When will the second stage of Kashagan development begin and who is the new beneficiary of the plant under construction at Karabatan?

The government and project shareholders cannot agree on who will build the GPP, which should help increase production at the field. And the former general contractor with new shareholders is again being considered as a new general contractor for the construction.

QazaqGaz announced in April that it was discussing with the Chinese National Petroleum Company (CNPC) plans to build a GPP with a capacity of 4 billion cubic m. per year, which will process Kashagan crude gas. The parties even created a joint working group to implement the project. In May, the head of the gas operator, Sanzhar Zharkeshov, informed the cost of the plant at over 1.3 trillion tenge ($2.6 billion). The enterprise will be able to produce over 3 billion cubic m. of marketable gas, 428.5 thousand tons – liquefied gas, 175.8 thousand tons – gas condensate and 896.3 thousand tons – sulfur.

As potential partners in the EPCf (engineering, supply, construction + financing), Chinese CNCEC, HQC, CITIC Group and French Technip Energies were selected.

Estimated time frame for project implementation is 2023-2028. It is expected that the plant will allow the operator of Kashagan to increase oil production at the field by 50,000 barrels per day, or 2.3 million tons per year.

However, this news came as a surprise to the North Caspian Operating Company (NCOC). The operator of Kashagan notes that there is a concept for further development of the field, agreed with the Ministry of Energy of the Republic of Kazakhstan, which includes the construction of a GPP with a capacity of 2 + 2 billion cubic m.  of raw gas per year, which is allegedly provided for by the Production Sharing Agreement for the Northern Caspian.

NCOC believes that the actions of QazaqGaz do not correspond to the chosen concept and, ultimately, will lead to another revision of the work and the project schedule.

The operator notes that last autumn he already applied to QazaqGaz with a request to clarify his plans, including the project structure, financing and the organization providing special technical services for this GPP. But never received any response.

The government and project shareholders cannot agree on who will build the GPP, which should help increase production at the field. At the same time, NCOC expressed written dissatisfaction with the fact that QazaqGaz is already negotiating with the Chinese CNPC. The Ministry of Energy believes that the consortium members are delaying the decision.

Kashagan and gas shortage

In general, it seems that the gas factor has become a stumbling block in the issue of the next stage of the development of Kashagan. The abundance of associated gas in the field has its pros and cons. In order to increase production, it is necessary to decide where to put the raw gas. Injecting it back into the reservoir means investing heavily in appropriate technologies, and in the conditions of the Northern Caspian, this should be as safe as possible.

Transporting gas to the shore and processing it there, or giving it to a third party for processing, is the most reasonable option. Moreover, gas consumption in Kazakhstan is growing every year, and the volume of its production is not keeping up with the growth in demand. It would seem that an ideal moment has been created for both the field operator and the government to carry out further development of Kashagan.

Currently, a GPP with a capacity of 1 billion cubic m. is being built at the field (or rather onshore, in the area of the Bolashak oil and gas treatment plant) for processing Kashagan raw gas. Construction work began in the spring of 2021 and was due to be completed in 2023. But the commissioning date was first postponed to 2024, and then to 2025.

Why have the deadlines been postponed so many times? Perhaps this is due to the departure from his post of the former head of QazaqGaz, Kairat Sharipbaev who according to a number of sources, was associated with the investor, GPC Investment LLP, who promised to build this plant. The enterprise passed into the ownership of the state last year, and the government transferred it to the management of the national gas company.

QazaqGaz promises to put the plant into operation in two years. Its construction will cost 391 billion tenge, of which the national company plans to finance 28% itself, 72% – through loans guaranteed by the Samruk-Kazyna fund.

However, the implementation of this project may remain at risk due to the complexity of this project and the choice of EPC – the general contractor. Recall that earlier, under the agreement between NCOC and GPC Investment LLP, Qazaq Zher Kurylys LLP was to act as the general contractor in the project implementation. After the January events of 2021, this company, among others (https://petrocouncil.kz/chto-budet-s-gazopererabatyvayushhim-zavodom-na-kashagane/ ), “announced” its withdrawal from the project and the plant had to complete another EPC contractor.

As an alternative, the assignment of the right to implement the project (OGCC KazStroyService JSC) was considered KSS company , but for unknown reasons this option was not implemented. Successful negotiations were also held with the Chinese EPC contractor, who agreed to implement the project on the condition that the current cost be maintained.

However, according to our information, a certain Kazakh Construction Group LLP is now being considered for the role of the general contractor, which turned out to be the same Qazaq Zher Kurylys LLP, renamed and re-registered with a new name on June 26, 2023.

From open sources it is known that Nurlakov Saidburkhan is the founder of the company, and Abdenov Serik, the former Minister of Labor and Social Protection of the Republic of Kazakhstan, is the head. Unofficially, one of the well-known businessmen from the Forbes list is called the ultimate beneficiary on the sidelines.

However, the position of the national gas operator QazaqGaz on the strategy of choosing an EPC contractor is unclear. An open tender with the selection of the best contractor offer is important for the implementation of this project and the further development of gas processing as an industry in Kazakhstan.

But let’s continue. NCOC plans to complete the construction of a 14.5 km gas pipeline by November of this year to supply raw gas to the GPP.

