Oil Chronicles: Set to Produce and Pipe
In 2007, Kazakhstan aims to keep the production and exports of hydrocarbons at the same level as in 2006.
According to the Ministry of Energy, in 2006 Kazakhstan produced 65.005 million tonnes of oil and gas condensate (a 5.5% increase on 2005) and 27 billion m3 of natural gas (a 2.9% increase). The exports of oil and gas condensate totalled 57.1 million tonnes, including 24.4 million pumped through the CPC pipeline, 15.6 million through the Atyrau–Samara pipeline, 2.2 million through the Atasu–Alashankou pipeline, 9.9 million through the Aktau port, and 2.4 million through Orenburg.
In 2006, the volume of gas transported by Kazakhstan’s pipelines managed by Intergas Central Asia totalled 121.905 billion m3 against the projected 119 billion. Out of the total, 6.461 billion m3 was pumped for national needs (5.964 billion in 2005) and 7.816 billion m3 for exports (7.579 billion in 2005). International transit dropped from the 115.7 billion m3 in 2005 to 107.6 billion.
In 2006, to extend the resource base, Kazakhstan held open tenders for 111 mining fields, including 23 hydrocarbon fields. In the end, the tender board announced the winners of 83 fields, including 21 hydrocarbon fields.
According to the Ministry of Energy, if all mining contracts awarded in 2006 are concluded, the national budget will earn over $690m in bonuses, more than $500m for social development and over $100m for the Astana development fund.
… and Plans for 2007
The oil and gas condensate production in 2007 is expected to reach 65 million tonnes, which is very close to the volumes produced in 2006. Out of that figure, 17.24 million tonnes will be produced by KazMunaiGas. Baktykozha Izmukhambetov, Minister of Energy and Mineral Resources, believes there will be no increase in the production of liquid hydrocarbons in 2007 because the lion’s share of Kazakh oil is produced at old onshore fields where the reserves are severely depleted.
The Ministry of Energy forecasts a significant increase in production not earlier than in 2008. That year, Tengizchevroil (TCO), a major oil producer, will raise its production from 13.3 million tonnes (January-December 2006) to 22 million tonnes. More than that, TCO promises to boost oil production to 27 million tonnes by 2010.
TCO started to produce oil in the Tengiz field in 1994 pursuant to the agreement made between Chevron Corporation and Kazakhstan in 1993. Today’s shareholders in the joint venture are the American-led ChevronTexaco Overseas (holding a 50% stake) and ExxonMobil Kazakhstan Ventures Inc. (25%), the Kazakh government (20% held via KazMunaiGas), and the Russia-U.S.’ LUKARCO (5%).
The industry’s target for 2007 is to produce 65 million tonnes of oil. The processing volumes should be raised to 12.5 million tonnes to produce 2.8 million tonnes of petrol, 3.5 million tonnes of diesel fuel, 3.2 million tonnes of fuel oil, and 384,000 tonnes of kerosene. These figures were announced by Baktykozha Izmukhambetov in January 2007 at the Ministry’s session attended by Prime Minister Karim Massimov.
In addition, in 2007 Kazakhstan plans to produce over 29 billion m3 of natural gas, a 7.4% increase on 2006, which will be largely due to the development of new gas fields.
The pipeline system managed by KazTransOil is expected to transport 43.325 million tonnes of oil and 124.8 billion m3 of gas.
New Projects in the New Year
In late December 2006, KazRosGas (a joint venture between Gazprom and KazMunaiGas) and Orenburggazprom (a Gazprom’s subsidiary) signed an agreement to supply Karachaganak gas to the Orenburg gas processing plant. According to the agreement, in 2007 Orenburggazprom will receive and process 7.502 billion m3 of gas from the Karachaganak field.
KazMunaiGas and Gazprom established KazRosGas on a parity basis, and the new company started operations on 1 January 2007. The key conditions for launching the venture were as follows: the parties were to enter into long-term (not less than 15-year) contracts to purchase and process 15 billion m3 of Karachaganak gas a year, sell the gas in Russia and Kazakhstan, and export it through a single channel, Gazprom.
It is expected that the maximum gas processing volume (15 billion m3) will be reached in 2012.
The Karachaganak field is one of the world’s largest fields in terms of oil and gas reserves (1.2 billion tonnes and 1.35 trillion m3, respectively). The field is developed by Karachaganak Petroleum Operating B.V., an international consortium comprising BG Group (32.5%), ENI (32.5%), Chevron (20%), and LUKOIL (15%).
