Saving Kazakhstan’s Oil Business: Is There A Hidden Agenda?

Kazakhstan To Develop Kashagan Field

Oil giant US Chevron, the largest investor in Central Asia’s biggest economy and thereby the foremost moneymaker for the region, has continued its loss-making trend through the first half of the current year. Nevertheless, the company has invested close to 37 billion greenbacks into Kazakhstan’s largest oil field Tengiz near the Caspian coast, and a similar amount can be expected from its partners. Sideliners have queued up speculating what could be the motive behind this surprising generosity displayed by what is largely considered a bear market these days. Looking beyond just oil and just profit may help to find the answer.

According to Chevron’s report over the first six months of this year, net losses over the period amounted to $2.195 billion year-on-year, compared to $3.138 billion in the same period of last year. Upstream losses, however, increased from $659 in the first six months of 2015 to $3.921billion a year later. The offset seems to be why Chevron can afford somewhat larger investments now, without significantly increasing its corporate debt.

“Cash flow from operations in the first six months of 2016 was $3.7 billion, compared with $9.5 billion in the corresponding 2015 period, the report reads. “Excluding working capital effects, cash flow from operations in 2016 was $5.8 billion, compared with $11.6 billion in the corresponding 2015 period. Capital and exploratory expenditures in the first six months of 2016 were $12.0 billion, compared with $17.3 billion in the corresponding 2015 period.”

Other key players in Kazakhstan’s oil sector also show that they have financial means left to let some sun shine through on a rainy day. The Royal Dutch Shell, Kazakhstan’s oil and gas sector’s second-largest investor since it purchased rival British Gas (co-operator of the Karachaganak gas and gas condensate field in the northeast of the country) posted a net profit of $1.659 billion over the first half of this year, down from $8.416 billion a year earlier. Still, the new combination has maintained a capital expenditure budget of $29 billion for the entire current year. France’s Total, another major oil investor in Kazakhstan, reported $3.81 billion in the first half of 2016, down from $5.687 billion a year earlier. Investments amounted to $9.474 billion, down from $9.474 in the first half of 2015.

A million barrels a day for half a century

If one excludes the still unexploited offshore field of Kashagan and adjacent blocks, Tengiz is Kazakhstan’s jewel in the crown. Discovered and first exploited in Soviet times, the onshore field, located in the otherwise desolated flatlands of western Kazakhstan near the Caspian coast, currently produces over half a million barrels of crude oil per day. The oil is heavy and contains high levels of sulfur, due to the fact that it is pumped up from reservoirs laying, under extreme pressure and temperatures, under a string of salt domes.

A capital injection by Chevron of the USA, which owns half of Tengiz, of 36.8 billion US dollar makes it possible to increase Tengiz’s output from 595,000 barrels a day in 2015 to 855,000 starting in 2022, and on top of that to open the adjacent field of Korolev (“King’s”) in the process as well. It is supposed that Chevron’s US rival Exxon, Kazakhstan’s state oil company Kazmunaygas and Lukoil of Russia, which hold 25, 20 and 5 per cent in the consortium Tengizchevroil, are putting similar investments on the table. While the others have more than enough money in their coffers thanks to better times, the Kazakh partner will probably have to borrow most of its contribution, or, if unable to do so, sell part of its share to raise co-funding.

Tengiz alone held 25 billion barrels of oil at the re-start of its operation after the break-up of the USSR, of which about one-third is considered “recoverable” with today’s available technology. Korolev holds 1.5 billion barrels in recoverable reserves. Geologists do not exclude the existence of a number of other “giants” in the area. Both a boost in Tengiz’s productivity and added output elsewhere in the area will be able to guarantee output of up to a million barrels a day for close to another half century.

Cash squeeze, capacity squeeze

Where this sudden faith in the future comes from is not too hard to tell even though few commentators touch upon it. On a broader geopolitical level, Chevron’s move, apparently sided by other oil multinationals, can be explained in relation to the strategy so far displayed by Saudi Arabia, targeting both fellow OPEC states and non-OPEC producers. That strategy comes down to forcing competitors to “sell out” meaning compensating lower oil prices due to the abandoned mechanism of price-versus-output corrections by boosting production and sales on one side and dropping the principle of reserve replacement at the cost of income.

In this way, the Saudis had hoped to let a “cash squeeze” on its rivals end in a production “capacity squeeze”. There is only one way for the targets of that policy, meaning multinationals and states with major direct interests in oil production, to escape such a sequence: keep exploration and development up, even at higher costs, in order to maintain sales capacity, even at lower revenue. And it seems that at least at the level of both state and corporate decision-makers in the former USSR that notion has finally dawned. Who made this wake-up call?

China’s economy: a single nervous system

As it appears, everyone has been looking of late at China’s economy, which has been short of everything except cash for the last decade-and-a-half. China is (and almost always has been) functioning like a nervous system: all nerves and muscles obey to a single mind. If an error occurs at any subordinate level, the mind corrects it. On the other hand, if an error occurs in the mind, everything dysfunctions, but in China this has not happened so far – even though it has happened a number of times in the country’s long history.

The Chinese approach is a highly physiocratic one. For most of the world ever since the middle of the XIX Century, money has been a goal and commodities tools to get it. China has proven the opposite is true: cash is the tool, and oil is the goal – since oil keeps industries going and cash does not. And only now what is bound to become the most important upturn in world history is beginning to look clear. And as though (but perhaps not entirely) by chance, Central Asia finds itself right in the middle of it.

by Charles van der Leeuw