Kazakhstan’s plans for oil production growth are increasingly clashing with its commitments to the OPEC+ group of producers, while threats to shipping in the Black Sea are raising concerns about export safety, analysts say.
Kazakh oil’s challenges within the OPEC+ alliance: quota constraints and growth prospects
Kazakhstan is one of the founding signatories of the OPEC+ alliance formed in 2016 in an effort led by Russia and Saudi Arabia to exert greater control over oil markets. Kazakh officials have repeatedly described the country’s OPEC+ membership as “symbolic”, and many observers assumed that any commitment to production cuts would take a back seat to pre-existing agreements with foreign oil and gas majors, including the expansion of Tengiz, Kazakhstan’s most productive field, which accounts for over 40% of Kazakh crude output.
Nevertheless, with Kazakhstan bumping up against its quotas and Saudi Arabia seemingly determined to reassert its control over the markets, the risk of disagreement is real. Kazakh crude production appears to have slightly exceeded quota levels for most of the first half of the year, averaging 1.64 million b/d, according to figures from the national statistics agency. The blackouts that affected traditional generators in July may not yet have brought the country into compliance, judging by preliminary data from the Ministry of Energy.
“We think Kazakhstan’s commitment, coordinated with other OPEC+ members, to cut production for the rest of 2023 won’t really be a drag,” said John Webb, director for Russian and Caspian energy at S&P Global Commodity Insights. However, “the Tengiz future growth project will test the hypothesis that the three major projects [de champs pétroliers et gaziers] operate largely independently of OPEC+ policy”, he said, referring to Kazakhstan’s three most productive fields and the Tengiz expansion.
Between dependence and quotas: Kazakhstan’s prospects for OPEC+ membership
One of the reasons why it is questionable whether Kazakhstan will strictly adhere to its OPEC+ commitments is its heavy dependence on international oil and gas companies. These have played a central role in the development of its highly complex, very deep and very sulfurous oil deposits, unlike some OPEC+ members.
Nevertheless, Kazakhstan has some room for maneuver to meet its overall quota over the coming months. Tengiz is scheduled for a maintenance shutdown in the current quarter, and two further shutdowns are planned for the field in 2024, as new facilities are commissioned, and production is expected to fluctuate. Kazakhstan’s production quota is also set to fall slightly from early 2024 to 1.628 million b/d, when the current additional “voluntary” cuts by a number of countries expire.
Chevron expands Tengiz production: Ambitious targets despite OPEC+ uncertainties
Mike Wirth, CEO of Tengiz’s major partner Chevron, seemed unfazed when he recently reiterated plans to increase Tengiz’s production to over 1 million b/d of oil equivalent by 2025 as part of the $45 billion expansion plan known as the Future Growth Project-Wellhead Pressure Management Project. This compares with 657,000 b/d of crude production in the first half of 2023, although the 1 million boe/d figure also includes gas and associated liquids, which are not subject to OPEC+ reductions.
Mr. Wirth said the first part of the expansion, the Future Growth Project, should be mechanically completed in the current quarter and start up in mid-2024.
“What you’re going to see in 2023 and 2024 is normal turnaround activity intertwined with project start-up activity,” he said. “It’s not just a question of commissioning a new part of the field. We are currently reworking the field’s entire collection and production capacity. It’s a fairly complex series of activities to implement, and the production reflects this.
Asked about a possible conflict with Kazakhstan’s OPEC+ commitments, Tengizchevroil, the Chevron-led consortium, said it was complying with applicable laws and contracts, focusing on safe and reliable operations, and striving to “meet the expectations of … Kazakhstan and its shareholders”.
“We do not expect Tengiz oil production to be affected by any OPEC+ agreement,” said a TCO spokesperson.
As things stand, the OPEC+ reduction agreements look set to remain a headache for Kazakhstan.
Kazakhstan’s oil export security: Growing challenges as Black Sea tensions escalate
Equally urgent is the question of how Kazakhstan ensures the continuity of its exports in light of the recent escalation of military strikes in the Black Sea, including the August 4 attack that severely damaged a Russian vessel near the Caspian Pipeline Consortium (CPC) loading facilities at Novorossiisk on the Black Sea. The CPC terminal, owned by a consortium of Russian, Kazakh and foreign partners and separate from Russia’s main pipeline network, handles most of Kazakhstan’s oil exports, with CPC Blend generally sold at prices well above those in the Russian Urals.
Even before the latest attack, Kazakhstan was concerned about its dependence on this route and was looking to use more alternative routes, but routes such as Azerbaijan involve significant infrastructure bottlenecks. Traders have speculated that any escalation could cause buyers to look elsewhere and turn away from the CPC blend, which is light and relatively low in sulfur thanks to Kazakhstan’s extensive sulfur removal facilities.
The price of crude has recovered since the 2022 invasion: Platts, part of S&P Global Commodity Insights, valued CPC Blend at a discount of $1.30/b to Brent dated August 11. Some observers downplay the risks of Ukraine attacking the main oil infrastructure and in particular the CPC facilities, pointing to the international consensus on the need to maintain oil exports, the potential damage to Kazakhstan, which is not party to the conflict and is supported by countries such as the USA, and the risks associated with an oil spill in the ecologically sensitive Black Sea.
Contrasting analysis of Kazakhstan’s oil export security: Diverging perspectives on Black Sea risks
But not everyone is so optimistic. Sergei Vakulenko, former head of strategy at Russia’s Gazprom Neft and now a researcher at the Carnegie Russia Eurasia Center, raised the possibility of escalation, including disruptions at Novorossiysk and, in the worst-case scenario, Russia taking control of the CPC facilities and using them to export its own crude oil from the Urals.
In a recent article published by the Carnegie Russia Eurasia Center, Mr. Vakulenko draws a parallel with the 1980s “tanker wars” between Iran and Iraq, and argues that the joint use of the CPC terminal for Russian and Kazakh exports “would serve to protect Russian cargoes, with interspersed departures of Kazakh cargoes, just as a civilian hostage is used as a human shield by terrorists”.
The CPC consortium dismissed Mr. Vakulenko’s comments as “a misunderstanding of CPC’s oil delivery principles and the composition of the consortium’s shareholders”. Attempts to reach Kazakhstan’s Ministry of Energy for comment were unsuccessful.
