Why does Kazakhstan want to build an oil pipeline along the bottom of the Caspian Sea?

Kazakhstan intends to double oil exports along the Trans-Caspian route, using the maximum capacity of the port of Atyrau, which today is 7 million tons per year. At the same time, the implementation of such plans will require about 10 new tankers with a deadweight of 12 thousand tons, the Ministry of Energy said.

The possibility of building the Atyrau-Kuryk oil pipeline, as well as a pipeline along the bottom of the Caspian Sea, is also being studied. It looks as if the government has decided to resume the implementation of the project of the Kazakhstan Caspian oil transportation system.

The ministry explained that the need for additional export routes appears in connection with the growth of oil production and the commissioning of new offshore fields, as well as the development of the Trans-Caspian International Transport Route. The Ministry of Energy is working together with the national company KazMunayGas (KMG), as well as other stakeholders.

KMG said that a joint project group is being formed together with international oil companies, which will analyse the current situation and prepare the necessary recommendations. Based on the data obtained, a decision will be made on the implementation of the project.

From Aktau to Ceyhan

The idea of laying an oil pipeline along the bottom of the Caspian Sea has been discussed before, especially after the collapse of the USSR and Kazakhstan’s independence, when the republic began to dispose of its natural resources itself. The arrival of investors in Tengiz, Kashagan and Karachaganak raised the issue of the need to expand existing export routes. The construction of the Caspian Pipeline Consortium (CPC) oil pipeline and further stages of its expansion removed the issue from the agenda for a while. But Kazakhstan intends to increase production, and first of all, this will be done through the development of offshore deposits. And this more than ever actualizes the need to lay a trans-Caspian oil pipeline, the profitability of which is now beyond doubt.

Kazakhstan and Azerbaijan agreed on the creation of the Kazakhstan Caspian Oil Transportation System (KCTS) back in 2006. At that time, the heads of the two republics signed an agreement to support and promote the transportation of Kazakh oil through the Caspian Sea and Azerbaijan. The capacity of the system was supposed to be 37 million tons per year. The treaty allowed the pumping of Kazakh oil through all available routes through the territory of Azerbaijan, but the Baku-Tbilisi-Ceyhan (BTC) oil pipeline overlooking the Mediterranean Sea was called a priority.

The KCTS project involved the construction of an oil pipeline – 740 km long and with a capacity of 25 million tons per year – from the Eskene area, where the onshore complex of the Kashagan field is located, to the port of Kuryk on the Caspian Sea, as well as a marine terminal with a capacity of 10 million tons per year (with subsequent expansion), with six oil storage tanks with a volume of 10,000 cubic meters each. To begin with, they wanted to transport oil from Aktau to Baku on tankers with a carrying capacity of 60 thousand tons (they had to be bought or built). With the growth of oil production at Kashagan to 20 million tons per year, it was planned to pump it through a pipeline laid along the bottom of the Caspian Sea. In addition, it was necessary to expand the loading terminal and the infrastructure of connection with the BTC on the Azerbaijani section. At that time, the cost of laying an oil pipeline along the bottom of the Caspian Sea was estimated at $1 billion, and the creation of the entire system at $4 billion, according to the calculations of the French Total.

KazMunayGas signed a memorandum of cooperation with investors of Kashagan and Tengiz on the project to create a KCTS. Its profitability was primarily associated with the development of Kashagan. But since the consortium postponed the start of commercial production at the field, the creation of the trans-Caspian system was also postponed. In July 2010, KMG announced that the project was postponed to 2018-2019, since due to the delay in the implementation of the second stage of the Kashagan project, there is no need for additional export capacities in the amount of 25 million tons per year.

At the same time, Kazakh oil continued to be shipped through the BTC, albeit in small volumes. But in 2015, exports along this route stopped, since Kashagan did not grow, and free capacities appeared at the CPC.

The current production capacity allows Kashagan to produce 20 million tons of oil per year. Last year, the operator was close to achieving the design indicators for the first time – almost 19 million tons were produced.

Pro et contra

The commissioning of the BTC pipeline in 2005 with a capacity of 50 million tons of oil per year broke the Russian monopoly on oil pipelines that exported Caspian oil, but not for Kazakh oil. It is possible that the KCTS project was not implemented, among other things, because of the uncertainty of the legal status of the Caspian Sea. After the collapse of the Soviet Union, the reservoir was at the disposal of five countries at once. If earlier the exploitation of the sea was regulated by documents signed by two countries – the USSR and Iran, now it was necessary to determine the legal status of the sea, taking into account the new borders. Iran and Russia believed that in order to lay pipelines along the bottom of the sea, the states must obtain permission from all five Caspian countries, while Turkmenistan, Azerbaijan and Kazakhstan proposed to coordinate the project only with those sections of the bottom through which the pipe would pass. It took the Caspian states a long 22 years to sign the Convention on the Legal Status of the Caspian Sea in 2018.

