Special Energy Issue on Kazakhstan September 2017 CONTENTS GENERAL... 1 OIL & GAS PRODUCTION... 4 OIL & GAS EXPORT & TRANSPORTATION... 4 OIL & GAS INFRASTRUCTURE... 6 RENEWABLE ENERGY... 7 CONTACTS... 8 INDUSTRY EVENTS IN 2017... 8 The Economic Section of the in Kazakhstan intends to distribute this newsletter as widely as possible among Dutch institutions, companies and persons from the Netherlands. The newsletter summarises economic news from various Kazakhstani and foreign publications and aims to provide accurate information. However, the Embassy cannot be held responsible for any mistakes or omissions in the bulletin.
GENERAL Kashagan compensates for oil output decline in Kazakhstan The country s largest oil field compensated for oil output decline in depleted fields in Aktobe and Kyzylorda regions, according to the National Energy Report-2017, presented today at the annual Kazenergy Eurasian Forum, Kazinform reports. According to the document prepared by IHS Markit, in 2016, oil production in Kazakhstan declined for the third year in a row. It is noted that the production declined mainly in the fields that are in the late stages of development, primarily in Aktobe and Kyzylorda regions. However, the experts note that starting late 2016 the overall output started to grow due to the increase in production at Kashagan which has been put back into operation. It is also noted that although in 2017 oil production in Kazakhstan may to some extent be limited due the framework of the agreement to cut it in order to prevent prices going down, the current situation with two of the country s three mega projects lays the foundation for sustainable growth. Thus, due to the expansion of production capacities at Kashagan, the overall output should increase by 80,000 barrels per day, which will allow reaching the planned stable production rate of the first stage of about 17 million tons per year (370,000 barrels per day), while the decision to start expanding capacities of the Tengiz oil field creates the prerequisites for an increase in production of 12 million tons per year (260,000 barrels per day) in the early 2020s. It is reported that due to the downward revision of the investment forecasts and also taking into account the current low oil prices, IHS Markit experts adjusted (also downward) the baseline scenarios of oil production and export volumes for Kazakhstan until 2040. Nevertheless, oil production in Kazakhstan is expected to grow in the long term, and the country shall retain its positions as the second largest oil producer and exporter in the CIS, Kazinform reported. Kazakhstan seeks new deal to develop delayed Kashagan field Kazakhstan plans to strike a standalone deal with a multinational oil and gas major to increase output at the Kashagan field, according to a Kazakh official who spoke to Reuters. Astana ramped up output by 9.9% between January to July, bringing its total production to 1.724 million barrels per day. The country had vowed to keep output below 1.7 million barrels per day last November, when OPEC and 11 non-member nations struck a landmark production agreement in Vienna. Kazakhstan does not plan to remain in violation of the OPEC deal for long. It hopes to renegotiate its quota during the smaller corollary meetings of the committee designed to oversee deal compliance. I think that talks on Kazakhstan s commitments will continue separately, Energy Minister Aset Magauov told reporters. There is understanding from OPEC that the project (Kashagan) is very large, there have been huge investments and there is a need to return these investments to shareholders. The development of the Kashagan garnered $55 billion in investments, giving the field an expected output of 260,000 barrels per day in 2018. Other fields in the country would lower production to compensate. Six multinationals and the Kazakh fossil fuel company currently have a stake in the Kashagan project. North Caspian Operating Company, the joint venture operating the field located near the Caspian Sea, said in January that would increase production at the field to a capacity of 180,000 barrels per day, following the resumption of output at the site in September last year. Kashagan was first put into operation in 2013, but just a month later, production was suspended because of a gas leak. An inspection revealed that the whole 200-km stretch of pipelines set to transport oil and gas from Kashagan needed to be replaced because of micro-cracks, the result of high-sulfur associated gas running through them. Commercial production resumed late last year after the multi-billion-dollar repairs, according to Oil Price. 2
