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 KAZAKHSTAN International Business Magazine №4, 2009
 Oil export. From monopoly to diversification
Oil export. From monopoly to diversification

Kulpash Konyrova

Today, Kazakhstan as a country richly endowed with crude oil and natural gas reserves is adhering to the principle of a multi-vector approach both in the development of its oil & gas sector and in foreign policy. The hydrocarbons transportation routes, those operating and those to be constructed, are quite diversified.

Rising star for Europe

The gas conflicts between Russia and the Ukraine, arisen in the last three years, pushed the EU countries to seek alternative sources of energy. Europe, the main consumer of Russian oil and gas, are fastening more and more on Kazakhstan.

The Poles were the first who came to our republic almost right after the first Russian-Ukraine gas conflict in 2005. Poland, bordering with Ukraine, was the first which had experienced all the “amenities” of that conflict. At that very time, answering the question of Kazakhstani journalists, the Minister of Economy of Poland, Petr Voznyak, said that: "Such conflicts are of great risk; the risk, in the first place, for our economy. That is why we aspire to find alternative options of gas supplies. Our interest to Kazakhstan is partly explained by this reason".

It is clear that in the end the gas wars affected not only Poland, but Austria, Italy and France, the main consumers of oil and gas from Russia, as well. High-rank European representatives, including the the European Union Energy Commissioner, Andris Pibalgs, paid visit to Kazakhstan in 2008. He, in spring of last year, called our country a “rising star for Europe in terms of supplies of energy resources”.

The hopes of the European Union, pinned on Kazakhstan today, are not groundless. It is expected that in the next ten years Kazakhstan will be among the top ten countries in terms of production of “black gold” and “blue fuel”. To date, the republic’s share in the world’s explored reserves is 3.2% for crude oil, making Kazakhstan rank seventh in the world, and 1.5% for that gives the sixth place to Kazakhstan. This is exactly why the new strategy of the European Union for Central Asia sets its main goal at ensuring of its energy safety due to the countries in the region, and, in the first place, to Kazakhstan. Meanwhile, the topic of the agenda for today is how to deliver our hydrocarbons to Europe?

With trust in the BTC

At the current moment, the main petroleum arteries, over which the republic transports its oil to the West, are Tengiz – Novorossiysk (Caspian Pipeline Consortium) and Atyrau – Samara. BothofthemarelaidthroughRussia. By now, the transportation volume of the Kazakhstani oil by these pipelines does not exceed 25 million – 35 million tonnes a year that is much less than our possibilities.

Baku-Tbilisi-Ceyhan (BTC), the first pipeline, traversing in by-pass of the said two routes, appeared only in summer of 2005. The throughput capacity of BTC, which was called a bridge, connecting the East with the West, is 50 million tonnes of oil a year. In fact, BTC is the alternative to the Russian energy carriers supply route, and it, undoubtedly, will open new ways for Kazakhstani oil to enter external markets. Moreover, Kazakhstan joined this project officially.

However, there is one “but”. The Caspian Sea lies between us and Azerbaijan. Now we can transport the oil by sea in tankers: To 7 million tonnes to start with and a subsequent increase of to 20 million tonnes. In the opinion of experts, the maximum amount of the “black gold” that can be transported this way is 38 million tonnes. This is only if the republic is able to purchase tankers of high tonnage.

In the future, taking into consideration our extensive plans of the Kashagan development, according to which the production of “big oil” is expected by the year 2012, it will be more logical to carry the raw material for the BTC over the other pipeline, which is supposed to be laid on the Caspian seabed. However, the implementation of this idea is quite illusive, the same as the idea of construction of the underwater Trans-Caspian gas pipeline, which Europe is dreaming of now.

The point is that any question related to the Caspian Sea can be resolved only after all the five Caspian littoral states (Russia, Kazakhstan, Azerbaijan, Turkmenistan, and Iran) come to a certain consensus. The negotiations between them as to the delineation of the Caspian seabed and defining the legal status of the sea itself have been carried on for a few years already, and the parties have not yet reached any agreement. Thus, it is likely that the tankers will remain the only method of transportation of Kazakhstani oil for the BTC for a long time. So, this pipeline will hardly cover all the potential of our hydrocarbons supplies to Europe. Nevertheless, we should repeat that this route is very important to Kazakhstan. In November of the last year, the first 300,000 tonnes of Tengiz oil were carried over the BTC. The transportation volume has reached almost 1 million tonnes of oil to date. On the whole, about 3 million tonnes of the Kazakhstani oil is transported through Azerbaijan, including by railway.

