Will KazMunayGas find oil at Karaton?

The National Company KazMunayGas and the Russian Tatneft intend to start drilling the first exploratory well at the Karaton subsalt site this year, and in 2028 – to produce oil. Even the planned annual volume of oil and gas production has been named.

From the name of the site, you can understand that we are talking about the search for hydrocarbons in deep horizons. It is assumed that the depth of the well will be 5,500 meters. However, oil has already been searched for in this area – both in Soviet times and after independence, but nothing has been found. Why has it now been decided that a large field will be discovered?

There was an agreement

KMG announced that this year drilling of the first exploratory well with a depth of 5500 m will begin at the Karaton sub-salt site. It is assumed that the field will produce about 4.5 million tons of oil and 930 million cubic meters of gas per year.

“The Karaton Pre-Salt project is a promising exploration project, in which the primary object of prospecting is a deep pre-salt deposit, similar to the nearby Tengiz and Korolevskoye fields,” KMG notes in its annual report.

The fact that KMG will implement the project together with Tatneft became known at the beginning of 2022. Then the press leaked information that the national company back in 2021 offered four exploration assets and 35 fields already under development to a Russian investor for consideration Karaton-Sarykamys even before the start of development. In addition, the Russian company wished to acquire a 50% stake of the Chinese CITIC in the Karazhanbas field, as well as to obtain the rights to operate the S.Nurzhanov field, developed by Embamunaigas JSC, a subsidiary of KMG, promising to invest $400 million in it and increase production. But the last two initiatives were not implemented for some reason, perhaps after the resonance caused by the publication of an article about the plans of the National Company.

But for the Karaton-Sarykamys block, the parties signed an agreement of intent for the joint implementation of the project in June 2022 in St. Petersburg, Russia.

A year later, in June 2023, KMG received from the state the right to subsoil use in this area, which was renamed Karaton Podsolevoy. The Ministry of Energy and the National Company signed an improved model contract, as the field was included in the category of complex.

In September 2023, KMG established a subsidiary, Karaton Operating Ltd., to which it transferred the subsoil use right. According to some reports, the reserves of the exploration block are estimated at 500 million tons of oil. According to the National Company, the expected (P50) geological resources of Karaton Sub-Salt are 353 million tons.

In February 2024, Tatneft officially entered the project, buying a 50% stake in Karaton Operating from KMG for $18.2 million. The sale and purchase agreement was signed in Kazan (Tatarstan), and the joint venture was registered on the territory of the Astana International Financial Center. The Russian company has pledged to fully cover the exploration costs. Investment will be carried out according to the carry financing formula – if oil is not found at the site, then the costs will remain at Tatneft, and if deposits are found, then the costs will be compensated. In general, it is planned to invest $2.4 billion in the project.

The previous head of KMG, Magzum Mirzagaliyev, relying on his experience as Minister of Ecology and Natural Resources, said that “our subsoil has been studied by only 24%,” and, according to geologists, there may still be great discoveries in Kazakhstan, especially “at significant depths.”

Dry wells

The search for hydrocarbons at Karaton has been carried out before. In April 2011, JSC KazMunayGas Exploration Production (KMG EP) acquired subsoil use contracts in four exploration blocks, including Karaton-Sarykamys, from KMG, i.e. from its parent company, paying $40 million for them. Geological resources for all blocks were then estimated at 1.5 billion barrels of oil equivalent (TOE).

In 2013, KMG EP announced that two exploration wells drilled at the Karaton-Sarykamys block were dry and it wrote off $9 million spent on them. In doing so, the company used seismic data conducted in 1998-2005 in this area by Tengizchevroil LLP, as well as information on the post-salt part of the block purchased from the State Fund.

The report on the possible impacts of exploration work at the Karaton subsalt site, prepared by KMG Engineering LLP, states that in 1974-1977, five exploratory wells were drilled in this area to study the geological structure and oil and gas content of the pre-salt sediment complex and conduct seismic logging. The total penetration with coring exceeded 931 meters. However, none of the wells gave an influx of hydrocarbons.

Perhaps, in order to find oil, it is necessary to look even lower, at a depth of 5000 m, as it was done at Tengiz, and as KMG and Tatneft are now planning to do. However, then KMG EP did not dare to do this. And there were no other willing (investors). And there are a number of objective reasons for this.

Back in 2017, IHS Markit experts noted that in the period after the discovery of Kashagan, the largest field discovered in Kazakhstan was North Truva, whose reserves were estimated at 68.5 million tons of oil. KMG managed to add only a few post-salt fields in the Caspian basin to the state’s balance sheet, and the program of deeper (pre-salt) drilling was unsuccessful, including at the East Zharkamys and Karaton-Sarykamys blocks.

According to experts, there were several reasons for such low performance. In particular, exploration work in the Caspian basin has its own difficulties. They are associated with deep bedding of layers under a thick layer of salt deposits, very high reservoir pressure, the presence of high-sulfur gas, etc.