Furthermore, KazMunaiGas, Russia’s Gazprom and Uzbekneftegaz made a swap agreement to supply Uzbek gas to Kazakhstan and to transport Karachaganak gas to Russia, which took effect on 1 January 2007.
According to this arrangement, Uzbekneftegaz will annually deliver to Gazprom up to 3.5 billion m3 of natural gas on the border of Uzbekistan’s and Kazakhstan’s gas transportation systems. The Russian company will then hand the whole volume over to KazMunaiGas to procure gas supplies to southern Kazakhstan. KazMunaiGas, in return, will need to deliver Gazprom an equivalent volume of gas from the Karachaganak field on the border of Russia’s and Kazakhstan’s gas transportation systems.
At the same time, despite all expectations, the Tengiz–Novorossiysk/CPC pipeline did not raise its capacity up to the projected 67 million tonnes of oil a year this March. It is expected that, when it reaches its maximum output, the CPC will become the “main export pipeline” to deliver Kazakh oil to world markets in the next 10 to 15 years.
The CPC enhancement project provides for building ten new pumping stations, extending the existing tanks to store an extra 480,000 tonnes of oil, and constructing a third mooring on the Black Sea. Pursuant to the project, this pipeline transports not only Tengiz oil, but also that of other players, including the Karachaganak operators.
The 1,580-km Tengiz–Novorossiysk pipeline connects the fields in western Kazakhstan with the Russian coast of the Black Sea. The largest portion of the oil transported is supplied from the Tengiz field. The CPC governmental founders have the following shares in the project: Russia 24%, Kazakhstan 19%, and the Sultanate of Oman 7%. The private oil companies participating in the consortium are the Chevron Caspian Pipeline Consortium Company (15%), LUKARCO B.V. (12.5%), Rosneft-Shell Caspian Ventures Limited (7.5%), Mobil Caspian Pipeline Company (7.5%), Agip International (N.A.) N.V. (2%), BG Overseas Holding Limited (2%), Kazakhstan Pipeline Ventures LLC (1.75%), and Oryx Caspian Pipeline LLC (1.75%).
Pipes and Extras
To extend oil export capacity, in late January 2007 the government drafted a resolution in Astana to develop the Kuryk seaport in Mangistau Oblast. The master plan of the project is to be developed by KazMunaiGas.
The port is being built under the state programme to develop Kazakhstan’s sector of the Caspian Sea (adopted in 2003 till 2015), the programme to build the national merchant navy, and the programme for Kazakhstan’s joining the Baku–Tbilisi–Ceyhan project.
In 2010-2015, Kazakhstan is expected to export about 20 million tonnes of oil through the Kuryk port. By that period, the tanker fleet of the country will comprise 20 modern oilers.
Currently, Kazakhstan has one seaport on the Caspian Sea — the Aktau port with an annual handling capacity of up to 1.5 million tonnes of solid cargo and 8 million tonnes of oil. It is clear that the existing capacity is not sufficient to fulfil Astana’s plans to build the trans-Caspian transportation system in order to access the Baku–Tbilisi–Ceyhan export pipeline and the markets of Western Europe and the U.S.
Early 2007 saw some changes on the “investment map” of Kazakhstan. Several new companies manifested their desire to invest in long-term oil and gas projects associated with high geological risk.
In particular, Canada’s Altius Petroleum International B.V. (a subsidiary of the Arawak Energy Corporation) signed a contract for hydrocarbons exploration and production in the East Zharkamys area in Aktobe Oblast. According to the contract, Altius bought a 100% interest in the project from Agrostimul. It is also obliged to pay the Kazakh government, which has waived its pre-emptive right to purchase the area, a bonus of $5.5m. The exploration in East Zharkamys is expected to last four years, although it may be extended for an extra two 2-year periods. The investment in exploration is expected to total $59.7m.
The 1,845-km2 East Zharkamys is located in the Caspian basin, 80 km from the Akzhar field being developed by Arawak. Several oilbearing structures were found in the area where the company intends to commence 2D seismic surveys by the end of 2007. Arawak is the operator of two Kazakhstan’s fields — Akzhar and Alimbai. In early 2006, the Ministry of Energy expanded the Akzhar licence area from 3.8 km2 to 73 km2. The Alimbai contract area is about 133 km2. In addition, Arawak has projects in Russia and Azerbaijan.
In December 2006, LUKOIL Overseas Holding Ltd. (a 100%-owned subsidiary of LUKOIL, orientated to international production projects) and India’s Mittal Investments signed an agreement, according to which LUKOIL sells Mittal a 50% stake in Caspian Investments Resources Ltd. for $980m. Mittal will also pay 50% or about $160m of the company’s debts. The parties intend to close the deal in the first quarter of 2007. And when it is closed, Caspian Investments Resources will become a joint venture between LUKOIL Overseas and Mittal Investments.