KCTS as a focus

To deliver Kazakhstani oil to the BTC, a decision was made three years ago to build the Kazakhstan Caspian Transportation System (KCTS). At the end of July this year, negotiations with petroleum companies over this matter came to an active phase. This activation had its own explanation, it was supposed earlier that the KCTS would be launched in 2012, right at the time the “first oil” from Kashagan was expected to appear. Along with that, the increase in oil production, achieved for the last two years at the other largest oilfield Tengiz, evidences that the necessity has arisen now to force work on the given project. The CPC pipeline, traversing through Russia, will likely fail to carry all the volume of Tengiz oil, to be increased by that time.

The KCRS project involves two phases: The Yeskene – Kuryk pipeline and the Trans-Caspian system (TCS). However, they are presently having intensive discussions in Astana only on the first phase of the project, the Yeskene-Kuryk pipeline. The foreign companies that comprise the structure of the international consortium engaged in the Kashagan development, the so-called G6 Group, and American Chevron are all taking part in these discussions. The Kazakhstan Energy Ministry and the National Company KazMunayGas were selected to represent the interests of the government at these negotiations.

It has become known presently, the President of JSC The National Company KazMunayGas, Kairgeldy Kabyldin, has taken a personal responsibility to run the negotiations over the KCTS. Earlier, this mission was assigned to the Managing Director of KMG, Maksat Idenov, to whom the successful completion of negotiations over the Nursultan oil-bearing structure and the Kashagan oilfield was credited. “In principle, this re-distribution of positions is clear: Kabyldin was among those who stood at the very beginning of the KCTS creation”, a petroleum sector worker, close to the negotiation process, informed.

Even the amateurs realize the importance of the current negotiations. It is not enough just to produce oil, it is necessary also to deliver it to the world market by pipelines. What share the company has in the pipe directly will depend on how much oil it will be capable to transport over it in the future, and, accordingly, on how much profit the company will be able to gain. Thus, a memorandum of understanding as to the principles of the project implementation will be signed only when all the participants of the negotiations over the Yeskene – Kuryk oil pipeline come to a common solution. By the way, this document has to cover important aspects related to the provision of guarantees on the volumes of oil transportation, participating interests in the project, and the terms of financing.

Position in principle

It is known that Kazakhstan intends to have no more or less than 51% in the Yeskene – Kuryk oil pipeline. The Minister of Energy, Sauat Mynbayev, announced this several times at his meeting with journalists. This is quite clear: The holding by the national company of the controlling shareholding would give the right of the deciding vote in the distribution of future oil exports volumes. According to the Minister, foreign investors were not inspired with this position held by Kazakhstan. Some friction was caused with Chevron at the beginning of negotiations, which in view of the increasing oil production at Tengiz was eager to gain as greater share as possible in the new export pipeline. However, judging by the confident answers of the Minister of Energy, the position of the republic in this matter was accepted at last. Oursharewillbeundoubtedly 51%. The remaining 49% of shares will be distributed between the participants of the international consortium on the Kashagan project and Chevron. How they will be divided is a matter of further negotiations. Presently Icannotsayanythingmore”.


Regarding the second phase of the KCTS, the Trans-Caspian system, where the chief partner of KMG is the state petroleum company of Azerbaijan SOCAR, here no disagreements have arisen as yet. All is coming in the framework of the agreement on major principles of the Trans-Caspian system (TCS), earlier signed between the parties.

We should remind that the TCS comprises an oil-loading terminal on the Kazakhstani coast of the Caspian Sea, tankers and vessels for transportation of oil and auxiliary operations, an oil-loading terminal on the Azerbaijan coast, and also the facilities connecting with the BTC pipeline.

The head of the SOCAR representative office for Kazakhstan, Vurgun Jafarov, informed that the specialists of SOCAR, KazMunayGas, Chevron, and G6, engaged in the project implementation, had held a series of meetings in Baku, Astana, and London, at which they covered a wide range of issues. “Almost all the questions were considered on the first project stage, and now work is being completed to finish the technical assignment to prepare for the feasibility study development, the order for which is to be confirmed before the end of the current year. Also after the meeting in Baku in spring of the current year, the Kazakhstani and Azerbaijani sides made the decision to set up a joint venture, to be engaged in the feasibility study development for the Trans-Caspian system. In short, we do not stand still, we move”, Mr. Jafarov said.  

