Tengizchevroil: risky hope for short-run survival

by Charles van der Leeuw, senior contributor

Tengizchevroil: risky hope for short-run survivalALMATY – Kazakhstan’s largest oil producing consortium Tengizchevroil (TCO), operated by American’s oil octopus Chevron which also owns half of the shares in the venture, has promised to increase its production in order to compensate in exportation volumes for losses in exportation revenue due to plummeted crude oil prices on world markets through the winter. The country, which (along with Argentina) finds itself at the very bottom of the overall economic pit the world has been sinking into since the American real estate bubble burst back in August 2007, needs all the income it can earn to keep its domestic cash flow running. But the consortium, which remains the most important engine to generate that income, has been forced to speed up its promises including an annual output that should top half a million barrels a day for the first time through this year.

Tengizchevroil signed its contract back in 1997, following endless strings of negotiations which had started at the time of Gorbatchov’s perestroika about ten years earlier. Talks had started on the initiative of the new First Secretary of Kazakhstan who was no one less than the current head of state Nursultan Nazarbayev, whose rise to power had followed the tragic events of December 1986, during which security forces had killed dozens according to official figures and hundreds according to later reports by witnesses. One of Nazarbayev’s conditions to take office had been the allocation of all oil, gas and metal exploitation revenue directly to Kazakhstan’s budget rather than being slurped up by the all-Union treasury.

It would take ten years and the collapse of the Soviet Union, resulting in Kazakhstan’s independence, to make the dream come true. Today, Tengizchevroil alone produces roughly two-fifths of Kazakhstan’s overall output of crude oil. In the first five months of the current year, the consortium pumped up 8.343 million tonne of crude and gas condensate together, against 30.547 million tonne produces by the country in all. It was followed by the Karachaganak consortium which posted a five-months output of just over 5 million tonne. Tengizchevroil also leads in terms of on-year growth so far, with an output increase of 13.6 per cent on-year in the first five months of 2009.

Apart from Chevron, other partners in the consortium are its American rival ExxonMobil with 25 per cent, Kazakhstan’s state oil and gas company Kazmunaygaz with 20 per cent and Lukarco, a joint venture between Russia’s Lukoil and BP-owned Atlantic Richfield with the remaining 5 per cent. Lately, Lukoil offered BP to take over its stake in Lukarco, after which Lukoil with be the sole owner of Lukarco. The reason for Lukoil to increase its influence in Tengizchevroil is the company’s major stake in Kazakhstan’s core exportation pipeline through the lowlands north of the Caucasus to the Russian Black Sea port of Novorossysk. So far, Tengizchevroil uses hardly more than half of the pipeline’s capacity of about 0.6 million barrels a day. Part of the remainder comes from Lukoil’s oil fields along the Volga river around Samara, the quality of which is compatible with Tengiz oil, with a relatively high level of sulphur and heavy, black crude. It is cheaper for Lukoil to transport its produce by pipeline than by rail to the Baltic port of Primorsk, which, strangely enough, is also used by Tengizchevroil for part of its output exportation.

Tengizoil in its latest round of talks with the government has committed itself to increase its output over the current year to 540,000 barrels per day, as compared with 450,000 in the first four months of the year. In order to procure the necessary production facilities including personal and ecological safety measures (at its initial stage of exploitation in the waning years of the USSR, a gusher at Tengiz set most of the site ablaze, wasting more than 20,000 barrels of oil which burnt or sank into the soil and devastating the already barren natural environment), the consortium issued worth 4.4 billion US dollar in IOU paper, all off which is set to expire in 2014, or less than a year before production at the fields of Tengiz and Korolyev is set to peak. Together, the fields contain in the order of 4 billion barrels of recoverable crude oil. However, one more half decade or so is needed to reach the minimum peak target of a million barrels per day.

Heavy borrowing on open debt markets in order to cover the costs has put global corporate position watchdogs on watch. On June 8, one of them, London-based Fitch Ratings, in an updated report warned investors to be cautious where it comes to buying into Tengizchevroil paper, assigning a low-level BBB-rating for the debt. “Given that the [production] expansion is not scheduled to be fully operational until 2013, Fitch does not assume any benefit to TCO during the life of the Series A notes that mature in November 2014,” the report reads. “[…] Fitch’s stress case analysis shows a relatively weak debt service cover ratio (DSCR) of 1.42 times in 2009, in particular due to assumptions relating to oil prices and the speed of production ramp up.”

The importance of Tengiz and its operator for Kazakhstan’s economy can hardly be underestimated, and it is therefore that market fluctuations can be dramatic in both ways. Prices for crude in the world lost in the order of two-thirds within weeks in October last year. Into the month of June this year, oil prices on global markets picked up by around 50 per cent from the end of the previous year (see table). Markets, however, do not seem to justify too much optimism where the future is concerned. Spot prices for physically traded oil have almost reached the level of futures prices again after gaping red margins in the winter, but looking at the figures one can still conclude that contracts are causing losses for their owners. For Kazakhstan, Tengiz’ relatively strong performance is sure to grant some relief for the present plights. On a slightly longer term, the first post-Soviet major offshore project, named Kashagan after its largest block and poised to double the country’s current oil output, must keep the cash flowing meant to keep the community going.

But the government in chorus with international sideliners keeps warning that in order to create a modern welfare state, commodities such as oil and gas will never be enough and sleeves need to be pulled up on all levels to industrialise the country. Kazakhstan’s economy contracted by 5.1 per cent and its gross revenue from industrial activity by 4.8 per cent on-year in the first quarter of this year: within the Commonwealth of Independent States which unites all former Soviet republics except for the three Baltic ones, only Armenia and the Russian Federation performed worse percentage-wise. In April, Kazakhstan’s industrial output (calculated in constant prices) fell by one more per cent on-month. Over the first three months, the country’s income from exports has fallen by 51 per cent year-on-year, while income-devouring imports fell by no more than just below 5 per cent. As a result, Kazakhstan’s external trade surplus in the first quarter fell to less than a third of what it was in the same period of 2008. This cannot happen too often – turning oil and other one-time-sale merchandise into a blessing doomed to die in order to make things better for future generations.


closing price 31/12’08 31/03’09 09/06’09
North Sea Brent 1-month/ICE-London 4559 4923 6962
North Sea Brent spot/Rotterdam 3988 4615 6895
WTI 1-month/NYMEX-New York 4460 4966 7001
WTI spot Oklahoma 3927 4969 7004

source: FT/Reuters