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Kazakhstan & Azerbaijan: Caspian output set to rebound

Both countries signed up to the Opec deal in 2016. Neither seems destined to stick to the terms

Oil production in the Caspian is set to rebound as the Kashagan project in Kazakhstan reaches capacity and international majors circle new energy developments in Azerbaijan.

Kazakhstan has already broken ranks with Opec in terms of the accord to rein in its crude output. Liquid production hit a record high last year and that was chiefly because of growth at the Kashagan project—which produced an average of 180,000 barrels a day last year—along with record output at TengizChevroil and Karachaganak.

Kazakhstan's oil production rose to 1.93m b/d in February, compared with 1.8m b/d registered in 2016 at the time of the pact with Opec. Tengiz, Karachaganak and Kashagan are the largest oilfields in Kazakhstan and the three giants should be able to bring the country's output to a new level in the coming years, even if new oilfields aren't discovered.

It's expected that Kashagan's output will rise this year to a capacity of 370,000 b/d, up from 270,000 b/d in the last quarter of 2017, and eventually to 450,000 b/d by 2020.

As a result, the Kazakh government has been urging Opec to review the quota it signed up to. The plea isn't likely to get much attention.

"Kazakhstan, as expected, remains highly constrained in its ability to comply with the agreement," Ashley Sherman, senior Caspian analyst at Wood Mackenzie, told Petroleum Economist. "There is a disconnect between its desire to continue to participate in the global agreement and what the production numbers show—now and in the future—due to growth at Kashagan."

This year should also be a pivotal one for the $36.8bn Tengiz expansion project, mainly on the logistics side. Chevron and partners will start to bring the huge modules that have been constructed in South Korea and Italy into the Caspian Sea, via Russian inland waterways.

Minus 751%—Kazakhstan's compliance with Opec+ cuts

"If that all stays on track, it will be an important landmark to start up, on schedule, in 2022," says Sherman. "For a project of this scale in a landlocked region, logistics are an overwhelmingly important factor in project delivery and cost. 2018-19 will see peak investment for the expansion."

In a meeting with Opec in March, Azerbaijan's President Ilham Aliyev declared that his country had fully met with its obligations to reduce production below 800,000 b/d. But the compliance may be short-lived.

Data from the Azeri Ministry of Energy show average daily oil production at 781,900 b/d last year. However, figures from January indicated that supplies had ticked up to 814,000 b/d, and to 806,000 b/d in February.

The managed decline at the Azeri-Chirag-Gunashli (ACG) oil megaproject, which accounts for 75% of the country's liquids output, meant that Azerbaijan met its obligations to Opec last year. The project's output slid to 585,000 b/d in 2017 from 630,000 b/d the year before.

Notwithstanding ACG's outlook, Sherman believes there's a "wider variety of bright spots on the horizon" for the Azeri energy sector, including the start of the Southern Gas Corridor and the Shah Deniz Phase 2 gas megaproject in 2018.

Phase 2 gas deliveries will start to Turkey this year and to the EU from 2020, and that will add additional condensate volumes-a source of new production for Azerbaijan's liquids.

Sherman points to ongoing talks with some of the international majors around new offshore ventures, such as the Umid-Babek gas project, over which Total is negotiating, and the Karabakh oil-and-gasfield, under discussion with Statoil. State firm Socar hopes to finalise the entry of new partners into these strategic projects in 2018, so investment can increase and accelerated timelines be met.

"In a few years, there could be a more diverse investment outlook for Azerbaijan than has been the case in the past few years, when investment has been so dominated by the SGC-$40bn value chain," Sherman says.

In the meantime, both Azerbaijan and Kazakhstan will be bracing themselves for any fallout from the stock market and ruble collapse triggered in Russia by US sanctions. The oil sector, though, seems insulated enough. Socar and Kazakhstan's national oil company KazMunayGas depend on the oil price for their financial health—and the price appreciation of the past year leaves them primed to oversee another phase of supply growth.

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