According to him, the cost of the feasibility study development for the TCS is still unknown. However, both Kazakhstan and Azerbaijan try to avoid unnecessary expenses and to make the feasibility study optimally comprehensive and detailed so that the price will be realistic and appropriate for both of the parties. “SOCAR and KMG together will be implementing the order for the feasibility study. Recently our Kazakhstani partners proposed the option allowing gain time: To start making the order for the feasibility study development without awaiting for the completion of all legal procedures on the setting up of the joint venture”, he emphasized.

At the same time, there is one more aspect sensible for the entire project: This is the assignment of proposed volumes to the consignors. The SOCAR spokesman believes that only in this case will the project be worthwhile and be in demand. “The guarantees must be both from Tengiz and Kashagan. Thisisimportantinprinciple”.

Instead of these guarantees, the foreign companies, the participants of the Kashagan consortium, raise the question from time to time as to their adjoining the second phase of the KCTS, the Trans-Caspian system.

“SOCAR’s position is quite explicit: In this project we deal only with KMG as a partner, and we do not consider any other partners. All the parties have to be interested in the project. SOCAR’s interest is in the expansion of its current transit corridor. For KMG, this is the option for enabling its oil reaching the world market, and for the consignors, this is the system of logistics ready for use. Thus, we consider the Kashagan project participants and Chevron only as the consignors”, Vurgun Jafarov summed up.

View from overseas

In August of this year, Ambassador Richard Morningstar, the Special Envoy of the United States Secretary of State for Eurasian Energy, paid a visit to Astana. During his two-day stay in the capital of Kazakhstan he met with all the key figures of the petroleum sector of the republic. The main topics of the meetings were the implementation of the pipeline projects aimed to delivering crude oil from the Caspian region to external markets, and, of course, the Kashagan project.

So close attention to the region (it is known that after visiting Kazakhstan, Mr. Morningstar went to Azerbaijan) is one more evidence that the USA is endeavoring to “have its finger on the pulse” of future projects, on which great hopes are pinned today as to the ensuring of energy security both in Europe and in the world.

We should note that the Special Envoy put a special emphasis on these two projects, the CPC and the KCTS. “Fortunately, Kazakhstan and the USA have an agreed position in this matter. Both sides realize how important these projects are in the light of future big oil at the Caspian. The White House realizes that those projects that are being initiated by Kazakhstan today are significant for transportation of crude oil from this region. We feel that a certain progress is evident on these two transportation projects and another on the Kashagan development”. Further, Mr. Morningstar added that the KCTS, from the USA’s point of view, is quite a rational project, and America is ready to provide political support to it. “We think that the KCTS project together with the expansion of the CPC pipeline are really the only realistic ways of getting the increased oil out of the Caspian and into the marketplace”.

Never-dying hopes of Ukraine and Poland

If before it was Europe who started discussions of diversification of the hydrocarbons supply routes, now it is Ukraine who is seriously concerned about this - that Ukraine which gave raise to notorious energy conflicts. The spokesmen from Kiev announced for several times that Ukraine was working on the issue, allowing it in the near future to have one more separate source of oil supplies from the Caspian region. The Odessa – Brody pipeline is expected to become one such source. We remind that it was built in 2001 to transit Caspian oil; however, from 2004 it has been used by Ukraine only for transportation of Russian hydrocarbons in very small volumes.

First, there were the Polish who remembered about this oil pipeline, with which they pin their hopes to diversify the hydrocarbons supply routes. Now it is the government of Ukraine which is lobbying the Odessa – Brody project. The point is to extend the oil pipeline up to the Polish city of Plock and carry Caspian oil over it to Europe. Ukraine is offering Kazakhstan and Azerbaijan to join this project.

Also the question about our country’s position with regard to this project is the most frequently asked by European journalists to our Kazakhstani ministers. As I recall, two years ago, at the time of taking the post of Energy Minister, Baktykozha Izmukhambetov answered at one of the international energy forums in Astana: “In principle, Kazakhstan is interested in this route. In order the possibility will appear for us to run negotiations over construction of the part of Odessa – Brody, connecting with Plock, first we should finish the matter on the CPC expansion”.

He explained that at present all the Kazakhstani oil that is delivered to the Black Sea ports is already distributed. Presently the volume of our oil is just 25 million tonnes a year. The CPC pipeline expansion will give the possibility to transport an extra 25 million tonnes. Part of this can be directed into the Odessa – Brody – Plock pipeline. Since the CPC pipe traverses through Russia, then anyhow the hopes of Ukraine for Odessa – Brody – Plock are unfeasible without participation of our northern neighbor, whom it intends to by-pass.

