Kazakhstan: a revival of the oil and gas sector

June 2, 2014

 

The dissolution of the Soviet Union in 1991 has warranted free market economies for a majority of the newly independent nations in Central Asia. Although natural oil extraction in the Caspian Sea region can be traced back to the 10th century, in Baku, Azerbaijan, large areas of the Caspian Sea were still untapped before the collapse of the Soviet Union. Central Asian countries such as Kazakhstan and Turkmenistan, which border the rich Caspian Sea, have tremendous oil and natural gas reserves derived from offshore deposits and onshore fields.

As one of the oldest oil producing areas in the world, the Caspian Sea plays a vital role in the source of global energy production. At present, the Caspian Sea and neighboring Central Asian countries are seeing a resurgence in oil and gas sector. It began in 1997, with development of the massive Azeri-Chirag-Guneshli field, off the coast of Azerbaijan, led by a consortium of global oil companies spearheaded by British multinational oil and gas company BP. Subsequently, the Caspian Sea has attracted a renewal of foreign investments.

These newly independent former Soviet Union nations have taken varying approaches in developing the oil and gas production of the area. At times, lack of regional cooperation between the governments of these neighboring countries has resulted in setbacks. However, the influx of foreign investments and escalating energy prices have created opportunities for the Caspian Sea and some of the Central Asian countries to move from extracting oil for domestic usage to supplying oil to the world markets.

Factors that affect the growth of oil and gas exports from these Caspian countries are: local demand of crude oil and natural gas in these countries, development of export infrastructure to international markets, and sufficient investments to fund the oil and gas development projects.    

Oil propelling the economy of Kazakhstan

Kazakhstan has been producing oil since 1911. However, it did not achieve world recognition until the 1960s and 1970s. In 2003, it achieved a revival production high of 1 million barrels per day (MMbbl/d). National oil and gas exploration and production company of Kazakhstan, KazMunaiGas (KMG), has since its inception in 2002, played an active role in expanding the country’s oil and gas sector.

Gross natural gas production in Caspian region, 2011 (Bcf/y)
 
Sources: U.S. Energy Information Administration, IHS EDIN, Eastern Bloc Energy, Rigzone, Rystad Energy 

Today, Kazakhstan is the largest nation and economic power linked to the Central Asian grid. With a wealth of natural resources, namely oil, minerals and metal deposits, and other commodities, Kazakhstan has seen swift economic growth since its independence in 1991. The country has successfully attracted major foreign investments and gained immense progress through economic freedom, reforms, and integration into the global economy.

On the contrary, other former Soviet Union nations like Turkmenistan and Uzbekistan approach their oil and gas sectors, with the unchanged regime inherited from the Soviet Union, by retaining the state ownership structure and limiting foreign involvement. 

Amongst the former Soviet Union republics in the Central Asia region, Kazakhstan has the largest oil reserves. With a total production of 1.64 MMbbl/d in 2013, Kazakhstan is a significant oil producing country. Both the Tengiz and Karachaganak fields contribute about 40% of the country’s total production in 2013.

As the country’s predominant source of oil production, the Tengiz oil field is situated off the northeastern shore of the Caspian Sea. The TengizChevroil consortium operates the production that was discovered in 1979. The field produced approximately 500,000 b/d in 2011, but production slowed down the following year due to weather, mechanical and transportation problems.

Production from Kashagan is expected to be at the forefront of Kazakhstan’s oil and gas future. This is the prospective field that Kazakhstan counts on for exponential growth, since it is deemed by some to be the most remarkable oil discovery in recent 

years, and the greatest oil field mapped outside of the Middle East.

Discovered in 2000, the Kashagan field extends over a surface area of approximately 75 km x 45 km, making it one of the world’s largest oil discoveries in the last 40 years. The reservoir lies about 4200m below the shallow waters of the northern part of the Caspian Sea.

Italian integrated energy company Eni’s subsidiary, Agip Kazakhstan North Caspian Operating Company (Agip KCO) is responsible for executing the first phase of development of the giant Kashagan field, thought to hold 35 billion bbl of oil in place and reserves of over 11 billion bbl beneath the Kazakhstan section of the north Caspian Sea.