Kazakhstan, investors may settle Karachaganak oil dispute this year A group of foreign oil companies have offered to build a gas processing plant in Kazakhstan in exchange for settling a $1.6 billion profit sharing dispute over the Karachaganak project, a Kazakh state energy firm executive told Reuters. Murat Zhurebekov, chief executive of PSA LLC, a unit of state energy firm KazMunaiGas, said Kazakhstan would evaluate the offer of the group led by Shell and ENI and decide before the end of this year whether to accept it. Kazakhstan is carefully studying the project and holding consultations both domestically and abroad, Zhurebekov said. Separately, a source close to the talks between the Kazakh government and the consortium told Reuters that President Nursultan Nazarbayev had ordered his cabinet to settle the dispute, which has already escalated to arbitration. Russia s Lukoil, also a consortium member, said in April 2016 Kazakhstan had filed a $1.6 billion claim against the group developing the Karachaganak gas condensate field. The former Soviet republic s energy ministry has said the dispute was about calculations of the parties shares in the field s output. Eni and Shell each own 29.25% of the Karachaganak project in northwest Kazakhstan, which they jointly operate. KazMunaiGas owns 10%, Chevron Corp 18% and Lukoil 13.5%. Karachaganak produced 78.8 million barrels of liquid hydrocarbons in the first half of 2016, up 11.3% from the same period a year earlier. The field contains 1.2 billion tons of oil and gas condensate and more than 1.35 trillion cubic metres of gas, making it one of the world s largest oil and gas deposits. The consortium exports gas condensate - which is very similar to oil - via oil pipelines through Russia. It pumps some of the gas it produces back into the reservoir to increase pressure, and ships the rest to Gazprom s plant in Orenburg, Russia. If the group were to build a plant on site, supplies to Gazprom may stop. Resolving the dispute could help Kazakhstan and the consortium accelerate a $4.5 billion expansion project aimed at prolonging its output peak, according to Reuters. KazMunaiGas Kashagan gets $0.6 billion advance from Vitol KazMunaiGas Kashagan (KMGK), a subsidiary of Kazakhstan s state oil company KazMunaiGas, has extended a deal with international trader Vitol on pre-export financing of oil supplies from the Kashagan field with an additional prepayment of $600 million, the subsidiary s press-service reported. KMGK is using the funds to pay for its 8.48% stake in Kashagan, which it acquired in 2008. KazMunaiGas (KMG) increased its share in the Kashagan project in 2008 by 8.48% to 16.81% after equity participation of other consortium shareholders decreased in exchange for the government s permission to extend the budget and project time frame. KMGK received an additional prepayment on August 10, 2017 for the amount of $600 million and made early repayment of the second instalment for a total sum of $804.4 million, KMGK said on its website. KMGK didn t disclose how much oil Vitol will receive for the prepayment. Vitol won a tender in 2016 for the right to make prepayment for KMGK s share in oil supplies from the Kashagan oil field worth $1 billion over five years. KMGK said at the time that the volume of oil supplies from Kashagan to Vitol will depend on global oil prices. The Kashagan oil field is operated by North Caspian Operating Company (NCOC), made up of Italy s Eni, US Exxon Mobil, China s CNPC, Anglo-Dutch Royal Dutch Shell, France s Total, Japan s Inpex Holdings Inc and Kazakhstan s KazMunaiGas. Six million tons of crude oil have been produced at the offshore field, Kazinform reported. According to the company s press service, since reopening the first wells on island A on September 28, 2016, NCOC produced 6 million tons of oil and over 1.7 billion cubic meters of natural gas. 3
OIL & GAS PRODUCTION Kazakhstan to talk with OPEC on oil output cut extension Kazakhstan s Vice Energy Minister Aset Magauov said Thursday his country is expected to discuss with the Organization of Petroleum Exporting Countries (OPEC) about a separate deal on the extension of oil output cuts. Under an earlier oil production quotas deal involving oil producers in and outside OPEC, Kazakhstan agreed to cut back output by 20,000 barrels per day in the first half of 2017. The deal was in May extended until the end of March 2018. Kazakhstan s commitments will be discussed separately, because there is understanding from OPEC about the fact that Kashagan is a very large project and there is a need to return these investments to shareholders. And therefore, I think that a decision will be made taking into account the conditions, Magauov said. Magauov noted that an output cut extension is decided by many factors, including forecasts on the further growth of demand for oil, situation in other oil-producing regions and political situation as well. It s hard to say what decision will be made, he added. Kashagan is Kazakhstan s first offshore oil and gas field in the Caspian Sea, and its largest international investment project. It started commercial production from November 2016, Xinhua reported. In 7 months production of crude oil in Kazakhstan reached 5 trillion tenge Through the first 7 months of this year the value of crude oil production in Kazakhstan reached 5 trillion tenge - 27.2% more than in the same period a year earlier. In physical terms, oil production reached 42.1 