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Viktor Katona

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A Silver Lining For Kazakhstan Oil In 2020

The Karachaganak saga has become one of the poster children of the oil-producing post-Soviet nations’ sea change in how they perceive themselves and their place in the world, already assured and confident of their capabilities and affluent enough to understand their mistakes of the past. Briefly put, Karachaganak is a story about Kazakhstan realizing that it deserves more of the funds that the international consortium of oil majors that signed up to the landmark 1997 production-sharing agreement paid out. But it is also much more than that – it is a timely reminder for all countries that are just about to embark on the path of hydrocarbon production that tying up all the loose ends before a potential conflict occurs is always preferable if one wants to avoid reputational damage. Karachaganak is one of the largest discoveries by Soviet geologists, a giant gas/condensate field with an oil rim. It combines three reservoir units, of which only one is oil-bearing (Lower Bashkirian / Tournaisian), laying at varying depths that range from 3700m to 5300m. Karachaganak’s gas production has traditionally been fraught with different roadblocks as the gas there is very rich in Sulphur and also wields a high carbon dioxide content. Its plentiful gas resources are only partially marketed – one half is moved to Russia (9 BCm per year, under a long-term sales and purchase agreement, extended until 2038) to the Orenburg Gas Processing Plant, where it gets processed and then exported, whilst the remaining half is reinjecting into the reservoir to boost production. 

Graph 1. Kazakhstan’s Top 3 Producing Fields in 2010-2020 (million tons per annum).

Kazak

Source: Argus.

The sheer size of Karachaganak is noteworthy, with reserves initially in place now accepted at 12 Bbbls of liquids and 57 TCfg, up from 9.7 Bbbls and 48 TCf assumed two decades ago. The field started producing in 1984 but back then the output was split between natural gas and condensate, oil production didn’t start in earnest until 2004, roughly corresponding with the commissioning of the Caspian Pipeline Consortium (CPC), a 1500km-long pipeline that connects the Kazakh Caspian shore to Russia’s Black Sea coast. In the past 15 years Karachaganak has become a mainstay of the CPC Blend crude that is transported via the pipeline and then loaded onto vessels at the CPC Terminal in Yuzhnaya Ozereevka, Russia. Thus, it is against this background in 2016 – i.e. already endowed with a fully functional infrastructure, proven outlet markets, still substantial reserves to dispense with - that the Kazakh government has raised the issue of missing profit oil payments. 

The crux of the matter lies in the differing interpretation of the Karachaganak 1997 PSA – the Kazakh authorities claimed that they have failed to receive the totality of profit oil revenues that the PSA provided for. This confrontation did not just come out of nowhere – the initial setup of shareholders (ENI, BG Group, Chevron, LUKOIL) managed to eschew governmental inclusion and Astana was trying hard to find a spot for the national oil and gas company, Kazmunaigas (KMG). First, it tried to force Karachaganak stakeholders to pay export duties when no one else in Kazakhstan had to (2008/2009, subsequently reversed), then it tried to pressurize the consortium with environmental fines. Once KMG was let into the stakeholders’ structure, the operating company KPO was exempted from export duties until 2037, throughout the duration of the PSA. 

Related: Was Buffett Right About Energy In 2020?

That was still enough for the authorities as negotiating a “final” PSA that would account for all the changes in the consortium’s ownership structure had yet to take place. With this in mind, then-Energy Minister Kanat Bozumbayev claimed in 2016 that the consortium had already recovered the stipulated level of cost oil and should not pay more to the state in the form of profit oil payments. Following a lengthy period of haggling, a compromise was made in 2018 – the KPO consortium agreed to pay $1.111 billion in compensation and to supply 1 BCm per year to the domestic market at “mutually agreed prices”, whilst the government agreed not to harass the consortium members with further claims. But less than a year after the above deal, the Kazakh government asked for an additional $1 billion in compensation.

Graph 2. Kazakhstan Crude Production in 2010-2020 (million tons per annum).

Kazak

Source: BP Statistical Survey 2020. 

Seemingly, the COVID-induced market slump and oil price drop has taken the edge off the Kazakh government’s tough negotiating stance, and voilà, December 2020 witnessed a new final agreement. Under the new deal, KPO will pay $1.305 billion in compensation to the government, and the profit oil formula will be amended conclusively, to the extent that if oil prices were to stay within the 40-50 USD per barrel interval Nursultan would receive an additional $600 million in revenues through 2037. In addition to the above, KPO also committed to several local content rules when carrying out Karachaganak’s expansion project – this, however, should not pose a problem to the field’s operators as the current state of local involvement exceeds that of the deal’s requirements. Thus, KPO agreed to pay a bit more whilst sticking to the sentiment of the initial 2018 deal, whilst the Kazakh authorities have implicitly acknowledged that there is a natural limit to its demands, especially in these COVID-ridden times. 

As plentiful in hydrocarbons as Kazakhstan’s subsoil is, the year 2020 will not go down in its petroleum history as a good one. Despite the efforts of OPEC+ to consolidate crude prices and Kazakhstan’s firm commitment to stick to its production quota, the production cuts have caused a gap in its budget – merely in the first few months of the year, the Kazakh government missed out on $4 billion worth of oil-relevant tax revenue. Kazakhstan’s OPEC+ participation has also stalled the past four years’ consecutive production growth, boosted by the ever-increasing output volumes from the Kashagan field. This being said, good news has been hard to come by in 2020, and settling the Karachaganak issue amicably is indeed good news for Kazakhstan.

By Viktor Katona for Oilprice.com

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