With the signing of this document, all formal reasons for banning the construction of the trans-Caspian oil pipeline disappeared. Article 14 of the Convention states that the parties may lay underwater trunk pipelines along the bottom of the Caspian Sea, provided that their projects comply with environmental requirements and standards enshrined in international treaties to which they are parties, including the Framework Convention for the Protection of the Marine Environment of the Caspian Sea and the relevant protocols thereto. Determination of the route for laying submarine cables and pipelines is carried out in agreement with the party through the bottom sector of which the submarine cable or pipeline is to be routed. That is, Iran and Russia can no longer ban the construction of the pipeline, unless they demand to strengthen environmental safety.

Route features

Now the Kazakh Trans-Caspian route includes sending oil to world markets, both through the BTC and through the Russian Makhachkala. Deliveries through Iran by swap are not currently carried out.

Raw materials are delivered to Makhachkala by tankers from the port of Aktau. Then it goes through the pipeline to the Black Sea port in Novosibirsk. This is an active route. In 2019-2021, the entire volume of trans-Caspian oil exports from Kazakhstan was sent through it. But in 2022, the republic resumed exports along the BTC and the Baku-Batumi railway route, for the first time since 2015 and 2017. It is difficult not to notice that this happened due to interruptions in the work of the CPC, which was subjected to pressure from Russian officials. CPC General Director Nikolai Gorban said this year that the pipeline has never stopped for political reasons. However, it is obvious that with the beginning of Russia’s military aggression against Ukraine, and the subsequent anti-Russian economic sanctions of the West, the pipeline has become an instrument of pressure from the Russian Federation on Kazakhstan and Western companies that export oil along this route. Despite the fact that the Ukrainian military does not attack the CPC marine terminal, although they have every reason and opportunity to do so, since Russian oil is also exported through it in addition to Kazakh oil, this direction is becoming less and less reliable.

CPC, whose capacity in 2023 (after the completion of the next expansion program) increased by almost a quarter, remains the main and economically profitable export route for Kazakhstan. Last year, it shipped over 56.5 million tons of Kazakh oil, or more than 80% of the country’s total exports. This figure (80%) has been held for many years. But in the future, it will change towards the trans-Caspian route. And not only because of the ongoing war between Russia and Ukraine, and therefore the danger of attacks on the pipeline infrastructure, but also because of the expected increase in oil production from Kazakhstan’s offshore fields, which are more profitable to ship through the Caspian Sea.

In 2023, S&P Global analysts changed their forecast for Kazakhstan’s export destinations and now they believe that the BTC oil pipeline will be used to export Kazakh oil at least until 2050. At the same time, experts believe that the volume of trans-Caspian oil exports from Kazakhstan will reach a maximum of 3.9 million tons in 2030, after which they will decrease to 3.2 million tons in 2050. But the authorities want to increase exports through the Caspian Sea to at least 20 million tons per year.

There are a number of points that complicate the implementation of these plans. In particular, the low level of netback of the trans-Caspian route compared to those provided by exports through the CPC and Atyrau-Samara oil pipelines. S&P’s assessment showed that for the CPC, the actual earned price of oil minus transportation costs is about $534 per ton, for the Atyrau-Samara oil pipeline – in the range of $522-546, for trans-Caspian routes – $446-474, and when exported through the Kazakh-Chinese pipeline (KCP) – $477 per ton.

However, experts believe that in the longer term, we can expect some reduction in the cost of transportation along these routes due to increased efficiency and the removal of infrastructure constraints. The cost of transportation along the trans-Caspian route is almost three times higher than the cost of exports along the CPC. The largest cost unit for the entire route, starting from Atyrau, is rail transportation to Aktau, the cost of which is almost $60 per ton.

These costs can be significantly reduced through the construction of an oil pipeline. For example, part of the raw materials from the Mangistau fields now goes through the existing system of the KazTransOil (KTO) company in Atyrau. Whereas from some fields, such as Karazhanbas and Kalamkas, it can be supplied through KTO oil pipelines directly to the port of Aktau. Such deliveries have a completely different cost structure. Companies operating in the above fields tend to export via the trans-Caspian route, as this allows them to reduce transportation costs compared to the route to the Atyrau-Samara oil pipeline. When oil is shipped to Aktau through the KTO pipeline, only about $3 per ton is spent. Costs can also be reduced by installing single point moorings in ports to simplify the procedures for loading and unloading tankers, experts say.