million tons - up 9.4% from the same period in the previous year. 54% of the production in value terms and 57.8% in natural terms are accounted for by the province of Atyrau. The largest oil giants of the region are Tengizchevroil LLP (TCO), Exploration Production KazMunaiGas JSC and North Caspian Operating Company NV (NCOC). According to TCO, during January-June 14.59 million tons of oil were produced at Tengiz field - 1.3% more than in the last year. Production at the giant Kashagan field (NCOC) is also growing. Thus, in July in the daily output relative to June increased 2.6%. In total 4.3 million tons of oil were extracted during January-July of 2017 at Kashagan. According to the results of the first half of the year, sales of crude oil on the domestic market of the country increased 2.2 times year-on-year by up to 3.1 million tons. At the same time, 78.1% of all produced oil and gas condensate and 91.4% of all crude oil (32.8 million tons, + 3.9% per year) were exported. During the first seven months of this year the price of oil was $51.7 per barrel, against $44 in 2016. According to the consensus forecast for 2017, the price is forecasted at the level of $53.5, and that for 2018 $55.3, with subsequent moderate growth in the medium term. In order to determine the state budget for the next year, the government sets a conservative price for oil base scenario at $45. Real GDP growth in this scenario is projected at 3.1% in 2018, with subsequent growth by 4.2% in 2022. The optimistic scenario assumes an increase in the price of oil to $55 per barrel in 2018-2022, and the pessimistic one a decrease to $35, Kursiv reported. OIL & GAS EXPORT & TRANSPORTATION Caspian Pipeline Consortium s oil exports drop 1% in August The Caspian oil pipeline cut supplies by about 1 percent in August from July, to 4.417 million tons, the Caspian Pipeline Consortium (CPC) said. In January-August, CPC s exports rose to 36.1 million tons from 28.08 million tons in the yearearlier period, in accordance with its expansion plans. 4
Last month, the consortium said it had curtailed its export target for this year to 56.5 million tons of crude oil (1.13 million barrels per day) due to a global oil output cut deal reached by OPEC and non-opec producers. Initially, it had planned to export almost 65 million tons this year. The pipeline connects the Tengiz field in Kazakhstan, and a number of other fields, to the sea terminal near Novorossiisk in Russia, according to Reuters. Caspian Pipeline Consortium has accepted three million tons of crude oil from the Russian fields on the Caspian shelf On September 21, 2017, the Caspian Pipeline Consortium (CPC) accepted three millionth ton of crude oil from PJSC LUKOIL at Komsomolsk PS. According to Consortium s Operations this milestone was accomplished in strict compliance with operation and environmental safety requirements. Overall, in 2017 PJSC LUKOIL delivered about 2.3 million tons of crude oil into CPC system and October 1, 2017 will be the first anniversary of LUKOIL s deliveries from their Filanovsky and Korchagina oil fields. CPC pipeline system is one of the largest investment projects in the energy industry with participation of foreign capital on the CIS territory. The length of the pipeline connecting the oil fields in Western Kazakhstan with the Marine Terminal near Novorossiysk is 1,511 km. The CPC Marine Terminal is equipped with single point moorings which allow for safe tanker lifting at a considerable distance from the shore, also when the weather conditions are unfavorable. The Expansion Project includes rehabilitation of 5 existing and construction of 10 additional pump stations (2 in the Republic of Kazakhstan and 8 in the Russian Federation), six new storage tanks (100,000 cubic meters each) in addition to the existing four near Novorossiysk and a third SPM at the CPC Marine Terminal, and also the replacement of an 88 km pipeline section in Kazakhstan with a larger diameter pipe. The total amount of the Project investments will be $5.4 billion, PortNews reports. Caspian Pipeline Consortium to launch two oil pumping stations in 2017 The Caspian Pipeline Consortium (CPC) will launch 2 oil pumping stations in 2017, reports the press-service of CPC. Extraordinary General Meetings of Caspian Pipeline Consortium-R and Caspian Pipeline Consortium-K Shareholders and Meeting of the Board of Directors of Caspian Pipeline Consortium- R were conducted in Batumi (Georgia) on September 26-27, 2017. After the gradual commissioning of new facilities of the Expansion Project CPC pipeline system throughput capacity has currently exceeded 58 M tons of crude oil per annum. Before the end of this year, CPC will have put into operation two more pump stations (one in Russia and one in Kazakhstan), thus ensuring the full designed capacity of the Tengiz-Novorossiysk pipeline system: 67 M tons of crude oil per annum, reads the message. The Governance bodies passed resolutions on CPC Quality Bank functioning, maintenance of the crude pipeline system facilities in the RF and other CPC