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Kazakhstan wakes to hydrocarbon promise

After years of foot-dragging and energy policy flip-flopping, Kazakhstan is putting its oil and gas aspirations back on track

A series of actions and agreements coming to fruition in the months ahead promise to make 2018 a turnaround year for Kazakhstan. However, the former Soviet nation still suffers from a dearth of greenfield projects and the government will have to maintain the current momentum if it wants to meet its goals.

The country possesses ample hydrocarbon reserves, estimated by the Kazakh Ministry of Oil and Gas at 35bn barrels of oil (4.8bn tonnes). But they're predominantly located in three mega-fields—Kashagan, Tengiz and Karachaganak—that produce more than half of the national output.

Because the Astana government has bet the country's future on oil exports, it urgently needs to find new reserves. Yet there's been a steady decline in drilling activity in the past five years.

Until that situation changes, the government will rely on the expansion of Kashagan, Tengiz and Karachaganak that, the ministry says, will create by 2025 a nearly 25% increase in crude and gas condensate production, at 2.15m barrels a day. These assumptions are based on a $55 price for Brent.

More disputes

Yet Astana continues to get involved in long-running disputes with international oil companies. The current issue concerns the calculation of shares in production from the Karachaganak field, which has oil reserves of 1.2bn tonnes and gas reserves of 1.35 trillion cubic metres. The contractors—Shell and Eni, both with 29.25%, Chevron (18%), Lukoil (13.5%) and local operator KazMunayGas (10%)—have offered to pay $300m to settle the matter, but Astana rejected the peace settlement. Under the latest timetable, the dispute was meant to be resolved by the end of March.

"In general, common approaches have been worked out," said energy minister Kanat Bozumbayev in late January. "Now we need to work out mechanisms to resolve the dispute."

The hatchet may, however, have been buried at the Tengiz field where Chevron is the dominant operator. A giant reservoir lying deep beneath the western Kazakhstan steppe, the oil column measures 1.6km (1 mile) across. With a surface area more than four times greater than that of Paris, Tengiz is one of the world's deepest producing fields and, as Chevron points out, "it is the largest single-trap producing reservoir in existence".

Boosting the attractions of Tengiz, the Korolev field nearby is another world-class reservoir. Chevron, holder of a 50% stake in Tengizchevroil that operates the two fields, takes a share of net daily production averaging 272,000 b/d of crude oil, 401m cubic feet a day of natural gas and 21,000 b/d of natural gas liquids.

So, the importance of Tengiz and Korolev to Kazakhstan can hardly be exaggerated. But there have also been political delays in the implementation of a project intended to boost total daily production from the Tengiz reservoir by about 260,000 b/d. First oil from the project, which will use the latest sour-gas injection technology, is planned for 2022.

Nearly a decade after it was first proposed, the modernisation of the country's three refineries at Atyrau, Pavlodar and Shymkent has, however, been completed, boosting Kazakhstan's refining capacity from 14.5m tonnes (291,000 b/d) to 17.5m tonnes (352,000 b/d). According to state-owned operator KazMunayGas (KMG), the country's refining volumes jumped by 3% in 2017.

Eurasia project delays

While these developments are encouraging, there's little movement in Kazakhstan's flagship Eurasia project in the Caspian Depression. This was slated for development between now and 2020, although the timetable has shifted over the years. The project, in the province of Atyrau, involves the exploration of deep-lying horizons of the Caspian Basin, onshore and offshore, in Kazakhstan and Russia. With estimated reserves of up to 60bn tonnes of oil, it's considered one of the most promising fields anywhere. According to early reports, the oil could be produced for as little as $20 a barrel at some of the onshore sites in Kazakhstan.

Although the initial data-gathering phase hasn't yet begun, a consortium has been formed—in June 2017—and a memorandum of understanding signed between state oil company Socar, KZM, Agip, China's CNPC and Neos. In January, KZM said talks had been held about signing a contract for geological exploration of the Caspian Depression. There's been no further news since.

Positive signs

There is, however, movement in the long-awaited overhaul of the Environmental Code involving the sub-soil laws. This is fundamental to drilling activity, for it will install a polluter-pays principle for any environmental damage. This replaces the former regime of fines and penalties, which Astana has ruled ineffectual.

As Platts consultancy noted earlier this year, the draft sub-soil code "sets an individual regulatory regime for each type of mineral: hydrocarbons, solid minerals and uranium". Another important— and helpful—change, adds Platts, is the granting of open access to geological data, excepting temporarily confidential information or data related to state secrets. "Leading powers' experience demonstrates that the investor faces less geological risk and hence finds the sub-soil more attractive to invest in if the state provides more qualitative geological data to investors," the consultancy explains.

According to the ministry, the first meeting of the working group on the code and related matters took place in late March and "the concept of the bill is being developed". The industry expects the laws to be rolled out during 2018.

In general, the sub-soil code-and related reforms in tax law that provide for an alternative sub-soil tax for new offshore and deep onshore projects—are promising. As Wood Mackenzie points out: "[They] are designed to simplify and improve investment conditions for all natural resources, with reduced bureaucracy and faster approvals."

The biggest reforms in a decade, from the viewpoint of the oil and gas industry, the new tax will be levied on profit, with rates based on a sliding scale linked to the prevailing oil price. Although the reforms are aimed at attracting new investment, existing concession operators should also be better off. In Wood Mackenzie's estimation, they could lead to IOCs re-evaluating the Kazakh offshore.

And right on cue, several majors including Eni, ExxonMobil and Shell have expressed interest in partnering KZM in the Abai block that's located in the northern part of the Caspian Sea, 65km from the shore at a depth of 8-10 metres.

Caspian Sunrise progress

One operator that's developing greenfield sites while avoiding conflict with Astana is London-listed Caspian Sunrise. This firm owns acreage in the Pre-Caspian and Turgay Basins in partnership with Kazakhstan-focused Nostrum Oil & Gas, also London-listed. Caspian Sunrise, which is drilling in its flagship BNG Contract Area in the Atyrau region at the mouth of the Ural River, hopes to find reserves of 730m barrels by the summer of 2018 and qualify for a 49-year production licence. The group expects to spend $40m in the BNG in 2018-19.

Caspian Sunrise also aims to monetise its good relations in Kazakhstan. As the group says: "The board believes there is a significant opportunity to assist much larger companies seeking to enter Kazakhstan's vast oil and gas market where they wish to have a well-placed local partner."

In this highly politicised country, it seems prudent to have somebody with local knowledge to hold your hand. 

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