Kazakhstan has again been found to have exceeded the quota set under the OPEC+ agreement. International news agencies, citing their sources, reported that the country continues to violate its commitments to reduce oil production.
According to Reuters calculations, the republic produced an average of 1.538 million barrels per day (bpd) in June, exceeding the OPEC+ quota by about 70,000 bpd.
Bloomberg wrote that OPEC+ member countries continue to produce more oil despite promises to compensate for excess production.
On July 8, the Ministry of Energy issued a statement that Kazakhstan supports the decisions taken jointly with the member countries of the alliance and has prepared a detailed plan, according to which it will gradually compensate for the overproduction in the first half of the year until September 2025.
Earlier, the Ministry of Energy reported that in March the republic exceeded its production quota by 131,000 bpd. The ministry attributed this to “climatic conditions and the duration of the heating season”. As of today, the country’s quota, agreed at the last OPEC+ meeting on June 2 this year, is 1.468 million b/d. At that time, the alliance extended the previously adopted for all participants reduction volume at the level of 5.86 million b/d. This includes a mandatory production cut of 3.66 million b/ds, adopted by all OPEC+ members (the term of this agreement expired at the end of 2024), as well as voluntary reductions by eight members of the alliance (including Kazakhstan) of 2.2 million b/d, which were originally scheduled to be completed in June 2024. The mandatory reduction was extended until the end of 2025, and the voluntary reduction until the end of September this year. Then – from October 2024 to September 2025 – these volumes will be gradually restored.
Production and exports have increased.
Kazakhstan has participated in the OPEC+ agreements since its inception in 2016, except for March 2020, when the alliance broke up due to disagreements between Saudi Arabia and Russia. Coordinated action by oil-producing countries helped first raise (after falling in 2014) and then maintain relatively high oil prices. But in recent years, especially since 2022, after Russia, one of the largest oil producers (about 10% of global production), became involved in a war with Ukraine and oil prices soared to $100 per barrel, several OPEC+ members have stopped honoring their commitments to reduce production. In 2023, the countries of the alliance even agreed to hire IHS Market, Rystad Energy and Wood Mackenzie to conduct an independent audit of the production capacity of all members of the deal. The audit was to be completed at the end of last month. Based on its results it was planned to make quotas for the next year.
However, the reasons for non-compliance of the deal participants may be different. If some exporters exceed the production quota to take advantage of the moment and capitalize on the rising cost of oil, others are simply technically unable to influence the level of production in their country. For example, if in Saudi Arabia and the UAE the main production is accounted for by state-owned companies, in Russia and Kazakhstan – by private companies. And in our case, even foreign companies.
“The main players that can support and even increase production are the three major projects – Tengiz, Kashagan and Karachaganak. All the others are unlikely to be able to because their production is falling. Over the last year, even if we compare monthly figures, we can observe a decline in production. That is, we have the main excess in three fields. But we should also realize that at Kashagan and Karachaganak contractors work under PSA, and Tengiz is a joint venture, where the majority shareholders are international companies. And I do not think that the government can in any way oblige them to reduce production. These are special regimes, so they can only ask very strongly,” oil and gas analyst Abzal Narymbetov said.
The government can only ask the operators of Tengiz, Kashagan and Karachaganak to reduce production. But the companies can refuse to comply with the government’s request, and nothing will happen to them. Unless the scheduled maintenance work in the fields is shifted, in certain months production will be reduced.
“But on the other hand, every production cut reduces their profitability. And they have a payback period. And the state is likely to compensate for these lost revenues. Because they have the period of exploitation of the fields limited by the license period. If they do not get profits now, they will probably never get them. And they need to compensate for their investments anyway. That is, it all comes down to cost recovery and profitability, and they will constantly coordinate all this,” the expert believes.
At the same time, it is not particularly profitable for the state to reduce oil production when production is already decreasing in other fields. The more oil is produced and exported, the more income the country has. Other industries do not bring as much profit as oil. And only Tengiz, Kashagan and Karachaganak can increase oil production. Now, approximately 80% of production in the country falls on these three projects. And all other producing companies send the main part of oil to the domestic market to cover the deficit of fuel and lubricants, which is growing annually.
“In the concept of the Ministry of Energy it is voiced that up to 3.5 million tons of oil from these three fields will be redirected to the domestic market. But here again, the issue of price comes into play. It is unlikely that these companies will supply oil to the domestic market at the same price as the others, when it is written in black and white in their contracts that they can send oil to the place where the maximum price will be. I don’t think there will even be a market price on the domestic market,” the oil and gas analyst believe.