operation matters. In the course of the meetings, it was pointed out that in the third quarter of the current year CPC would allocate $320 M to repay its debt to the Shareholders. In accordance with the existing business model the debt is to be completely repaid in 2020. The CPC pipeline system is one of the largest investment projects with foreign capital in the energy sector in the CIS. The length of the Tengiz Novorossiysk Pipeline is 1,511 km; it transports over two thirds of all Kazakhstan export crude, as well as crude from Russian oil fields, including the Caspian Region. CPC Marine Terminal is equipped with three Single Point Moorings (SPM) that allow to load tankers safely at a significant distance offshore, also amid poor weather conditions. CPC Shareholders: Russian Federation (represented by Transneft (24%) and CPC Company (7%)) 31%; Republic of Kazakhstan (represented by KazMunaiGas (19%) and Kazakhstan Pipeline Ventures LLC (1.75%)) 20.75%; Chevron Caspian Pipeline Consortium Company 15%, LUKARCO B.V. 12.5%, Mobil Caspian Pipeline Company 7.5%, Rosneft-Shell Caspian Ventures Limited 5
7.5%, BG Overseas Holding Limited 2%, Eni International N.A. N.V. 2% and Oryx Caspian Pipeline LLC 1.75%. Kazakhstan to increase gas exports to China Energy-rich Kazakhstan intends to increase the export and transit of gas to China up to 100 billion cubic meters per year. This was announced by Erkanat Temirkhanov, Deputy General Director for Transformation and Development of KazTransGas JSC, who spoke at the 16 th ERRA conference on investments and energy regulation, Kazinform reported. In connection with the commissioning of Beineu-Bozoy-Shymkent at full capacity, we are building a powerful compressor station. We want to increase the export and transit of gas to China to 100 billion cubic meters per year, and maybe even more, he said. Kazakhstan holds 0.8% of the world s natural gas proven reserves, and produces 0.6 percent of the world s total gas output, according to the BP s statistics 2015. The country serves as a major transit country for gas exports from Turkmenistan and Uzbekistan that are destined to Russia and China. Volumes from Turkmenistan and Uzbekistan are transported through the Central Asia-China gas pipeline network that links with CNPC s Second West-East Pipeline in western Xinjiang province at the border with Kazakhstan. The volume of gas exports rose by 7.9% in 2016 to 13.7 billion cubic meters. In a bid to increase the country s gas industry in 2018-2024, the government is considering the Amangeldy deposit not only as a resource base, but also storage. The Amangeldy gas field in Jambyl region of Kazakhstan will be used as a large gas storage facility, according to Temirkhanov. KazTantransGas has a subsidiary company Amangeldygas, through which it is planned to bring the volume up to 500 million tons a year. It's our subsidiary located in Jambyl region, he said. Temirkhanov added: For now, we are ready to transport 10 billion cubic meters of gas only to China. But we are working with Uzbekistan, Turkmenistan and Russia - its Gazprom. Today, together with our scientists and other investors, we are developing a project for using Amangeldygas as a large gas storage facility. The available capacities for us are already not enough. We are thinking about the prospects for the growth of gas transportation to China, we will need a large gas storage facility in the south, Temirkhanov explained. KazTransGas JSC is the largest gas supply company in the Republic of Kazakhstan, representing the interests of the state on domestic gas market and worldwide. KazTransGas operates natural gas transport via main gas pipelines, sales natural gas on domestic and foreign markets, develops, finances, constructs and maintains pipelines and gas storages. KazTransGas operates a huge gas transportation system, which includes more than 30,000 kilometers of gas distribution networks, more than 15,000 kilometers of main gas pipelines, 56 compressor stations that have installed 316 gas compressor units and 3 underground gas storage. Currently, KazTransGas is represented in 10 regions of Kazakhstan which are Almaty, Aktobe, Atyrau, East Kazakhstan, Zhambyl, West Kazakhstan, Kostanai, Kyzylorda, Mangystau and South Kazakhstan regions. Kazakh gas is expected to face strong competition from Turkmen, Uzbek and Russiangas supplies under long-term contracts with China. A majority of Kazakhstan s proved natural gas reserves and natural gas production is possible thanks to the Karachaganak field. The Karachaganak field s gas reserves are estimated at 1.35 trillion cubic meters while oil and liquid condensates around 1.2 billion tons. About 49% of Kazakhstan s gas production and 18% of its produced oil are extracted from this field, according to AzerNews. OIL & GAS INFRASTRUCTURE Kazakhstan, Uzbekistan to construct Shymkent-Jizzakh oil pipeline by 2021 Kazakhstan and Uzbekistan have agreed upon the construction and commissioning of the Shymkent-Jizzak main pipeline with the annual capacity of 5 million tons by 2021, Kazinform refers 6
