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Opec+ creates Central Asian headache for IOCs

Foreign companies tapping large fields in and around the Caspian Sea face tricky decisions on production cuts

The decisions of Central Asian oil-producing nations to agree production cuts in line with the Opec+ group has created friction with IOCs active in the region. The firms are understandably reluctant to commit to sizeable output cuts at fields with billion-dollar developments tabs.

Kazakhstan’s government instructed companies in mid-May to throttle back an estimated 22pc of production in the May-June period, as part of the overall 9.7mn bl/d Opec+ cut. This equates to 390,000bl/d of shut-in production out of Kazakhstan’s 1.7mn bl/d of total output. The onshore 650,000bl/d Tengiz field, developed by the Chevron-led Tengizchevroil (TCO) joint venture, and the 400,000bl/d Kashagan field, developed by the North Caspian Operating Company, which includes ExxonMobil and Total, will bear the brunt of meeting the commitment.

IOC partners have dug in their heels, arguing such shut-ins would compromise safety at a time when coronavirus outbreaks have affected staffing levels among contractors. Technical issues also render shutting in production challenging, given the high sulphur content at Kashagan in particular. Officially, TCO says it continues to produce according to the business plan approved by the company’s shareholders.

“The operators of Tengiz and Kashagan are likely willing to do their best to accommodate whatever the government directs them to do, but they want to make sure any production cuts are conducted in a safe and orderly manner” Brinker, HIS Markit

IOCs are, at the same time, unwilling to rupture relations with host governments, meaning a fine balancing act is required. “The operators of Tengiz and Kashagan are likely willing to do their best to accommodate whatever the government directs them to do, but they want to make sure any production cuts are conducted in a safe and orderly manner, especially for Kashagan with its high hydrogen sulphide gas component,” says Lysle Brinker, executive director of equity research for integrated oils and NOCs at consultancy IHS Markit. “The partners also have to manage production cuts to ensure that they will not harm the reservoir over the longer term.”

This is not just a Kazakhstan problem. Across the Caspian, Azerbaijan is committed to cutting 164,000bl/d in the May-June period, although with the BP-operated Shah Deniz field producing about 100,000bl/d of condensate—excluded from the Opec+ deal—it is less materially affected than Kazakhstan. Azerbaijan’s state oil company Socar has requested the BP-led consortium that operates the Azeri-Chirag-Guneshli (ACG) offshore field cut 75,000-80,000bl/d of output from a field that last year averaged 540,000bl/d.

Worth persevering

This 15pc reduction will not, in reality, prove too onerous. Indeed, for IOCs used to operating in Opec member states, where production quotas form part of the operating landscape, shutting in production—even at the scale envisaged at Tengiz and Kashagan—is something of which they will have experience.

A bigger issue is timing. "It does not help that this is just one more issue these companies are facing in terms of managing their global portfolios, and while most of them are in the process of decreasing their geographic footprints,” says Brinker.

22pc – output cut in Kazakhstan

But IOCs’ larger projects will likely shake off short-term niggles. Although Chevron has faced investor criticism for cost overruns at Tengiz—where, in November 2019, the company estimated it would increase expenses by 25pc, to $45.2bn—the project is still an important source of revenue.  And the major has been operating the field for more than 25 years, maintains a good relationship with the government in Nur-Sultan and is committed to projects that will help extend field life for decades ahead. 

“Tengiz is profitable enough even at lower prices, and it is definitely a field that Chevron will focus lots of resources on. It is one of their top three assets, so they will do everything they can to maintain a strong relationship with Kazakhstan,” says Brinker.

They will be able to figure this out in a way that suits both sides’ needs, he predicts. “They are not going to let temporary production cuts damage the long-term future of this legacy project.”

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