According to the price agency Argus, in May this year at the Pavlodar Petrochemical Plant (PNHZ) 1 ton of oil cost (dap) $238-272 (105-120 thousand tenge), that is, $33-37 per barrel. At the same time on international markets, it was sold at an average of $80 per barrel and was often even more expensive. At the same time, PNHZ had the highest price on the domestic market. At Atyrau refinery it was even lower – $170-192 (75-85 thousand tenge) per ton, i.e. $23-26 per barrel; Shymkent refinery offered $204-272 (90-120 thousand tenge) per ton or $28-37 per barrel.
Can we get out?
Meanwhile, production cuts can be beneficial for the companies themselves. In the sense that it somehow leads to a decrease in the supply of oil on the market, which is followed by an increase in its price. If all OPEC+ members cut and it gives a rise in prices even by a couple of dollars per barrel, it can significantly affect the economy of the company, because by reducing production and correspondingly increasing the price of oil, they can get more profit.
“But again, this must be modeled and look at how much each reduction of a barrel of oil in Kazakhstan can affect the increase in oil price and each enterprise can compensate and get even more profit. I do not know to what extent such a model exists. But four years ago, I did such a simple algorithm, where I showed that by reducing production and increasing the price per barrel, enterprises get more profit than if they continue the same production,” says Abzal Narymbetov.
In his opinion, the volume of oil that Kazakhstan commits to cut is insignificant compared to how much other alliance members, such as Saudi Arabia and Russia, which take the brunt of the production cuts, are cutting.
“The fact that our country does not fulfill its production reduction commitments, or does not compensate for exceeding the quota, I think it will not affect the whole volume very much. It should also be noted that OPEC+ decisions are more of a recommendatory nature. Members of the alliance make commitments, but there are essentially no penalties for failure to fulfill them. However, if it is systematic, the states themselves must decide whether it is worthwhile to be in the alliance. If you do not fulfill your obligations, then why participate in the deal,” the expert says.
Participation in OPEC+ is more of an image value for some countries. But if you don’t fulfill your commitments and you are written about by the world’s business publications as some kind of cheat, which hurts your reputation, then maybe you shouldn’t be in this group and make commitments. Even OPEC members leave the organization and some then come back again. And it’s not the fact that the cartel is penalizing anyone for that.
“We must look holistically at how beneficial it is for Kazakhstan to be in this club. There are many countries that do not make any commitments, such as Brazil, which increases production every year, thus earning more. While OPEC and OPEC+ countries reduce production,” the expert notes.
Some producers participating in the alliance reduce production and contribute to the increase in the cost of oil, while others not participating in the deal, such as Brazil, the U.S., Canada, on the contrary, increase production and take advantage of rising prices.
According to the price agency Argus, in 2023 Kazakhstan produced 89.97 million tons of oil, which is 7% more than a year earlier. Oil exports from the republic increased by almost 10% to 70.54 million tons. This year, according to Argus forecast, the indicators will grow again: production to 90.30 million tons, exports to 70.80 million tons.
At the same time, the actual figures for January-April this year do not quite correlate with the forecast data. Thus, 30.26 million tons of oil were produced in four months, which is 0.6% less than a year earlier. Whereas exports grew much more than expected – by 1.2%.
Experts of the agency expect that planned repairs at Tengiz and Kashagan will limit oil production and export this year. At the same time, shippers have already reduced requests for oil pumping through the Caspian Pipeline Consortium (CPC) system from 70 to 65.2 million tons.
Alternative route
Another major problem for the government related to the country’s oil and gas industry (besides the lack of full control over oil production and exports) is the dependence of export routes on Russia. Last year, 96.7%, or more than 68.2 million tons, of Kazakhstan’s export oil was transported via routes through Russia. The CPC alone provided transit for 80.21% of exports. At the same time, the export pipeline system, which is mainly used by companies developing Tengiz, Kashagan and Karachaganak, has been characterized by its periodic unscheduled shutdowns over the past two years. And although the pipeline operator assures that the system outages are due to storms, it is hard not to link them (outages) to Russian military actions, which started just in 2022.
In addition, there is no guarantee that the Ukrainian military will not at some point launch attacks on the CPC marine terminal, through which Russian oil is also shipped – almost 7 million tons last year. Therefore, Kazakhstan needs to keep alternative export destinations on standby.
“This issue has been discussed many times. In fact, there is no alternative to the CPC, we must honestly admit. And in the next 3-5 years, and even more, this (to find an alternative – author’s note) is impossible to realize. But I have always had the position, not in terms of economic feasibility, but in terms of risk management, that you should always have an alternative. Even if such a route will not fully replace the CPC. Because independence is above any enterprise or company. And I am a supporter of the fact that there should always be an alternative route, even if it is not profitable for the state to build it,” says Abzal Narymbetov.