There are not enough courts

Now the tanker fleet and the infrastructure of sea terminals that are at the disposal of Kazakhstan are not able to provide transportation in the volumes that the Kazakh authorities are aimed at. The largest oil carriers in the country are the state-owned company Kazmortransflot LLP (KMTF) and the private Mobilex Energy. The characteristics of the oil tankers they have are similar: they were built in 2005-2006 in Russia, their deadweight is 12,000-13,000 tons. A tanker of this capacity can transport about 1 million tons of oil per year from Aktau to Baku. KMTF owns three vessels, Mobilex Energy – two.

According to experts, Kazakhstan has several possible ways to avoid a shortage of tanker capacities: to purchase new ones from foreign suppliers; to build it yourself; to make wider use of the Azerbaijani fleet.

Buying new tankers without guarantees of their loading is risky from a commercial point of view. KMTF has already stated the importance of obtaining officially confirmed delivery commitments from shippers. This means that the company is not yet ready to purchase new vessels without long-term transportation contracts.

There is an option to create a tanker construction plant in the country. Such an approach looks expedient to solve the problem in the longer term, experts believe. The Ministry of Energy also holds this opinion. However, the authorities have not yet approved a timetable for implementation, nor have they decided on financing mechanisms and other key aspects of such a project.

The wider use of the Azerbaijani fleet to transport Kazakh oil from Aktau to Baku means an increase in dependence on Azerbaijan in this matter. Now Azerbaijani and Kazakh ships are involved in deliveries on a relatively parity basis. Azerbaijan, which has the largest fleet among all the Caspian states, is able to allocate more vessels.

The problem of the shortage of ships can be solved by Caspian Integrated Maritime Solutions (CIMS), a joint venture of KMTF and the Emirati Abu Dhabi Ports Group. It was established in 2023 specifically to provide maritime and shipping services to energy companies in the Caspian Sea. Last year, CIMS acquired two tankers with a deadweight of 8,000 tons each. The joint venture plans to apply for participation in tenders for various projects with an estimated contract value of more than $780 million. And they want to transport oil in the waters of not only the Caspian, but also the Black Sea.

Marine terminals

There is also work to be done to remove the infrastructure restrictions of the two Kazakh ports. The total capacity of Aktau and Kuryk is about 12 million tons per year. At the same time, the railway tracks leading to these seaports are overloaded, and dredging needs to be carried out in both terminals. Oil supplies through Aktau peaked at 9.6 million tons in 2006, but since 2010 their volume has been much lower. According to the Ministry of Energy, at the beginning of last year, Aktau’s crude oil shipment capacity was 7.5 million tons per year.

The Aktau International Sea Trade Port, built in 1963, has been owned by the national railway company Kazakhstan Temir Zholy (KTZh) since 2013. Oil companies have access to the port by pipeline and rail. The pipeline, which is operated by KTO, supplies oil from the fields of the Mangistau region, and raw materials from other regions get to the port by rail, which increases transportation costs. As it turned out, the 17 km section of the railway route to Aktau belongs to the private company Kaskor-Transservice, which charges a fee significantly higher than the usual tariff of KTZh.

Also in the port of Aktau, it is planned to reconstruct two berths that were decommissioned eight years ago. According to experts, the measures being implemented or under consideration can increase the port’s oil transshipment capacity to 17 million tons per year.

The port of Kuryk, located 70 km south of Aktau and commissioned in 2017, has opportunities for transshipment of oil and petroleum products using railway ferries. At the same time, Kuryk is closer to Baku compared to Aktau, which means that the travel time for tankers is shorter, and its water area is deeper. Although dredging needs to be carried out here as well. The port’s capacity is planned to be increased to 20 million tons of oil per year. Preliminary basic design is currently underway. The cost of the project may amount to $50 million.

Thus, if we sum up the planned capacities of the two ports for oil shipments, we will get 37 million tons per year, just as much as was planned within the framework of the Kazakhstan Caspian oil transportation system.

Recall that on March 11, KMG and the Azerbaijani state-owned company SOCAR signed an agreement to increase the volume of transit of Kazakh oil through the BTC to 2.2 million tons per year. The previous contract, concluded in 2022, provided for the transit of 1.5 million tons of oil per year.

According to the Ministry of Energy, in 2023, 1 million 57 thousand tons of Kazakh oil were shipped along this route. According to KazTransOil, about 1.4 million tons (including more than 1 million tons of Tengiz), which is 5.5 times more than a year earlier (250 thousand tons). can be read here.