The two producers have pledged to trim oil output but the long-awaited Kashagan project will probably boost the region's supply, not crimp it
Between them, Azerbaijan and Kazakhstan are on the hook for 55,000 barrels a day in cuts. Baku is to account for 35,000 b/d (or 0.87m tonnes) of this, and says the oil will be gone by June. It's not clear how serious Kazakhstan is taking its commitment to the deal, especially with big plans underway to lift production from its much-delayed Kashagan project.
Azerbaijan: the cuts were coming anyway
Azerbaijan's reduction is actually natural decline dressed up as a cut, and the target is in line with what it was expecting to lose, deal or no deal. Output in 2017, says the government, will come in at 39.8m tonnes (about 0.8m b/d), compared with 41.2m last year.
Whether this drop enters the ledger as a cut or just a natural fall in output, the BP-led Azeri-Chirag-Guneshli (ACG) fields, which account for about 80% of the country's production, will bear the brunt. The AGC fields produce Azeri Light, the low-sulphur oil used for exports.
Socar, the state company that produces the other fifth of the country's oil, will not itself do any cutting. It has maintained output above 8m tonnes a year for years, and will keep production at 8.2m in 2017. Socar's oil is refined for the domestic market-cutting back would bring shortages of fuel. In short, you can count on Azerbaijan cutting oil supply next year. But its part in the Opec deal is purely rhetorical.
PE rating: The cuts were coming anyway
Kazakhstan's 'symbolic' cuts
Kazakhstan's part of the deal is a modest 20,000-b/d cut in production to 1.68m b/d. But whether it manages even this volume-described by oil minister Kanat Bozumbayev as "symbolic"-will depend entirely on the progress of big fields like Kashagan. Unlike Azerbaijan, Kazakhstan should-all being well-be entering a period of production growth, not another year of decline.
After years of delays, Astana will not voluntarily hold back Kashagan-it needs the field to start producing as much as possible as quickly as possible to start clawing back some of the project costs under the field's production-sharing agreement. The government still wants to oversee a near doubling of production in the coming years, to 3m b/d.
Unless another hiccup shuts a field that came back on stream last year more than a decade late, Kashagan should on its own add more than 100,000 b/d to Kazakhstan's production in 2017. Older fields, including those in Mangistau and Aktobe regions-where peak output has already passed-will keep declining. But they won't shed enough supply to stop a net increase in output. The country's production declines have averaged about 25,000 b/d per year in the past three years, thanks to these maturing producers. So further growth at Tengiz-where Chevron and partners will start spending heavily next year to increase production from about 0.6m b/d at present-and Kashagan, which is scheduled to produce about 200,000 b/d in 2017, compared with about 90,000 b/d now, will overwhelm losses elsewhere.
Despite its hazy commitment to the Opec-non-Opec deal, Kazakhstan needs it to work. The IMF thinks Kazakhstan needs an oil price of more than $70/b to keep its budget in the black. Whatever it committed to in Vienna in December, the ideal outcome for Astana is for others to do the heavy lifting of oil prices, while it does its own lifting of supply.
PE rating: Expect more oil from Kazakhstan in 2017, not less
This article is part of a report series on Opec. Next article: Malaysia committed, Brunei could waver