to the Framework Agreement On Certain Issues of Energy Cooperation between the governments of Kazakhstan and Uzbekistan. The two countries agreed upon the possible timeframes and amounts of oil transported to Uzbekistan through the territory of Kazakhstan: up to 0.2 million tons in 2017; up to 1 million tons per year in 2018-2020; up to 5 million tons since 2021. As it is explained, the designing, financing, construction, and operation of the Shymkent-Jizzakh oil pipeline will be conducted by the authorized organizations of each of the countries in compliance with these organizations terms. Besides, the parties agree to provide their authorized organizations with the necessary powers, permits, and licenses for the designing, construction, and operation of the Shymkent-Jizzak oil pipeline. The Uzbek party expresses interest in supplying Kazakh oil up to 2 million tons a year for needs of the Jizzakh refinery. In addition, the Kazakh party, under the national law, will assist in supplying up to 2 million tons of Kazakhstani oil per year, if it is economically feasible for the economic entities of the Republic of Kazakhstan. The parties support annual delivery of up to 1 million tons of oil produced in Russia through Kazakhstan s Shagyr oil loading point and then by rail to Uzbekistan. Also, both countries support the need to develop the oil transportation infrastructure so that to ensure the supply of up to 5 million tons of Russian and Kazakh oil per annum to Uzbekistan through the territory of Kazakhstan, and this includes the construction of the Shymkent-Jizzakh main pipeline. In general, Kazakhstan is interested in supplying its oil products to Uzbekistan, according to the document. In exchange, the Uzbek party will ensure nondiscriminatory access to the territory of Uzbekistan and assist the Kazakh party in the marketing of Kazakhstan-made petroleum products in Uzbekistan and neighboring countries. At the same time, the states agreed to develop joint marketing of the oil products, obtained after the processing of Russian and Kazakh oil in the Uzbek refineries, including the Jizzakh refinery, in Uzbekistan s domestic market and foreign sales markets; logistics of oil products to external markets, including via Kazakhstan s logistics infrastructure, according to Kazinform. RENEWABLE ENERGY Kazakhstan to increase the use of renewable energy sources The Ministry of Energy of Kazakhstan plans to increase the share of renewable energy sources (RES) up to 3% of the country s total electricity generation by 2020, Vice Minister of Energy Magzum Mirzagaliyev said at a press conference on September 22, the official website of the Prime Minister of Kazakhstan reported. According to the Vice Minister, today the share of renewable energy sources in Kazakhstan is about 1%. This is a fairly good indicator, especially given that we are a country with rich hydrocarbon and coal reserves. In order to go further, we are aimed at attracting the best technologies, and also the cheapest ones. Over the past year, significant steps have been taken to improve the investment climate in the renewable energy sector, the Vice Minister said. Mirzagaliyev said that a plan for placing RES facilities was approved, taking into account the available infrastructure and climatic conditions, as well as the principle of partial indexation of fixed tariffs taking into account the floating exchange rate of the national currency. A new mechanism is being developed that will allow us to move away from fixed tariffs towards the auction method. After implementing this method, we expect that both investments and technologies will enter our country more actively, Mirzagaliyev added. According to him, these measures already give the first results. For example, a Memorandum was signed between the EBRD and the Ministry of Energy on the allocation of $200 million in funds for renewable energy projects in Kazakhstan, with an additional $480 million from other financial institutions. This will help introduce about 500 MW of generating capacity in the coming years. Agreements on the implementation of projects in the field of wind power with ENI and General Electric were also signed. An agreement was signed on the construction of a solar power station in Zhambyl region with a capacity of 50 MW, financing of a solar power project in Kyzylorda region 7
with a capacity of 50 MW, and a wind farm project in Akmola region with a capacity of 100 MW, the Times of Central Asia reports. CONTACTS Embassy of the Kingdom of the Netherlands 62, Kosmonavtov str. Chubary mcrd, 3 rd floor 010000 Astana T: +7 7172 555450 F: +7 7172 555474 ast@minbuza.nl Embassy Office in Almaty 103, Nauryzbai Batyr Str. 050022 Almaty T: +7 727 2503773 F: +7 727 2503772 alm@minbuza.nl INDUSTRY EVENTS IN 2017 KIOGE International Oil & Gas Exhibition and Conference 3 6 October 2017, Almaty Organizer: Iteca www.kioge.kz Global Oil & Gas Mangystau Mangystau Regional Exhibition on Oil, Gas and Infrastructure 7 9 November 2017, Aktau Organizer: Iteca www.moge.kz 8