportation capacity to exporting countries which nobody needs, but it will also bring transportation costs up for the simple reason that the tens of billions to be invested have to be earned back by hook or by crook, thereby stripping Central Asia’s gas producers of their profit margins.

Thus, Chevron calculated an average sales price for natural gas of $3.92 per thousand cubic feet in the first three quarters of this year – against $5.37 in the same period of 2008. The price is mainly based on America’s benchmark Henry Hub, which is unconnected with the European benchmark FOB spot price determined on the market at the outlet to the United Kingdom at the Belgian North Sea terminal of Zeebrugge. Chevron sells associated gas from its Tengiz field on the Caspian shore in the west of Kazakhstan, as well as core gas from the Karachaganak field to its northeast, through Gazprom on a commission basis which include the latter’s transportation costs.

Chevron is basically anti-Russian lobbyists only hope to fill eventual gas transportation bypasses. Eni, which owns considerable assets in Russia in joint operations with Gazprom, on November 6 signed a note of understanding with Kazmunaygaz Exploration and Production, the London-listed subsidiary of Kazakhstan’s state oil and gas company Kazmunaygaz, with the aim to consolidate both parties’ assets in a consortium which would combine joint up-, mid- and downstream activity. Investments, including Eni’s existing commitments in Kazakhstan, could accumulate to the equivalent of 50 billion US dollar. Paolo Scaroni stated on the occasion that other parties active in the region such as Chevron, Lukoil and Total would be welcome to joint the consortium eventually formed. Last year, Eni ran into trouble as the chief operator of Kazakhstan’s first major offshore field Kashagan following disputes over development costs after the latter had more than doubled to the astronomic amount of $136 billion.

Since it can safely be excluded that the initiative would not have occurred without compliance of Gazprom, the consortium will be sure to include the upgrading of the Central Asian gas pipeline trunk from Turkmenistan through Uzbekistan and Kazakhstan into Russia as well as the new pipeline, now under construction, from Turkmenistan across Kazakhstan into Russia along the eastern shore of the Caspian Sea. Even though the much pushed-for so-called Trans-Caspian pipeline scheme which should link up Central Asia to the existing gas pipe from the Azeri shore through the southern Caucasus into Turkey has not been excluded from the venture, FOB and downstream sales prices these days, narrowing upstream operators’ capital investment margins, hardly justify the obligation to do so.

It is therefore that the overall message sent into the world by top players in the upstream arena of energy consumable resources in the wider Caspian region, with Kazakhstan at its centre, should be comprehended in the following way. There is no more space – or rather no cash – for wild dreams to come true. Economics should prevail over politics. Plans and their realisations should be determined by those who provide the funds rather than political meddlers and peddlers. And then, of course, there is the longer-term outlook into the post-petroleum era which is likely to turn a one-time prediction by no one less than OPEC-brainmaster Sheikh Ahmed Yamani, who at the turn of the millennium stated: “The stonee 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.” Not much more could be said – even though the world’s oil barons and their political lackeys still seem to be a long way off its full meaning judging by their statements.


ExxonMobil $13.3bn / $4.7bn
Chevron $ 7.9bn / $3.8bn
ConocoPhillips $ 5.1bn / $1.5bn

source: company data

(prices in USD cent unless otherwise indicated)

date 31/12’08 31/03’09 30/06’09 30/09’09
Brent 1-month ICE 4559 4923 6930 6907
Brent spot 3988 4615 6813 6584
WTI 1-month NYMEX 4450 4966 6989 7061
WTI spot 3927 4969 6984 7048
HH gas NYMEX 562.2 377.6 383.5 484.1
Euro spot Zeebrugge (p/btu) 65.50 32.00 25.80 25.60

source: FT/Reuters