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Oil Traders Butt Heads over Kashagan

By Joao Peixe | Tue, 15 October 2013 21:53 | 0

Now that the supergiant Kashagan oilfield in Kazakhstan is operational, the rumor is that two US trading powerhouses are competing for the $1 billion in crude share of the country’s state-run company in the field.

The world’s largest oil traders—Glencore Xstrata Plc (GLEN) and Vitol SA—are said to be vying for the production share from Kashagan owned by state-run KazMunaiGaz, according to anonymous sources cited by Bloomberg.

According to Reuters, “rivals to trading house Vitol led by Glencore are challenging its decade-long leadership in crude exports from Kazakhstan to Europe as new Caspian Sea Kazakh production comes on-stream.”

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The Kashagan field was discovered in June 2000 and is the largest oil discovery in the past 35 years. It is believed to hold up to 35 billion barrels of oil in place and 10 billion barrels of recoverable oil, along with around 1 trillion cubic meters of natural gas. Initial production should reach 180,000 barrels per day before shooting up to 350,000 bpd and eventually reaching 1.5 million bpd. In 2014, the estimate is that we will see 8 million tons of crude produced at Kashagan.  

On 11 September, initial oil production began at Kashagan after years of delays. But only days into initial production, operations were halted on 25 September when a leak was detected on a pipeline running to a processing plant that receives oil from the field. Production was resumed on 6 October and ramped up steadily and then was again halted on 11 October.  

The corporate stakeholders are a consortium of super majors each with 16.81%, including ExxonMobil, France’s Total, Royal Dutch Shell and Italy’s Eni, along with state-owned KazMunaiGaz. The smaller partner in the consortium is Japan’s Inpex, with a 7.65% stake. But China’s state-run CNPC is also now in on the game with a recently acquired 8.4% stake that it bought out from ConocoPhillips for $5 billion. For commercial output by the end of this month, the target is 75,000 bpd—anything less will have repercussions.

Vitol has enjoyed a long run in Kazakhstan, buying up small volumes from multiple producers—enough to fill tankers. But now with the supergiant Kashagan coming online, others are stepping in to challenge Vitol’s hegemony here.

"Vitol is proud of its long history of partnership with the Kazakh oil industry. It is an important business for the company and we look forward to building on these relationships in the years to come," Reuters quoted a Vitol spokeswoman as saying.

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"We have committed to the market over the long term and have a compelling commercial offering," she added.

What’s changing is that the consortium that has just produced its first full-size cargo has offered it up on tender, so Vitol was forced to compete with the likes of Glencore, Trafigure, Eni, Royal Dutch Shell, Petraco and Chevron.

According to Reuters, Glencore won that first tender, with the cargo to be shipped from the Russian port of Ust-Luga on 21-22 October.

And the consensus seems to be that this is the future—everything will be offered up on tender and Vitol will find itself in a new world of competition here.

So Kashagan is giving Glencore—the second largest world trader after Vitol—a leg up in the game.

By. Joao Peixe of Oilprice.com

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