Beyond Kazakhstan's Megaprojects

Commentary by Mauro Fiorucci in Newsbase

A former consultant to Kazakhstan’s national oil company tells NewsBase why Kazakhstan has had little luck developing projects besides its largest three fields

WHAT: Kazakhstan is becoming increasingly reliant on just a trio of oil projects to support its economy. WHY: Lacklustre exploration results and investment risks have deterred companies from exploring further in the country. WHAT NEXT: Oil production in Kazakhstan will continue rising for at least another decade, but only on the back of increased yields from the Kashagan, Karachaganak and Tengiz deposits.

LAST year proved to be a turning point for Kazakhstan’s oil industry. In July, the consortium managing the country’s biggest onshore oilfield, Tengiz, signed off on a US$37 billion expansion plan that will raise output at the deposit by 260,000 bpd. Several months later, Kazakhstan relaunched operations at the massive Kashagan field in the Caspian, a project that has suffered perennial problems since its conception.

Kazakhstan is now poised to return to production growth after suffering losses since 2014, just as its economy begins to recover from the malaise caused by the oil price crash. With 30 billion barrels in reserves, the former Soviet state’s output is set to continue rising for at least another decade. However, the problem is that its existing reserves are concentrated heavily on a handful of giant fields in the Pre-Caspian Basin.

Kashagan, Tengiz and Karachaganak, a large onshore gas and condensate field, accounted for over half of Kazakh output last year. As Tengiz and Kashagan prepare to ramp up production, this share will widen, especially as many of Kazakhstan’s older fields continue to see decline. Meanwhile, recent years have experienced a slump in exploration, leaving little potential for alternative sources of growth.

Naturally, this is a concern for Astana, which relies on the oil industry for 60% of its budget revenues. It is worth examining how this situation has arisen, and whether there are any remedies.

man climbs stairs next to Kazakhstan oil production unit

Early challenges

The Tengiz field, launched in 1993, is estimated to contain 6-9 billion barrels. Its operator, Chevron, was able to take an existing Soviet-era project, with wells already dug into the ground and oil reserves easily exploited, and capitalise on it. Karachaganak, which is now run by a consortium that includes Royal Dutch Shell and Italy’s Eni, also began pumping oil and gas prior the collapse of the USSR. Kashagan, which is thought to hold 9-13 billion barrels, was discovered much later, in 2000. However, its development has been dogged by delays and cost overruns. Even after it came online for the first time in late 2013, production was halted several weeks later after gas leaks were discovered in its offshore pipeline network.

As such, Kashagan has hardly served as an advertisement for investors interested in Kazakhstan’s oil sector.

Mauro Fiorucci, an energy expert at Opportune who spent some time as a consultant to Kazakhstan’s national oil company (NOC), KazMunaiGaz (KMG), recalls the sentiment among investors when Kashagan was discovered. “Immediately after the discovery, there was a lot of excitement among majors and independents about Kazakhstan, especially in the pre-Caspian Basin,” he told NewsBase.

During those years, Astana offered international oil companies (IOCs) a favourable deal, known as the 80-20 production-sharing contract (PSC). Under this agreement, the government received 80% of profits from production while foreign companies received 20%, but only after they had fully recovered, tax-free, their initial costs.

However, investors’ appetite for the oil industry in Kazakhstan began to wane after 2010, according to Fiorucci.

“Very few were able to acquire interesting assets … and it was not worthwhile investing significantly in exploration,” he said, citing challenging geology and a lack of logistics, particularly with regards to export infrastructure. “The problem was getting your oil out of the country,” he said. Click below to read the full article.

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