In 2005, LUKOIL (via Caspian Investments Resources Ltd.) purchased Nelson Resources Ltd., which then owned a 50% stake in the Alibekmola and Kozhasai fields (another 50% owned by KazMunaiGas), North Buzachi (50% owned by CNPC), Arman, and 76% in the Karakuduk field.
Nelson Resources’ proved and probable hydrocarbon reserves are 269.6 million barrels. Plus, Nelson Resources has an option to purchase a 25% stake from KazMunaiGas in the South Zhambai and South Zaburuniye exploration blocks located in Kazakhstan’s sector of the Caspian Sea.
On 30 December 2006, state-owned China International Trust & Investment Corp. (CITIC) purchased Kazakhstan’s stake in Canada’s Nations Energy Company Limited for $1.91bn.
The core Nations Energy’s asset in Kazakhstan is the Karazhanbas field operated by Karazhanbasmunai, which produces 50,000 boe per day and boasts recoverable reserves of 340 million barrels.
Kazakh law requires that the deal be approved by the Kazakh side, so CITIC offered KazMunaiGas to repurchase 50% of the acquired assets for $955m. KazMunaiGas, in return, has already announced its intention to buy this share in Nations Energy in the 2nd-3rd quarter of 2007. To this end, the national operator intends to raise a ten-year loan of $805m, which will be guaranteed by CITIC without the right of recourse to KazMunaiGas. The remaining $150m will be provided from KazMunaiGas’ own funds subject to a guaranteed annual rate of return.
It is worth pointing out that CITIC’s purchase of oil and gas assets in Kazakhstan provoked a noticeable public reaction. Some parliamentarians said they were concerned about extending the presence of Chinese power companies in the oil and gas sector of Kazakhstan.
In particular, Valery Kotovich believes that China is persistent and rather straightforward in purchasing oil companies in Kazakhstan. If it is successful, China will control about 28% of the domestic oil production and this indicator could exceed 40% in the future.
Baktykozha Izmukhambetov tried to allay the concerns of the Kazakh legislators. He states that Chinese companies account for some 12% of the hydrocarbon production in Kazakhstan. “China has the same right as Russia and the U.S. to be interested in Kazakhstan’s power resources,” said the minister in conclusion.
In early 2007, Agip KCO, the operator of the North Caspian project, postponed commercial oil production at the Kashagan field again. Agip was to commence commercial production in 2005. However, in February 2004 the consortium reached an agreement with the Kazakh government to put off the production till 2008 and was obliged to pay a compensation of $150m ($50m for each year delayed).
In the first quarter of 2007, Astana and Agip started negotiating another deferment of commercial production at Kashagan. Agip is reported to announce new deadlines for “the big Caspian oil” to be produced — 2009–2010.
The operator explains that the project should be deferred because there is a need to increase the approved in-place reserves and revise the financial expenses for the Kashagan development.
The Agip KCO consortium (formerly OKIOC) was founded for 40 years after the respective production sharing agreement (PSA) was signed in 1997. The consortium operates several oil-bearing fields in Kazakhstan’s sector of the North Caspian shelf, the largest being Kashagan. In addition to Kashagan, the PSA describes the contract area to include the Kalamkas, Aktoty and Kairan oil-bearing fields. All the four structures occupy eleven offshore blocks with a total area of 6,000 km2. Previously Agip estimated the recoverable oil reserves at Kashagan at 7-9 billion barrels and total in-place reserves at 38 million barrels.
Currently, the consortium comprises ENI, Total, ExxonMobil, Royal Dutch/ Shell (holding an 18.52% interest each), ConocoPhillips (9.26%), Inpex and KazMunaiGas (8.33% each).
Ever Get off the Ground?
Agip’s intention to put off the project again is reported to have produced an equivocal reaction in Astana. In particular, the leaders of the national oil and gas operator are set to launch an investigation into the reasons why Agip failed to fulfil its contractual obligations.
According to KazMunaiGas’ president Uzakbai Karabalin, who made a relevant statement at the extended session of the Samruk Holding on 24 January 2007, Kazakhstan has serious claims to the North Caspian project’s contractor because of the delay in production and an increase in the project costs. “To see the reasons, the management of KazMunaiGas will initiate its own investigation with the help of independent, internationally recognised advisers. The results will be reported to Samruk and the government,” said Uzakbai Karabalin.
