How will the military conflict between Russia and Ukraine in the Black Sea affect the export of Kazakh oil?

The Ministries of Defense of Russia and Ukraine exchanged threats to consider ships going to Russian and Ukrainian ports in the Black and Azov Seas involved in a military conflict, and this means that ships can be attacked. Thus, the export of Kazakh oil that is exported through the Black Sea is under the threat of a blockade.

No Agreement

On July 19, the Russian Defense Ministry announced that due to the termination of the “grain deal” which provided a humanitarian corridor for the transport of goods from Ukrainian and Russian seaports, all ships going to the Ukrainian ports would be considered potential carriers of military cargo. This was done after it became known that Ukraine would allegedly continue grain exports despite Russia’s announcement to stop the agreement. A day later, the Ministry of Defense of Ukraine stated in response that all ships in the Black Sea going to the seaports of the Russian Federation and Ukrainian seaports located on the territory of Ukraine temporarily occupied by Russia can be considered as carrying military cargo with all the associated risks.

Kazakh Energy Minister Almasadam Satkaliyev said on July 25th that he sees no significant risks for oil exports due to the situation in the Black Sea.

According to an expert interviewed by the British Air Force, if insurance companies consider that the risk of transporting goods across the Black Sea is high it can lead to the increase of the insurance rate or withdrawal. As source in one of the shipping companies told the Russian newspaper Vedomosti, some of the shipowners will refuse to work in the Black and Azov Seas and others will raise freight rates by 2 times or more. Cargo owners will have no choice but to shift the cost of transportation into the cost of cargo.

According to Reuters, Russian Black Sea grain terminals handle about 70% of Russian grain exports. The port of Taman accounts for about 7.5% of the country’s total LPG exports. Russia exports oil from the Sheskharis terminalwhich has an annual capacity of 40 million tons.

Last year 54.3 million tons of Kazakh oil were shipped through Sheskharis terminal owned by the Russian company Transneft as well as the Caspian Pipeline Consortium (CPC) in Yuzhnaya Ozereevka located near Novorossiysk (over 84% of the total export).

Potential Trap

The situation in the Black Sea raises the issue of alternative routes for the export of oil from Kazakhstan. After the war between Russia and Ukraine the CPC periodically began to fail and Kazakhstan began to search for routes that lie outside the territory of the conflicting parties.

Since European countries are the main (70-75% of export) customers for Kazakh oil the government prioritized to establish stable supply to this region. In this regard, the most suitable alternative route is the Baku-Tbilisi-Ceyhan (BTC) pipeline which goes to the Mediterranean Sea. Kazakh National Operator KMG managed to reach an agreement with the shareholders of the pipeline on transporting only 1.5 million tons of oil per year. This year Kazakh exporters began to supply in this direction.

Currently, BTC is loaded with half of its capacity. Kazakhstan could transport through the pipeline for another 20-25 million tons. However, the shareholders of the pipeline are not interested to increase the volumes of Kazakh oil since the quality of Azerbaijani oil transported through the pipeline will fall. Azeri Light is marketed above Kebco and CPC.

Another issue is the cost of transportation of BTC route which cost $124 per 1 ton, (three times higher than CPC).

Argus agency analyzed the cost of various routes for the export of Kazakh oil. The most inexpensive transportation is through the Druzhba oil pipeline where the Atyrau-Samara pipeline is connected. Oil supplies to Germany via this route cost $29 per ton and up to 17 million tons of oil can be shipped through it per year. The second inexpensive direction is also Atyrau-Samara but with delivery to the Baltic port of Ust-Luga costs $31 per 1 ton with the same capacity. Third inexpensive route is the CPC with $38 per ton. At the same time, the capacity of the CPC oil pipeline system for transporting Kazakhstani oil today is 72.5 million tons. The entire Kazakh export planned for 2023 in the amount of 71 million tons could be exported through this pipeline.

However, CPC was not stable last year and there is no guarantee that it will not suddenly stop this year. In addition, it is not clear how the situation in the Black Sea will deteriorate after mutual threats from Russia and Ukraine. Obviously, this will affect the cost of chartering tankers. It is necessary to have alternate export routes.

Through the Black Sea ports (Taman, Batumi) Kazakh oil products are exported as fuel oil and liquefied petroleum gas.

There are options for exporting oil to China through the Kazakh-Chinese pipeline. Argus estimates capacity at 20 million tons and the cost of transportation at $43 per ton. Shipment by rail to China will cost $142 per ton with an annual volume of more than 3 million tons. It is possible to export about 2 million tons of oil by rail to Uzbekistan and it will cost $45 per 1 ton. Export through Iran (oil will have to be delivered via the Caspian Sea on tankers) will cost $113 with a capacity of 5 million tons per year.

Window to Europe

After the ban on Russian oil by European Union Kazakhstani Kebco became a popular and increased in price. Since the end of February this year it has been sold at a premium to the reference Brent. Sulphurous Kebco is identical to Urals blend and refineries in Europe, mainly in Italy, Turkey and Spain buy Kazakh oil.

In addition, the decrease in deliveries also affected the growth in Kebco’s value. If in October last year Europe was supplied with an average of 270,000 barrels per day, in May this year the volume dropped to 180,000 barrels.

Almost the entire volume goes to the countries of the Mediterranean Sea: 60% through the Black Sea Novorossiysk and 40% through the Baltic Ust-Luga.

Argus experts note that the position of Kazakh oil on the global market looks stable. The Norwegian Juhan Sverdrup is delivered mainly to North-West Europe and Middle Eastern producers are bound by long-term contracts with Asian refiners and cannot quickly redirect shipments to European consumers.

In addition to Kebco, Kazakhstani oil of the CPC Blend is supplied to Europe via the CPC pipeline. In total, Kazakhstan provides about 50 million tons of the continent’s needs for hydrocarbons. It is necessary to look for the possibility of delivering oil to this region and bypass the unstable territory. The main alternative route is the Trans-Caspian route, that is the BTC pipeline.