Russian project on the Balkans

One more oil pipeline, capable of carrying Kazakhstan oil to Europe is the Burgas – Alexandroúpolis. It will bypass the Black Sea, traversing through Greece and Bulgaria, and with this, it will allow reducing the volume of oil transportation by tankers through the overflow routes Bosporus and Dardanelle. However, this project is just on paper at present. It was initiated by Russia, which is interested in the routes diversification. This is important to Russia so that in future it will not depend on either Ukraine, or Belarus, having maintained a thirty-year reputation of the reliable supplier. The three Russian companies, OJSC Rosneft, OJSC Gaspromneft, and OJSC Transneft, intend to participate in the given project, wishing to hold for all a 51% shareholding in it. This group of three petroleum giants is going to use the year 2009 for activation of their negotiations over the project with Bulgaria and Greece.

So, Kazakhstan can keep in mind this route as an option for the future. Although, even if the pipeline is constructed, we will be able to transport the Kazakhstani hydrocarbons only if the question with the CPC expansion is resolved. Presently we have all volumes of oil transported to the Black Sea oil-loading terminals transported by CPC.                                                     

Right time for the CPC expansion?

The CPC pipeline is the most profitable among the operating routes, used to deliver Kazakhstani oil for export. The issue of its throughput capacity expansion was raised a few years ago. However, as it became known, some disagreements arose between British BP and the rest of the CPC shareholders as to the methods of financing of the pipeline expansion project. ВР offered to raise funds through borrowing from foreign sources, while the remaining shareholders were eager to use the funds of the consortium.

In the end, long negotiations resulted so that BP decided to sell its assets in Kazakhstan. For the two main participants of the CPC, Kazakhstan and Russia, this is the opportune moment for increasing their shares and reducing in the number of shareholders, and, as a consequence, for a more rapid start of the expansion project implementation. I should remind that today Russia holds a 31% shareholding in the CPC, while Kazakhstan holds 19%.                                         

Batumi is with us  

Kazakhstan, learning from other’s mistakes, is in constant search of new routes. One of them is from Aktau carrying through the sea to Baku and then by railway to the oil-loading terminal in Batumi. For this, in December of 2005, JSC KazTransOil (a subsidiary of KMG) together with the Georgian (Caucasus) Company the Batumi Oil-Loading Terminal set up a joint venture, Batumi Terminals. This step allowed oil petroleum producing companies to get direct access to the Black Sea and from there to international energy markets.

After dissolution of the USSR, the Georgian oil terminal in Batumi was working at one forth of its capacity. In the last year, it was transferred in full into the ownership of KazTransOil. The experts believe that in future it will become the key component of the Trans-Caucasus oil transportation corridor. 

The oriental express of KCP

Speaking about the ambitions of Kazakhstan, claiming for a role as one of the world energy suppliers, it would be unfair not to mention the Kazakhstan-China pipeline and its first part, Atasu – Alashan’kou. By this pipe Kazakhstan oil is carried in the opposite direction to Europe – to China. The demands of this country increases with every coming year.

Built in a record short time, during less than one year, the one thousand kilometer oil pipeline Atasu – Alashan’kou is a model example of diversification, and is quite in line with the multi-vector policy pursued by Kazakhstan today. In one year alone of operation, more than 2 million tonnes of crude oil was directed from the Kumkol’ oilfield to the “Middle Kingdom”, and this is not the limit. It is known that the design capacity of Atasu – Alashan’kou is 10 million tonnes a year with the expected subsequent increase of up to 20 million tonnes.

Today, Astana proposes to join this route and the Russian companies for transportation of Western Siberia oil to China. While the Russians are considering this point, Kazakhstan and China have completed the construction of the third part of the KCP, the Kenkiyak – Kumkol’ pipe which is to be put into operation at the end of the current year. This means that apart from Kumkol’ oil, Caspian oil also will be carried to China.

Thus, Kazakhstan will gain this route, which will allow us, with all our reserves and production volumes, not to be upset about any possible energy conflicts with the participation of Russia. We know what to do with our oil, if any unexpected problems arise on any of the transit directions.


Table of contents
Caspian Gas: One for All?   Sergei Smirnov 
Insurance Market: Sight from Outside  The special report of Standard & Poor’s 
Macroeconomy. September 2009  Sergey Kasyanenko, Edilberto L. Segura 
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