From the Black Lagoon

The figures alone make it apparent why Kazakhstan has become such a hotspot for the global oil and gas industry. With 30 billion barrels of proven reserves, Kazakhstan has the world’s 11th largest oil reserves and the second largest after Russia in the CIS. The country produced 1.6 million barrels per day (bbl/d) in 2011, which qualifies it as the world’s 17th largest oil producer. As for natural gas, Kazakhstan enjoys 85 trillion cubic feet of natural gas reserves, the 14th largest in the world, and is the 27th biggest producer, having produced 1.3 billion cubic feet of gross natural gas in 2010, according to the US Energy Information Administration (EIA).

According to a decree signed by the Prime Minister in October 2011, Kazakhstan has identified over 40 hydrocarbon fields of strategic importance. Of these, Kashagan, Tengiz, and Karachaganak are the biggest.

TENGIZ

The Tengiz field opened in 1979 and is located in the west of Kazakhstan. It is considered to be one of the world’s deepest, at 3,810 meters, and largest, at 565 square kilometers. It is estimated to contain reserves of 26 billion barrels, 6-9 billion of which are recoverable. In 1993, the Kazakhstani government and Chevron established a joint venture, Tengizchevroil, to develop the field. Currently, Tengizchevroil’s partners include Chevron (50%), KazMunaiGas (KMG)(20%), ExxonMobil (25%), and LukArko (5%).

In 2008, Tengizchevroil completed a five-year expansion that increased the production capacity of the field to 540,000 bbl/d from 310,000 bbl/d. In 2010, the field produced 567,000 bbl/d of crude oil, 822 million cubic feet per day (mmcfd) of natural gas, and 44,000 bbl/d of natural gas liquids on average. In February 2012, Chevron reported that Tengizchevroil expects to start front-end engineering and design (FEED) on a 250,000-300,000 bbl/d expansion of crude oil production and wellhead pressure management. The new expansion and pressure management program, along with new drilling, is estimated to cost around $20 billion-$25 billion.

The crude oil from the Tengiz field is exported via the Caspian Pipeline Consortium Oil Pipeline opened in 2001. The $2.7 billion, 1,505-kilometer pipeline transports crude from Tengiz to the Russian Black Sea port of Novorossiysk. The pipeline currently enjoys a volume of 730,000 bbl/d. According to the planned expansion project, the capacity will increase to 1.4 million bbl/d.

KARACHAGANAK

Discovered in 1979, Karachaganak is one of the world’s largest gas and condensate fields. Covering an area of over 280 square kilometers, it is located in northwest Kazakhstan and is estimated to hold 9 billion barrels of condensate and 18 billion barrels of oil equivalent of gas, less than 10% of which has been extracted. Production began in 1984. The output from the Karachaganak field accounts for about 45% of gas and 18% of all oil produced in Kazakhstan. In 2010, the venture produced some 133.7 million barrels of oil equivalent.

According to the final production-sharing agreement signed in 1997, Karachaganak Petroleum Operation Group (KPO) consisted of four foreign interests. British BG Group and the Italy’s Eni each had a 32.5% majority stake, while Chevron and Lukoil enjoyed a 20% and 15% stake, respectively.

In December 2011, consortium partners and the government of Kazakhstan signed an agreement, according to which KMG acquires a 10% stake in Karachaganak. Effective from January 30, 2012, the agreement will see each contracting company transfer 10% their shares to KMG. Consequently, the share of BG and Eni will decrease to 29.25% each while they remain joint operators of KPO.

The contracting companies will receive $1 billion in exchange for the first 5% of their stakes and a further $1.5 billion for the second 5% share. The contracting companies will loan KMG $1 billion, which will be repaid over three years with the revenue KMG will generate from its new stake in the consortium.

The Ministry of Oil and Gas estimates that Kazakhstan’s 10% stake in KPO will bring KMG an additional $3.3 billion-$5 billion in revenue flows during the 2012-2037 period based on the forecasted oil price of $85 per barrel, the Minister told TBY. “Kazakhstan is currently doing what many resource-rich countries are doing; assessing the state’s involvement in developing its natural resources,” Francisco Parrilla, CEO of Chagala Group, added. Gurvir S. Khera, CEO of Kaz Energy Suppliers, remains pragmatic, however, stating “There is never a perfect balance. We need to have a lot of understanding over what to expect when two parties are in partnership. It’s a marriage that needs constant flexibility to move forward.” On the agreement, Mark Rollins, President of BG Kazakhstan, told TBY, “[the agreement] was a significant milestone in our relationship. The agreement opens the way for the next phase of Karachaganak development. It also opens the way to the full entry of KMG into the Karachaganak consortium.”