In addition, investors did not want to invest in geological exploration due to the “unfavorable regulatory environment” of the republic. Among these factors were the government’s decision to no longer conclude new stabilized contracts when investing in exploration and production, the growing trend of state control over oil and gas assets, the complex and lengthy process of negotiations with government agencies and KMG (especially in relation to offshore projects), as well as difficult business conditions and lack of transparency.

There were also technological limitations, such as a shortage of drilling rigs, which slowed down not only the drilling of exploratory wells, but also the assessment of already discovered reserves. Another obstacle to the implementation of new projects is the limited access to geological information, both for potential investors and for companies already operating in the country. All these problems did not allow attracting potential investors, which means they did not contribute to an increase in geological exploration and the discovery of new deposits.

The legislative norms on the so-called “Improved Model Contract” (IMC) introduced in January 2023 will help attract investors to the search and development of new fields. This formula of interaction between the government and the subsoil user provides the investor with favorable conditions, while the state does not suffer large losses, as when concluding a Production Sharing Agreement (PSA).

Nurlan Zhumagulov, an expert in the oil and gas industry, director of the Energy Monitor Public Foundation, explained the advantages of the IMC for the subsoil user:

“The IMC exempts investors from procurement procedures. They will have to be guided by their own procurement rules, as NCOC (North Caspian Operating Company) does at Kashagan or TCO at Tengiz. But at the same time, as soon as the operator is ready to start mining, it needs to develop a program for the development of Kazakhstani content. So certain preferences are given at the exploration stage.

As for the participation of local companies in the supply of GWS for the project, joint Kazakh-Russian enterprises are likely to be created here. Any Kazakhstanis themselves will participate. But it’s too early to guess. Oil production will begin only in 2028. Before that, exploratory drilling, calculation of reserves, their approval by the commission, approval of the stages of field development in the event of commercial discovery, etc., must be carried out, so a lot of things can happen during these 3-4 years.

The most important difference of the IMC is the absence of export customs duties, and for offshore projects – also the absence of obligations to supply oil to the domestic market. For onshore field developers, such obligations remain, but I think there will be a maximum of 25% (of total production). This is all done to attract investors.”

– It turns out that the IMC is only a lite version of a kind of PSA?

“No, the PSA has a completely different economic model. There, costs are accumulated and then reimbursed from oil. And plus, if there are royalties, then everyone pays for it, and then after a certain period there is an income tax. And the IMC is similar to a contract that is concluded with an ordinary LLP. All payments are fixed in it, including the mineral extraction tax, etc., which depend on the volume of production and on the price of raw materials.

The improved model contract was created primarily to attract investors to the Kazakh sector of the Caspian Sea. Because it is economically difficult to implement a project there. Secondly, for the development of new gas fields. And thirdly, for complex fields, where reservoir pressure is high, hydrocarbons are deep, etc.

And most importantly, the IMC frees the investor from all these bureaucratic procurement procedures. For example, KMG must conduct all its purchases according to the rules of the Samruk-Kazyna Fund, and this is very difficult and takes a lot of time. It takes up to six months to hold one tender. And if any company refuses, then everything will have to be reorganized. The IMC involves less bureaucracy and approval procedures. And some obligations, such as R&D and training of local personnel, are not taken into account at the exploration stage.”

In addition to Karaton Podsolevoy, KMG has also signed IMC for the Kalamkas-Sea-Khazar and Urikhtau projects.

The National Company also expects to find oil in deep horizons at the Turgai Paleozoic site in the Kyzylorda region. This year, it plans to drill a well of 5500 m. The total investment will amount to 581 billion tenge ($1.3 billion). Projected recoverable reserves are estimated at 23.1 million tons.

As early as 2024, it is planned to drill a well (2.5 thousand meters) together with Eni at the Abai site in the Caspian Sea. The estimated volume of reserves is 760 million tons of oil equivalent; the cost of work is 14 billion tenge ($31 million).

Under the Kalamkas-Sea, Khazar, Auezov project in the Caspian Sea, KMG and Lukoil plan to reach oil production in 2028-2029.

At the same time, there were also unsuccessful projects. For example, the well at the Zhenis block in the southern part of the Kazakh sector of the Caspian Sea, where KMG also worked together with Lukoil, and where about 1080 m was drilled, turned out to be dry. The companies announced this last summer.

Tatneft is a vertically integrated company similar to KMG in terms of production volume. In 2023, it produced 28 million tons of oil and 19.5 million tons of petroleum products, KMG – 23.5 million tons of oil and 18.1 million tons of petroleum products.

Tatneft’s net profit last year amounted to 238.11 billion rubles ($2.6 billion), KMG – 924 billion tenge ($2 billion).

Market capitalization: Tatneft – $18.1 billion, KMG – $15.5 billion.