With 2013 poised as the "big jump" in Kazakhstan's oil productivity following the first-phase output startup of the country's first major offshore project known as Kashagan, at least two setbacks have been reported in other prospective schemes. With output from existing resources in decline through 2012 for the second year in a row, raising money and satisfying fund providers proves to have gotten harder and harder as time flows by more steadily than oil flows out.
According to the latest figures presented by Kazakhstan's National Statistics Agency last week, the country's crude oil output has been down through 2012 for the second year in a row, and decreased by 1. 6 million tons, or close to 2 per cent, from its peak in 2010. With the exception of coal, most of which is used for electricity generators and metal smelting but also as household fuel in most of the north and northeast of Kazakhstan which still have no gas distribution networks, other hydrocarbon sectors show similar signs of stagnation.
Surrounded by controversySalvation must come from the Kashagan field and (eventually) its four adjacent blocks, with total proven recoverable reserves standing at 13 billion barrels of crude, which should boost Kazakhstan's oil output by 370,000 barrels a day initially by the end of the current year, to reach 1. 5 million barrels per diem by the middle of the upcoming decade. But relief can only come gradually, observers say.
"Kazakhstan's oil supply is predicted to increase by 70,000 barrels per day over the previous year to average 1. 66 million barrels a day in 2013," the latest OPEC market survey reads. "The expected growth in 2013 is supported by the anticipated start-up of the Kashagan field in the late second quarter. [...] Uncertainties surrounding the start-up of Kashagan and strike actions in some oil-producing areas could affect output in 2013. On a quarterly basis, Kazakhstan's supply is expected to average 1. 62 mb/d, 1. 61 mb/d, 1. 65 mb/d, and 1. 73 mb/d respectively."
The highly hazardous and expensive Kashagan project ($46 billion including this year's budget has been spent so far) remains indeed surrounded by controversy. Following the withdrawal of a tandem consisting of BP and Statoil back in 2001 and of British Gas later, a third partner in the consortium, ConocoPhillips of the US, has dropped out last year. Right of first refusalIt looks as though foreign partners in Kashagan have let their deadline of January 25 to bid for the share of ConocoPhillips in the consortium slip, which according to the contract comes down to a waiver.
On behalf of the state, Kazakh national oil and gas company Kazmunaygas has until summer to use its preemption right. It has been reported, though, that the state company will have to raise money in debt to pay for it - something which requires state guarantees in a broadly suspicious financial market. What could save the day is an offer made by India's state oil and gas corporation ONGC to buy ConocoPhillips' stake.
Kazakhstan today remained non-committal on supporting state-owned Oil and Natural Gas Corp's $5 billion acquisition of ConocoPhillips' stake in the Central Asian nation's giant Kashagan oilfield," India's daily Economic Times wrote on January 9 this year. In its biggest acquisition till date, ONGC Videsh Ltd, the overseas arm of the state explorer, on November 26 last year agreed to pay US energy giant ConocoPhillips about $5 billion for the 8. 4 per cent stake in Kashagan, the biggest oilfield discovery in over four decades.
The deal is subject to the approval of the government of Kazakhstan and other partners in the Caspian Sea field waiving their right of first refusal. The stake at stake is not 8. 4 but 7. 56 per cent. At the current state of affairs, the Royal Dutch Shell, Total, Eni, ExonMobil and Kazmunaygas each have a one-seventh (16. 81 per cent) share in the Kashagan consortium, the official name of which is North Caspian Operating Company (NCOC).
The remainder is split between ConocoPhillips and Japan's Inpex. 'People with knowledge'But while other partners seem to have given a silent nod to the entry, Kazmunaygas seems to drag its feet with the government, its majority owner, remaining undecided.
The Indian paper also quoted Kazakhstan's Vice Minister for Oil and Gas Bolat Akchulakov as avoiding a clear answer, indicating that "the decision to approve or not approve the deal is to be decided by related ministries in due course of time", in the newspaper's words.
The Kazakh government has yet another 180 days following January 25 to make up its mind. And there seems to be more hard nuts to crack in sight. The waiver by at least two of the foreign partners in the consortium contradicts earlier rumors. "Exxon Mobil and Royal Dutch Shell are seeking bigger stakes and operating control in the Kashagan oil field before starting to expand the $46 billion project," Bloomberg reported on August 30 last year, quoting two unnamed "people with knowledge of the matter" in the agency's words.
Exxon and Shell have warned they may quit the project unless they gain more control in the venture and Kazakhstan's government agrees to extend the production-sharing contract for 20 years. Earlier reports also suggested that some of the foreign partners seek prolongation of the contract, which expires in 2041, in exchange for the boost in investments. At the same time, it looks more and more indeed like Kashagan is Kazakhstan's last straw - and more trouble surrounding the project is the last thing everybody needs.
According to a report by the Baku-based news agency Trend dated January 22, quoting a Kazakh periodical called Kazakh Petroleum, two greenfield projects in the form of prospective fields to be explored and developed have fallen through last year. In spring, concession holder Total of France tore up its contract for the Zhenis block which it held in a tandem with Norway's Statoil, followed in September by Eni of Italy informing the government that it would not go ahead with its field of Shagala. Both are located in the west of Kazakhstan.
Both projects were relatively fresh. On 6 June 2010, Total announced that they had signed agreements to explore the Caspian Sea for oil and gas with Kazmunaygas. Kazmunaygas said in a statement it had signed a memorandum of understanding with Total to assess the exploration potential of the Zhenis block of the Caspian, where recoverable oil reserves are estimated at 179 million tons.
The Zhenis block, 80 km from the shore, has estimated [total] resources of 615 million tons of oil equivalent and is located at a depth of between 75 and 100 meters. Eni's project had been clinched and trumpeted on a much higher-profile level. "Eni CEO Paolo Scaroni and Kazmunaygas President Kairgeldy Kabyldin signed today, in the presence of Kazakhstan President Nursultan Nazarbayev and the Italian Prime Minister Silvio Berlusconi, a cooperation agreement on exploration and production activities and strategic industrial facilities in Kazakhstan," a press release from Eni dated November 5 2009 read.
"Under the agreement, which follows a preliminary Memorandum of Understanding signed in July 2009, Eni and Kazmunaygas (KMG) will jointly study the Isatay and Shagala exploration areas located in the Caspian Sea, the optimization of gas usage in Kazakhstan, and a number of industrial initiatives including a gas sweetening plant, a gas turbine power plant, a drydock shipyard and the upgrading of the Pavlodar refinery, in which KMG holds a majority interest.
Final investment decisions on all these projects are expected by two years after the completion of the detailed technical and commercial studies. Whether such studies have ever been completed is not publicly known. But whatever the case, the setback could jeopardize Kazakhstan's entire scheme to secure energy provisions for its northeastern regions, where the country's heavy industry is concentrated, for decades to come.
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