It cannot be said that today the republic completely lacks access to the world oil markets or other ways of selling the extracted oil. Some oil could be sold to neighboring Uzbekistan and China, some could be shipped via Iran along the Caspian Sea. Export through the Baku-Tbilisi-Ceyhan (BTC) pipeline is certainly the most acceptable option. Argus experts have calculated that the total capacity of all alternative routes is 20-25 million tons per year. At the same time, transportation costs on other routes may be higher, but oil is also more expensive (see tables below). Thus, oil supplied via BTC is sold at a premium to Brent, while via CPC, on the contrary, at a discount.
The situation with exports to Uzbekistan is not easy either. Exports to the neighboring republic are also declining, as Kazakh oil is losing in competition to cheap Russian crude. We can’t send much to China either, because we gave this route to the Russians for 10 years. The domestic market is also unable to digest a large volume of oil, as the utilization of Kazakhstan’s refineries is close to 100%. Therefore, only the far abroad market remains. And there are not so many routes that can deliver oil there.
“I don’t know, maybe they are a bit relaxed now because these problems with the CPC, which were in 2022, when the pipeline was partially or completely shut down several times, are not there now. Nor were they in 2023. But not even a full alternative, but at least a partial one should be available. It is better than having nothing at all,” says Abzal Narymbetov.
Table 1. Oil exports from Kazakhstan
mln tons
| Direction | 4М 2024 | 4М 2023 |
| Atyrau – Samara | 2,87 | 2,99 |
| KTK | 19,73 | 19,49 |
| Kenkiyak – Alashankou, including: | 3,78 | 3,66 |
| Export of Kazakh oil | 0,44 | 0,44 |
| Transit of Russia oil | 3,34 | 3,22 |
| Aktau Port | 1,19 | 1,02 |
| Railroad | 0,20 | 0,25 |
| Total | 24,26 | 23,97 |
Table No. 2. Oil export routes from Kazakhstan
mln tons
| Direction | 2024* | 2023 |
| Atyrau – Samara | 9,2 | 9,2 |
| Including “Druzhba” | 1,2 | 1 |
| KTK | 58 | 56,6 |
| Mahachkala Port | 2 | 2 |
| Batumi Port | 0,1 | 0,1 |
| Baku – Tbilisi – Jeihan | 2 | 1,4 |
| Uzbekistan | 0,1 | 0,1 |
| Kazakh-China Pipeline | 1,2 | 1,2 |
*Forecast
Table 3. Capacity of directions from Kazakhstan
mln tonsper year
| Direction | Capacity | Capacity Load in 2023 |
| Atyrau – Samara | 17 | 9,2 |
| KTK | 72,5 | 56,6 |
| Aktau Port | 5-7 | 3,5 |
| Mahachkala Port | 9 | 2 |
| Batumi Port | 7 | 1,6 |
| Supsa Port | 7,4 | 0,2 |
| Baku – Tbilisi – Jeihan | 60 | 29,4 |
| Iran | 5 | 0,2 |
| Uzbekistan | 2 | 0,3 |
| Kazakh-China Pipeline | 20 | 11,2 |
| China (Railroad) | 3 | 0 |
Table No. 4. Transportation costs for deliveries from Kazakhstan
(May 2024) $/ton
| Direction | Cost |
| Novorossiysk – Ust-Luga (Atyrau-Samara) | 30,6 |
| by the Druzhba pipeline to Germany | 31 |
| KTK | 38 |
| Mahachkala – Novorossiysk | 39,7-40,1 |
| Makhambet Station – Samur – Batumi | 137 |
| Baku – Tbilisi – Jeihan (calculated upon shipment from Kulsary station) | 91,46 |
| Iran (from Aktau) | 63,2 |
| Makhambet Station – Fergana | 151,7 |
| Zhagyr Station – Fergana | 58,8 |
| Kazakh-China Pipeline | 43,6 |
Table No. 5. Differentials for Caspian oil grades
(mid-June 2024) Discount or premium in USD($) per barrel
| Oil grades | $/barrel |
| Urals (when shipped via Ust-Luga and Novorossiysk) | -15,30/-15,40 |
| Kebco (By Druzhba Pipleline) | +2,25 |
| Kebco (via Novorossiysk Port) | +2,50 |
| KTK blend | -2,90 |
| Tengiz, condensate (Aktau, towards Azerbaijan) | -18/-25 |
| Baku – Tbilisi – Jeihan blend | +2,50 |
| Alashankou blend (China) | -5,33 |
| Kumkol/Urals | -9/-12 |
| Kiyanly Blend (Turkmenistan) | -18/-20 |
Source: Argus