The head of KazMunaiGas believes that the main field of the North Caspian project — Kashagan — is currently at the commercial development stage, and the remaining four fields — Aktoty, Kairan, Kalamkas offshore and South-West Kashagan — are in the appraisal phase. According to Uzakbai Karabalin, “the Kashagan development obligations were fulfilled to about 60% if one counts from the beginning of the project”.
In 2007, KazMunaiGas intends to increase its loan from $700m to $1.5bn to finance its share in the project and speed up the development of Kashagan.
Moreover, Agip drew close attention from Kazakh regulatory bodies. In January 2007, the prosecutor’s office of Atyrau Oblast ordered an inspection of Agip KCO, North Caspian Constructors (Agip’s general contractor) and GATE Insaat Taahhut Sanayi ve Ticaret (Agip’s subcontractor). This decision was taken after the disorder that took place on 12 January 2007, when 50-60 Kazakh workers of the Turkish constructor, GATE Insaat Taahhut Sanayi ve Ticaret, involved in the construction of an oil refinery in the settlement of Karabatan, gathered at the Bolashak rail station to protest against their pay.
In response, the top leaders of Agip said they would set up a trade union at the Karabatan refinery in the near future and consider an increase in the pay of Kazakh workers involved in the project. They also promised to agree a compensation scheme with the contractors to guarantee it is fair and reasonable.
Agip’s management also promised to keep close watch to prevent any personal or social discrimination against Kazakh workers and to monitor their living and employment conditions.
“Agip KCO’s employment strategy is and will always be based on the non-discriminatory principles as regards living conditions, and full compliance with the laws of Kazakhstan,” said Luciano Vasques, Agip’s regional director, at the meeting with the leaders of Atyrau Oblast.
In January-February 2007, Kazakhstan produced 8,732,700 tonnes of crude oil and 1,908,900 tonnes of gas condensate, with a year-on-year increase of 8.1% and 21.9%, respectively. Out of these figures, KazMunaiGas accounted for 2.671 million tonnes of oil and gas condensate (a 4.9% increase on the first two months of 2006).
The production of natural gas in the same period amounted to 4,715.2 million m3 (a 23.5% increase year on year). The production of natural gas in gaseous form totalled 2,673 million m3 (an increase of 25.6%) and its commercial output 1,385.8 million m3 (a decrease of 11.7%). The production of petroleum gas in the period amounted to 2,042.2 million m3 (an increase of 20.8%).
Kazakhstan produced 418,600 tonnes of petrol, including aircraft petrol (a year-on-year increase of 23.2%). The production of fuel oil fell by 28.7% to 378,300 tonnes. At the same time, the production of kerosene grew by 14.3% to 52,000 tonnes and that of gas oil by 12.9% to 648,100 tonnes. According to the national Statistics Agency, in January 2007 Kazakhstan exported 5,052,000 tonnes of oil and gas condensate worth $2,008.1m (vs. 3,812,600 tonnes and $1,412.5m in January 2006, respectively). The exports of natural gas stood at 1,226.7 million m3 and earned $40.6m (1,330.9 million m3 and $33.4m, respectively). Imports totalled 1,034.7 million m3 and cost $43.5m (1,060.6 million m3 and $36.9m, respectively).
The exports of oil products in January 2007 totalled 281,800 tonnes or $92.4m (against 113,800 tonnes or $29.7m in January 2006) and imports 216,000 tonnes or $97.9m (113,000 tonnes or $45.6m).
In January-February 2007, KazTransOil transported 7.38 million tonnes of oil, a 13.6% increase on the same period of 2006. The volume of gas pumped by Intergas Central Asia dropped by 8.4% to 20.5 billion m3 comparing with January-February 2006. This decline can be explained by a fall in international transit volumes caused by a reduction in gas supplies from Turkmen fields, and a decrease in Russian transit, which is due to the repair of a Gazprom pipeline.
The activity of oil and gas companies contributed to an increase in capital investment: in January-February 2007, the investment in fixed assets totaled 308.1 billion tenge, a 2.1% increase on the same period of 2006. Out of that figure, 36.9% was invested in the development of oil and natural gas production.
The largest increases in investment were recorded in West Kazakhstan (2.8 times), Mangistau (2.4 times) and Kyzylorda (1.9 times) oblasts. At the same time, Atyrau Oblast reported a 1.3 times decline in investment, although this region accounted for 76% of all foreign investment.
The main sources of capital investment were the companies’ own funds (70%) and foreign investment (18.1%). The national budget contributed 4.5% and loans made up 7.4%.
The largest portions of the capital investment were disbursed by private companies (72.2%) and foreign businesses working in Kazakhstan (23.1%). The government sector accounted for 4.7%.
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