Kazakhstan will have to find alternative oil export routes even if the Caspian Pipeline Consortium (CPC) system runs smoothly as the republic plans to increase hydrocarbon production.
“If today we are planning about 85-87 million tons of annual production, then by 2024 the production level will already be 100 million and even 103-107 million. If new reserves are discovered, there may also be an increase. Therefore, we will inevitably have to address issues of increasing our transport capabilities,” says Energy Minister Bolat Akchulakov.
According to him, there are two main directions where export oil can be shipped: the first – to China, if it agrees to increase the volume of shipping and the second – through the Caspian Sea (to Europe). There are also opportunities to deliver to Iran through swap operations in small volumes – up to 5 million tons.
It should be reminded that this year oil transportation through the CPC, through which about 80% of exports (Tengiz, Kashagan, Karachaganak) is delivered, decreased several times. In March, the operation of two of the three SPMs of the marine terminal in Novorossiysk was suspended for a month, allegedly damaged due to a storm. In June, the operation of two mooring devices was suspended for 10 days due to the elimination of the mine danger. In early July, the Primorsky Court decided to suspend the work of the CPC for 30 days at the suit of Rostransnadzor. However, then the regional court replaced the suspension of activities with a fine of 200 thousand Russian rubles.
At the same time, on July 7, President Kassym-Jomart Tokayev announced the importance of diversifying oil supplies and named the Trans-Caspian route as a priority for exports. He instructed KMG to work out the best option for its implementation including the possibility of attracting investors from the Tengiz project. The government and Samruk-Kazyna were given the task to increase the capacity of the Atyrau-Kenkiyak and Kenkiyak-Kumkol oil pipelines, transform ports in the Caspian Sea and strengthen the navy.
The Trans-Caspian route was chosen as the main direction since it provides an opportunity to enter the European premium market. Every year, the countries of this continent buy over 50 million tons of Kazakh oil (more than 73% of all exports from the republic). In this regard, the most suitable option is to transport oil through the Baku-Tbilisi-Ceyhan (BTC) pipeline. The oil pipeline is currently not operating at full capacity. With a annual capacity of 60 million tons, in fact, only 26 million tons of oil were shipped through it last year. Azerbaijan, where the pipeline originates, is seeing a decline in oil production, dropping from over 1 million barrels per day (b/d) in 2010 to 0.74 million b/d in 2021 by about 30%. In addition, the BTC was built with the expectation of transporting not only Azerbaijani but all Caspian oil (within the limits of possibilities). However, how profitable is it now for exporters to ship raw materials through this pipeline and are they ready to accept Kazakh oil in Baku?
The press service of the Baku office of BP which owns a 30.1% stake in the consortium that owns BTC explained to Petrocouncil whether the pipeline is capable of receiving oil from Kazakhstan.
Thus, according to Bakhtiyar Aslanbeyli, BP vice-president for the Caspian region, oil from the Azeri-Chirag-Guneshli block and condensate from the Shah Deniz field are mainly transported via BTC. In addition, this pipeline transports small volumes of Caspian regional blend of oil which are received from the client based on a transportation agreement. BP reports that the pipeline continues to transport oil from Turkmenistan, since October 2013 the shipment of some volumes of Tengiz oil from Kazakhstan has been resumed. From commissioning in June 2006 until the end of the second quarter of 2022, a total of 3.87 billion barrels (more than 516 million tons) of oil were transported via the BTC.
The pipeline currently has sufficient capacity to receive additional volumes of third-party oil, but the technical and commercial aspects of such a transportation agreement must first be agreed with the supplier and shippers, and then with the consortium, Aslanbeyli says.
Meanwhile, on Friday August 12 Reuters reported that in September Kazakhstan will start exporting part of its oil through Azerbaijan bypassing Russia. Agency sources said that KMG is negotiating with the trading division of the Azerbaijani state company SOCAR on permission to pump 1.5 million tons of Kazakh oil per year through the Azerbaijani pipeline. The final contract is to be signed at the end of August and the shipment of oil via the BTC will begin in a month. The volume of just over 30,000 b/d is small compared to the usual 1.3-1.4 million b/d that passes through the CPC, the agency notes.
Another 3.5 million tons of oil per year from Kazakhstan can be exported in 2023 through another Azerbaijani pipeline to the Georgian Black Sea port of Supsa.
Combined with BTC flows total Kazakh oil will be just over 100,000 b/d or 8% of exports via the CPC pipeline. According to the agency Tengizchevroil is separately negotiating exports via pipeline and rail.
The BTC pipeline could also be an option for TCO, the agency said, but it could take six months for exports to begin. The company had already begun to divert a small amount of oil by rail to the Georgian port of Batumi in April when a hurricane caused part of the CPC terminal to fail. TCO is ordering more rail traffic and it may increase in September or October.
The diversion of oil to the BTC means that Kazakhstan will have to rely on a fleet of small tankers to transport oil across the Caspian Sea to Baku from the port of Aktau which has limited capacity. Another factor hindering the adequate coordination of the route is the quality of the oil. The flagship Kazakh CPC Blend is a light sour crude sold at a significant discount compared to the flagship Azerbaijani BTC which is a medium that is easier to process.
Reuters noted that Kazakh oil exports account for more than 1% of world supplies, or about 1.4 million b/d.
Comparison in favor of….
Last year the CPC shipped over 60.7 million tons of oil (3% more than the previous year) where over 53.71 million tons Kazakh, about 7.6 million tons Russian. The largest volumes came from the Tengiz (26.5 million tons), Karachaganak (10.2 million) and Kashagan (15.7 million) fields.
From 2001 to January 9, 2022, about 767 million tons of hydrocarbon were supplied to world markets through the Tengiz-Novorossiysk oil pipeline system where 669 million tons from Kazakhstan and more than 98 million tons from Russia.
In 2019 CPC shareholders decided to implement a debottlenecking program. On the Kazakhstan section of the pipeline pumping stations, auxiliary systems of PS Tengiz, Atyrau, Isatai and Kurmangazy will be upgraded. After all the work is completed the oil pipeline will be able to pump 83 million tons of oil per year: from Kazakhstan – 72.5 million, from Russia – 10.5 million. During 2021-2023, CPC plans to allocate about $600 million for the implementation of the program.
Despite all the shortcomings experts believe that the CPC will remain the most optimal route for the export of Kazakh oil: both in terms of the speed of delivery to world markets and the cost of pumping ($38 per 1 ton).
While transportation via the BTC (if you start using this route today) will cost $90 per 1 ton. This includes the cost of transporting oil by rail from Atyrau (where oil is delivered from Tengiz, Karachaganak and Kashagan to the port in Aktau) and from there to the BTC. This includes a tariff of $32 per 1 ton for pumping oil through the pipeline.
There is an option with the resumption of the Kazakhstan Caspian Transport System (KCTS) project, but it requires large investments. In 2007, a consortium was created for this project with the participation of KMG, Chevron, ExxonMobil and a number of other foreign companies. The project included the construction of an oil pumping station at Tengiz, the Tengiz-Oporny-Uzen-Aktau main oil pipeline, an oil terminal and a new port in Kuryk, as well as the reconstruction and expansion of the Aktau port. At the initial stage, the capacity of the route would be 25 million tons of oil per year with the possibility of expanding in the future to 56 million tons. The cost of the project was estimated at $5 billion, half of which was to be spent on the construction of the Eskene-Kuryk oil pipeline through which oil would be shipped from Kashagan.