Agip KCO acts as an agent for the operator of the North Caspian Sea Production Sharing Agreement of 1997, North Caspian Operating Company (NCOC). NCOC itself acts on behalf of co-venture partners comprising state oil company KMG, Eni, Shell, ExxonMobil and Total, along with ConocoPhillips and INPEX, that hold smaller equity stakes.

In order to maintain growth in Kazakhstan, these three fields (Tengiz, Karachaganak, and Kashagan) are together vital for the development of additional export capacity in the country.

Most of Kazakhstan’s natural gas reserves, are also found in the fields of Karachaganak, Tengiz, Imashevskoye, and Kashagan.  

Facing up to the challenges

In the past, Caspian oil and gas producers have lacked adequate infrastructure. Kazakhstan is not exempted from this. Its oil and natural gas fields are located well away from export markets and proper logistics needs to be considered to transport oil to sea ports where it can reach international markets.

Some countries try to pool their resources together to form sufficient export capacity, while in other cases, the old Soviet Union pipeline networks have been used. In 1997, Kazakhstan inked a deal with China to build the Kazakhstan-China oil pipeline, which opened in 2005. This was a significant move since it was the first pipeline to directly export oil to China.

The present plan for the export of production from the Kashagan field start-up is to use a mix of existing pipelines as well as rail exports.

Meanwhile, the development of Kashagan, in the harsh offshore environment of the northern part of the Caspian Sea, represents a combination of technical and supply chain complexity. The combined safety, engineering, logistical and environmental challenges make it one of the largest and most complex industrial projects currently being developed anywhere in the world.

Challenges include the low salinity of the sea. Due to the in-flow of fresh water from the Volga River, combined with shallow waters and winter temperatures below minus 30 degrees, the northern part of the Caspian Sea freezes for nearly five months of the year.  It is also a very sensitive environmental area with abundant and diverse fauna and flora, including a number of endemic species. Furthermore, it is a difficult location to supply essential project equipment. Logistical challenges are amplified by limited access to waterways, such as the Volga Don Canal and Baltic Sea-Volga waterways, which are only navigable for around six months of the year due to thick winter ice.

All these factors escalate the costs of offshore projects. 

Nevertheless, infrastructure in Kazakhstan and Azerbaijan is more developed in comparison with other Caspian Sea coastal countries. Evidence of this is seen in the launch of the Caspian Pipeline Consortium, an oil pipeline connecting the Tengiz oil field in western Kazakhstan to the port of Novorossiysk at the Russian Black Sea, in 2001. This is in addition to the Baku-Tbilisi-Ceyhan pipeline, which is the other main transit route for Caspian energy resources.

High investment costs

Apart from location and transportation challenges, and the need for high investments to bolster projects, legal issues surrounding the Caspian Sea are also hampering its appeal to foreign investors. High investment and eroding foreign investor confidence are inter-woven with the on-going disputes of the legal status of the Caspian Sea territories. The lack of agreements is causing regulations and laws to constantly change. In one instance, Russia and Kazakhstan had to agree to set maritime boundaries in order for both countries to develop their oil resources.

In the southern basin, disputes regarding maritime borders between Turkmenistan, Azerbaijan, and Iran have resulted in exploration setbacks. The legal status of the Caspian Sea is not clear since it is questionable whether it is a sea or lake, which means two sets of international laws (United Nations Convention on Law of the Sea 1982, or an international law governing border lakes) could apply.

The lack of agreements between the coastal countries of Russia, Kazakhstan, Turkmenistan, Iran, and Azerbaijan is also causing them to operate and shift regulations based on economic and political interests. Other challenges or threats in growing the oil and gas sector include high corruption stemming from the old Soviet Union regime, regulatory uncertainties, and threats of terrorism.

Conclusion

Taking into account the vast energy resources, robust economic growth, and open market opportunities, oil and gas is likely to remain as Kazakhstan’s leading economic driver. The country is endowed with about 4 billion tons of proven recoverable oil reserves and 3 trillion cubic meters of gas. With planned expansion of oil production buoyed by economic and political reform efforts and programs from the government, Kazakhstan will likely rise over a variety of challenges and threats. The sector is expected to thrive with a soaring production of 3 million bbl/d by 2015, which may spearhead the country into the world’s top 10 oil producing countries.

 



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