Two years ago, at the beginning of construction, the initiators of the project said that the launch of the plant would increase oil production at Kashagan to 450,000 barrels per day (bpd).

Quote in Russian: “A and B sitting on a pipe”

Last year, NCOC presented the government with a concept for the further phased development of Kashagan. During stage 2A, which is planned to be implemented during 2024-2028, oil production at Kashagan will increase by 50,000 bpd to 500,000 bpd. The operator intends to achieve this with the least possible effort by lifting some of the oil and gas production restrictions at Island D and the Bolashak plant. Of the new large facilities, an offshore pipeline and a gas processing plant for 4 billion cubic meters will appear. per year.

The preliminary cost of this stage is $4-5 billion. It is expected that the final investment decision on the project will be made next year.

In February of this year, the consortium participants announced their readiness to develop the concept of a gas plant in the format of 2 + 2 billion cubic m. per year. Two options for implementing the project are being considered. The first one is that NCOC builds and operates the GPP on its own, the second one involves a potential partner who builds the plant and will own it, working with the operator of Kashagan on a tolling processing scheme.

With oil prices at $85 per barrel, the Stage 2A internal rate of return (IRR) is expected to be approximately 30%, cash flow for shareholders will reach $20 billion, and for the republic – $15 billion.

The Ministry of Energy believes that the current shortage of gas in the country, the shareholders of Kashagan want to use to obtain significant economic and environmental concessions from the republic.

Stage 2B is planned to be implemented after 2032, moving the deadline by 2 years. According to forecasts, oil production at Kashagan during this period will increase to 700,000 barrels per day. 6 billion cubic m. will be sent for processing. of raw gas.

To implement the project, it will be necessary to drill 8 wells on the DC-05 island, lay a 34-inch multiphase pipeline to the shore, and build a new complex oil treatment unit – UKPN-2. The preliminary cost of Phase 2B, which is still at the pre-basic design stage, is $9 billion. The final investment decision is expected to be made during 2025-2027.

In February of this year, shareholders proposed to re-adjust the concept of stage 2B. NCOC wants to use the free capacity of Tengiz for gas re-injection.

The Ministry of Energy notes that the shareholders continue to delay the decision-making on stage 2B and the full-scale development of the field, and also disrupt the deadlines for the roadmap for the further development of Kashagan, approved in December 2020.

At the same time, the economic losses of the republic due to the postponement of the implementation of stage 2B will amount to about $2.8 billion.

Because it’s not profitable

According to the calculations of the Ministry of Energy, the implementation of stage 2A with the construction of a gas processing plant for 4 billion cubic m. per year will additionally produce over 4 million tons of oil before (and after) the end of the PSA in 2041, which is also the income of the republic.

The authority believes that it is necessary to insist on the option of building a gas plant on their own by the shareholders of Kashagan. At the same time, QazaqGaz must simultaneously carry out calculations and negotiations with investors in case the consortium refuses to implement the project.

Stage 2B involves the construction of a gas processing plant for 6 billion cubic m.  per year. Specialists believe that Kashagan’s shareholders are delaying the implementation of this stage, since it is economically unprofitable for them, and the assumption of financial obligations under the project will lead to a decrease in cash flows for the period of the project. Therefore, it looks unlikely that shareholders will decide to invest heavily in Phase 2B. The consortium is expected to demand significant economic and environmental concessions from the government to the detriment of the republic’s interests. This means that it is necessary to look for investors for the construction of the gas processing plant.

At the same time, NCOC is ready to build a plant with a capacity of 2 + 2 billion cubic m. of gas per year under stage 2A and has already asked for state support measures, in particular for tender procedures, local content, VAT, customs duties, etc.

The authorities agree to provide a number of benefits, but ask NCOC and consortium members to pre-fix a reasonable approach to the formation of the final gas price.

Recall that this year the Ministry of Energy and PSA LLP began arbitration proceedings with the shareholders of Kashagan, including in connection with the failure of the project participants to fulfill their obligations for the full-scale development of the field, various omissions on the project, including last year’s accident at the Bolashak plant, when the slugcatcher is out of order.

In June, Energy Minister Almasadam Satkaliyev ruled out an out-of-court settlement with shareholders in this case.

By the way, due to last year’s accident at the Bolashak plant at Kashagan, oil production decreased by 22%, to 12.7 million tons, gas production decreased by 20%, to 7.9 billion cubic m.

This year, NCOC plans to produce 18.2 million tons of oil and 11.9 billion cubic m. of gas, of which 3.9 billion cubic meters will be produced of commercial gas.

In 2017-2022, the field operator spent $6.5 billion on the purchase of goods, works and services, of which the share of local content was $3.3 billion.

In total $72.7 billion has been invested in the North Caspian project since the start of its implementation. During this period, Kazakhstan received $3.8 billion in the form of a priority payment, bonuses and a share, including about $560 million last year. For comparison, the income of Kashagan shareholders for 2022 was $7.9 billion.

It is assumed that by the end of the PSA in 2041, the republic’s cash receipts at an oil price of $90 per barrel (excluding projects of stages 2A and 2B) will amount to $83 billion. Shareholders will earn $117 billion over the same period.

Shareholders of Kashagan: KazMunayGas (16,88%), ExxonMobil, Eni, Shell, TotalEnergies (each one has 16,81%), CNPC (8,33%) and Inpex (7,56%).