Giant Kashagan Finally Starts Production, Watch the Transport

Bottom Line: Thirteen years and $50 billion later, Kazakhstan's giant Kashagan oil reservoir started pumping on 11 September-but follow the money for the transport, which is where the real game is being played right now.

Analysis: Kashagan is an offshore Caspian Sea reservoir off the coast of western Kazakhstan. Right now, Kazakhstan is producing about 82 million tons of oil and expects to increase that next year to 83 million tons with the first oil from Kashagan. By 2018, the forecast is 110 million tons based on Kashagan production. Kashagan has been phenomenally expensive because the consortium running it has had to build artificial islands and a massive amount of Caspian infrastructure in freezing, shallow waters to make it happen. The multinational consortium North Caspian Oil Company (NCOC) has spent $50 billion so far. The delays have been almost unbearable. The original production start-up was supposed to be 2005. The Kazakh authorities had given the consortium a final deadline of 1 October (moved from June) to have oil pumping or face fines and a loss of partial compensation. The consortium includes Kazakhstan's state-run KazMunaiGas, Italy's Eni, ExxonMobil, Shell, and France's Total-all with 16.81% stakes, along with Japan's Inpex with 7.56%. While production has started it will still take at least a month to achieve commercial production. Kazakhstan needs about 2 million barrels a day for domestic consumption, so the rest should be available for export. Look to China for a market for some of this expected output. China's National Petroleum Corp. (CNPC) this week secured an 8.33% stake in Kashagan with a $5 billion deal with Kazakhstan's KazMunaiGas.   

Recommendation: What we're watching here is the transport, and Russia is being favored to break the pipeline bottleneck. There are a number of potential routes and pipelines to consider: a Russian-Kazakh line run by the Caspian Pipeline Consortium (CPC, led by Chevron) to the Russian Black Sea port of Novorossiysk; the Atasu-Alashankou route to China; an Azeri-Turkish link run by BP; and a route controlled by Russia's Transneft. While publicly Kazakh authorities are talking about the CPC and Atasu-Alashankou, in the quieter corridors of power we keep hearing about Transneft's Atyrau-Samara pipeline, which connects Kazakhstan to Russian links via the Black Sea, Baltic Sea and Central Europe. Our prognosis is that while CPC will get some of this business, the bulk of it may go to Transneft, which has a bigger capacity and is right now outshining CPC in terms of expansion to handle more from Kashagan. CPC of course won't be cut out because its shareholders also hold stakes in Kashagan, but Transneft is emerging as a bigger player here than is reported. Keep your eye on Kashagan shareholders right now because this is big-with this giant field finally producing, the only question remains the fastest and cheapest way to get product to China.