KASHAGAN

The Kashagan field was discovered in July 2000 and is named after a 19th-century Kazakh poet from Mangistau. It is located in the Kazakhstani sector of the Caspian Sea and covers an area of approximately 75 kilometers by 45 kilometers. The reservoir lies more than 4 kilometers below sea level, is highly pressured (770 bar of initial pressure), and contains high amounts of sour gas.

Kashagan’s discovery is described as the largest in the past 30 years, and its projected output is regarded close to that of the Ghawar megafield in Saudi Arabia. The oilfield’s reserves are estimated at 38 billion barrels, with 10 billion barrels being recoverable. Natural gas reserves are estimated at over 1 trillion cubic meters.

The field is developed by a consortium comprising Eni, Shell, ExxonMobil, Total, and KMG, all with a 16.81% stake, as well as ConocoPhillips (8.4%), and Inpex (7.56%). Initially, Eni was in charge of Phase I of the field’s development, while Shell was responsible for production operations. Currently, North Caspian Operating Company (NCOC) is the operator of the field.

Several delays in production increased the cost estimate for Phase I to $46 billion from $24 billion in January 2012. In February 2012, Kazakhstan approved $45 billion in funding to develop the field, which will be handed over in 2013 and 2015. Production from the field is now expected in December 2012 and Phase II development is speculated to start in 2018-19.

The field will start production at a level of 75,000 bbl/d, increasing to 350,000-450,000 bbl/d. Production is estimated to peak at 1.5 million bbl/d by 2021.

The consortium is considering various transport routes and international markets for exporting Kashagan’s output. Options include the use of existing infrastructure such as the Caspian Pipeline Consortium pipeline and the Atyrau-Samara pipeline, and the construction of a new pipeline to connect the Bolashak production center with the Baku-Tbilisi-Ceyhan pipeline. The Volga Canal, despite its seasonal nature, is another transport option.

ADDING VALUE

Kazakhstan is looking more into enhancing its processing capacity to bring the most value-added to its hydrocarbon reserves. “The industrialization program is based on oil and gas aimed at adding value. The value is in the final product, not crude.” Ivan Daudin, General Director of Honeywell in Kazakhstan, told TBY in an interview.

The country has three major oil refineries. The Pavlodar refinery supplies the northern region, while the Atyrau and Shymkent refineries supply the west and south, respectively. Total annual refining capacity is approximately 427,000 bbl/d, less than one-third of the country’s daily crude production. In 2004, Kazakhstan approved a $4 billion modernization program to upgrade the country’s three oil refineries to supply the domestic market with a wide range of petroleum products by 2014.

In December 2011, Kazakhstan signed a $1.7 billion contract with China’s Sinopec and Marubeni of Japan to modernize the Atyrau refinery. The project will be completed in 41 months and will enable the country’s oldest refinery to produce cleaner fuels; by 2016 the refinery will be the first Kazakhstani producer to comply with Euro 5 emission standards. Also, production capacity at the refinery will expand to annually process 2.4 million tons of crude. Plans to develop Atyrau’s processing capacity also comprises a $6.3 billion integrated gas and chemical complex, which will produce 500,000 tons of propylene and 800,000 tons of polyethylene.

As for Karachaganak, a working group is currently carrying out a feasibility study for a gas processing plant. According to the initial estimates by KMG, the plant will cost $3.7 billion and have an annual capacity of 5 billion cubic meters. While the first phase will be put in place in 2014-2018, the second phase will take off in 2018. “The construction of a gas processing facility for the production of polypropylene and polyethylene will not only diversify Kazakhstani exports, but also create conditions for the formation of a number of new high-tech chemical industries in Kazakhstan,” President Nazarbayev told TBY.

Kazakhstan is also looking into supporting other sectors of the economy in the non-oil regions via better processing of its hydrocarbon reserves. To this end, a $2 billion fertilizer facility will be built in the Zhambyl oblast in the south of the country with a view to increasing agricultural output and triggering more industrial activity in the region. “All of these global initiatives are aimed at addressing the key objectives of Kazakhstan’s economy; a self-sustaining, independent domestic market of oil products and mineral fertilizers, the gasification of the northern regions, the enhanced energy supply of the southern regions, and the formation of transport arteries and international transit routes,” President Nazarbayev added.