CIC Special Briefing - Oil and Gas: Resources for the Future

Although only a minor oil exporter in 2002, Kazakhstan is expected to be one of the world's top five oil producers within the next decade. Most of Kazakhstan's oil comes from three enormous fields: Tengiz, Karachaganak and Kashagan. Between 1999 and 2002, Kazakhstan's oil production grew by 16 per cent annually, resulting in a doubling of production since Independence. Aware that the current oil boom was only made possible by massive inward investment following the Soviet collapse, the citizens of Kazakhstan regard the boom as a symbol of the country's independence and of new opportunities to be achieved through international partnerships. For their part, the oil companies that have joined international consortia to develop the country's oil wealth recognise that without political stability and an educated and adaptable work force, such rapid progress would not have been possible.

In the ten-year period since Independence, Kazakhstan has received US$13 billion of foreign investment to develop its oil and gas industries. According to the most recent analysis produced by the IMF in its Republic of Kazakhstan: Selected Issues and Statistical Appendix published this month, the petroleum sector accounts for almost 25 per cent of Kazakhstan's GDP, and about one half of the country's export earnings.

Kazakhstan possesses the Caspian Sea's largest recoverable crude oil reserves, and accounts for roughly two thirds of the 1.5 billion barrels per day currently being produced in the region (with Azerbaijan and Turkmenistan producing the remainder). Western analysts estimate that Kazakhstan's proven combined onshore and offshore reserves are between 9 and 17.6 billion barrels and that Kazakhstan is consequently poised to become an increasingly influential player in world markets in the coming decades.

Much of the recent increase in oil exports is due to the completion of the Caspian Pipeline Project (CPC) in October 2001. This extends from the Caspian Sea to the Russian Black Sea port of Novorossisk and was developed by the governments of Russia, Kazakhstan and Oman in conjunction with a consortium of international oil companies. The pipeline is actually an extension of the existing oil infrastructure which has been updated. New components of the line run from the Russian town of Komsomolskaya to Novorossisk where oil is loaded on to tankers. Initial capacity of the pipeline was 560,000 million barrels per day (bbl/d) with plans to increase this to 1.34 million bbl/d.

According to the [US] Energy Information Agency, one third of Kazakhstan's oil exports flowed through the pipeline in 2002, but the flow is likely to increase significantly during the present year as two new pipeline spurs come into operation. The flow of oil through the Atyrau-Samara pipeline - which once carried nearly all of the country's exports - is set to increase as a result of a recent oil transit deal with Russia, but will consequently decline in terms of total export volume.

Total oil production rose in 2002 to a record 47 million tons, of which 70 per cent went for export. Production is likely to increase further in the present year during which time the Kazakh Minister for Energy and Mineral Resources, Vladimir Shkolnik, has estimated that total production will reach 52 million tons. According to government targets announced in June of this year, the country expects to produce 120 million tons a year by 2010 and 180 million tons by 2015.

International oil majors, such as Shell and Hurricane, have recently expanded their Kazakhstan holdings.

International projects have generally taken the form of joint enter-prises with the national oil company, Kazmunaigaz (formerly Kazakhoil), but there have also been production-sharing arrangements and exploration and field concessions, some of which have been criticised for their opaqueness. Following the "Transparency Initiative" launched by the British Prime Minister Tony Blair in September, 2002, at the World Summit in Johannesburg, the Kazakhstan government announced in June this year that, because of the superior transparency of such arrangements, in future its preference would be for joint ventures. It also indicated its willingness to debate the issue of contractual transparency both with both the oil companies and with interested NGOs. "The important thing is that the Joint Venture approach will provide for more openness and transparency of oil and gas development." At the same time it announced the details of its new Caspian Sea Development Programme under which new offshore blocks will be auctioned, beginning 2004. First offers will be made to Kazmunaigaz, which will then conduct tenders for partners.

The biggest existing oil venture is TengizChevroil, a partnership involving ChevronTexaco (50 per cent), ExxonMobil (25 per cent), Kazakoil (20 per cent), and Russia's Lukarco (five per cent). Reserves in the Tengiz basin, which is located in the swamplands along the Northeast shore of the Caspian, are estimated at 6-9 billion barrels, and during 2002 production was 290,000 barrels a day, or one third of national daily production. Peak production is expected to reach 750,000 barrels a day by 2010. According to the Kazakhstan government, total revenue from Tegiz-Chevroil was £1 billion in 2001.

Even more excitement has been generated by the discovery of high quality crude oil at Kashagan on the northern shore of the Caspian Sea near the city of Aturau - the country's first offshore project - believed to the second biggest oil field in the world, and the largest new discovery since Alaska's Prudhoe Bay. Although the field is still being appraised, according to the [US] Energy Information Agency reserves could equal those of Brazil, South America's second biggest producer. The field is to be developed by a consortium consisting of Eni, ExxonMobil, British Gas, Royal Dutch/Shell TotalFinaElf, Phillips Petroleum and Japan's Inpex. Total reserves at the field remain partly a matter of speculation, and there are technical problems to be overcome, but Vittorio Mincato, the chairman of Eni, has described the reserve as "enormous."

The Karachaganak field, near the Russian border, contains sub-stantial reserves of oil and gas condensate. According to British Gas, which developed the field in collaboration with the Italian company, Agip, the field contains oil reserves totalling more than 2.4 billion barrels, and substantial gas reserves recoverable over the 40-year life of the project. With the government of Kazakhstan, the consortium members are working on plans for an on-site gas-processing facility.

The largest importers of the country's oil, gas and refinery products are Russia, the UK, the Ukraine, Switzerland and Italy. But also seeking to join the queue for Kazakh oil is China, which hopes to reduce its dependency on the Gulf States, currently providing more than half of its needs. The current domestic supply of oil in China has hit a plateau and is unable to keep up with rocketing demand resulting from car sales that increased by 36 per cent during 2002. These sales are expected to rise by a further 20 per cent during the present year. In March this year, the China National Offshore Oil Corporation announced that it would buy an 8.3 per cent stake in the Kashagan field from British Gas for US$615 million - perhaps in the hope that the purchase will help fulfil long-held ambitions to construct a major pipeline to the East. On 3 June these ambitions, which have been beset by a range of technical and other problems, moved a modest step forward when the Kazakhstan news agency, Interfax, announced that Kazakhstan had signed a cooperation agreement with the China National Petroleum Company. The agreement, which was reached during a visit to Astana by the Chinese President Hu Jintao, included a commitment to jointly research the feasibility "of investment in the stage by stage development of a pipeline from Kazakhstan to China". The Chinese President, who made no secret of his desire greatly to increase oil imports from Kazakhstan, said his country was experiencing an energy shortage. At the same time, he said, Kazakhstan had rich energy resources and was able to supply "tens" of millions of tons to world markets.

Despite being a net importer of gas, Kazakhstan has substantial proven natural gas reserves of 65 million cubic feet, comparable to Canada or Kuwait and placing it in the top 20 countries in the world. As a result of a law requiring industrial enterprises, such as oil and mineral extraction companies, to include gas projects in their plans, production doubled in 2000 and rose by a further 16 per cent in 2001, and preliminary figures suggest that this figure was exceeded in 2002.

Present trends therefore suggest that Kazakhstan will soon be a significant net gas exporter - a goal which has come closer with the development of the Karachaganek oil and gas condensate field, which accounts for a quarter of the country's reserves, and the start of a US$500 million programme to update its gas-pipeline in collaboration with the Russian company, Gazprom.