Kazakhstan is the world's 18th largest oil producer and an increasingly important supplier of oil to its eastern neighbor, China. With total liquids production estimated at 1.6 million barrels per day (bbl/d) in 2012, Kazakhstan is a major producer; however, key to its continued growth in liquids production will be the development of its giant Tengiz, Karachaganak, and Kashagan fields. Furthermore, development of additional export capacity will be necessary for production growth.
Rising natural gas production over the last decade has transformed Kazakhstan from a net gas importer to a country that as of 2011 was self-sufficient. Natural gas development has lagged oil due to the lack of domestic gas pipeline infrastructure linking the western producing region with the eastern industrial region, as well as the lack of export pipelines.
Kazakhstan is land-locked and lies a great distance from international oil markets. The lack of access to a seaport makes the country dependent mainly on pipelines to transport its hydrocarbons to world markets. It is also a transit state for pipeline exports from Turkmenistan and Uzbekistan. Neighbors China and Russia are key economic partners, providing sources of export demand and government project financing.
Kazakhstan is trying to transition toward a free market in energy and encourage foreign investment to exploit its oil and gas resources. The Ministry of Energy, Industry and Trade was the main government entity responsible for implementing this policy. In March 2010, the Ministry of Energy and Mineral Resources was dissolved and replaced by the Ministry of Oil and Gas and the Ministry for Industry and New Technologies, which are responsible for the petroleum industry and mining, respectively. The realignment of the ministries was designed so that the state can play a more central role in the oil and gas sector. With this realignment, KazMunaiGas (KMG) is no longer involved in the regulation of the sector, effectively removing the potential for conflicts of government and commercial interests.
Kazakhstan is shifting its trade and energy patterns away from the former Soviet Union and toward its neighbors in Central Asia, the Caucasus, and Turkey. The TRACECA Program (Transport System Europe-Caucasus-Asia) is developing an East-West corridor from Central Asia, through the Caucasus, across the Black Sea to Europe. This program, which was set up at a European Union Conference in 1993, is often called "the Great Silk Road."
In 1997, the government of Kazakhstan issued a decree on privatization and restructuring in the energy sector. Through this decree, all companies in the energy sector have gone through an incorporation process and are legally prepared for future privatization and restructuring.
Kazakhstan is in the process of privatizing its electric system. All the major power plants, comprising 85% of generating capacity, have been privatized. The regional distribution companies are now slated for privatization, with foreign investment encouraged. The government still sets electrical tariffs on a quarterly basis, but this control may be relaxed as competition develops.
In January 2001, the President of Kazakhstan set up a National Fund to try to level off the effect of fluctuations of oil revenue on the economy. Revenues such as taxes from oil companies, royalty payments by joint venture partners, and signing bonuses are designated for the Fund, including $660 million paid by Chevron-Texaco for a 5% stake in a joint venture in the Tengiz oil field. As of June 2003 there was $2.3 billion in the National Fund.
In February 2002, a presidential decree merged the state oil company Kazakhoil and the national oil and gas transportation firm KazTransGaz. The new combined company is called Kazmunaigaz.
Kazakhstan's proven oil reserves were estimated at 30 billion barrels by the Oil and Gas Journal in January 2012. The country's main oil reserves are located in the western part of the country, where the 5 largest onshore oil fields (Tengiz, Karachaganak, Aktobe, Mangistau, and Uzen) are located. These onshore fields account for about half of current proven reserves, while the offshore Kashagan and Kurmangazy oil fields, in Kazakhstan's sector of the Caspian Sea, are estimated to contain at least 14 billion barrels, with Kashagan accounting for around 9 billion barrels.
The offshore Kashagan field is being explored by Agip, a subsidiary of Italy's ENI. In February 2001, ENI won out among the partners of the Offshore Kazakhstan International Operating Company (OKIOC) and became the operator of the Kashagan field. Then OKIOC was renamed Agip Kazakhstan North Caspian Operating Company (Agip KCO).
In March 2001, Agip KCO drilled for oil in Kashagan West 1 and found a large deposit. In June 2002, Agip KCO released estimates that Kashagan's proven reserves were 7-9 billion barrels of oil. Agip KCO also estimated that secondary recovery techniques, such as gas injection, could increase the potential of the field to 9-13 billion barrels. At its first stage of development, in 2005, the Kashagan field could produce 100,000 barrels per day (b/d).
The Tengiz field has 6 to 9 billion barrels of estimated reserves. This field is being developed by the Tengizchevroil joint venture, run by ChevronTexaco. Production at the Tengiz field has increased from 25,000 b/d in 1993 to 250,000 b/d in 2002. It is expected that production of this field will continue to expand, with ChevronTexaco investing $3 billion over the next three years.
The Uzen oil and gas field is an older field that is operated by Uzenmunaigaz, a subsidiary of Kazmunaigaz. It is 100% state-owned, without foreign investors. Uzen is estimated to contain 1.5 billion barrels of oil. In mid-2002, its production rate was 94,467 b/d.
The Karachaganak field is being developed by Karachaganak Integrated Organization (KIO), a consortium led by BG of the UK and Agip of Italy. The consortium plans to invest $4 billion by 2006. BG estimates that the field has 2.4 billion barrels of oil and 16 trillion cubic feet (Tcf) of natural gas which can be recovered over the 40 year life of the project. Estimates are that the field could be producing 180,000 b/d of crude and 240,000 b/d of gas condensate by 2008.
In June 2003, Kazakhstan announced a new Caspian Sea development program involving auction of new offshore development blocks, starting in 2004. It is planned that the first offers will be made to Kazmunaigaz, which will then conduct tenders for partnerships.
Kazakhstan is the second largest oil producer after Russia among the former Soviet republics. The state-owned oil company is Kazakoil, and the pipeline company is Kaztransoil. Of the 818,000 b/d of crude oil (including natural gas liquids) that Kazakhstan produced in 2002, about half came from three large fields, Tengiz, Uzen, and Karachaganak. It is expected that oil production will reach 1.2 million b/d in 2005 and 3 million b/d by 2010. A considerable amount of oil production is being done by companies other than Kazakoil. CNPC-Aktobemunaygas, has been partially acquired by the U.S. company Access Industries. Most of the oil produced by CNPC-Aktobemunaygas is exported to Russia, specifically for Russia's Tyumen Oil Company and its Orsk Refinery (also partially owned by Access).
In June 2002, Kazakhstan signed a 15-year oil transit agreement with Russia. Under this agreement, Kazakhstan will export at least 350,000 b/d of oil using the Russian pipeline system. Kazakhstan has also begun doing oil swaps with Iran and the two countries have discussed the possibility of building a pipeline to connect them. Kazakhstan is also trying to find uses for associated natural gas which is being flared, such as building gas-fired power plants.
To exploit its oil fields, Kazakhstan has entered into joint ventures and production-sharing agreements with foreign investors. Major oil fields that have recently come onstream include North Buzachi, Sazankurak, Saztobe, Chinarevskoye, and Airankol. New fields expected to start production in the near term include Alibekmola, Urikhtau, and Kozhasai.
In 1993, Chevron formed the $20 billion Tengizchevroil joint venture to develop the Tengiz oil field. Tengizchevroil produced 285,000 b/d in 2002, most of which went through the Russian pipeline system. Some oil went by barge and rail to the Baltic Sea; most of the remainder went by ship, pipeline, and rail to the Black Sea. With the $3 billion in increased investment, significant expansion of Tengizchevroil's output is expected, and its production could increase to 450,000 b/d by 2006. With sufficient export outlets, Tengizchevroil could reach a peak production of 700,000 b/d by 2010.
In 2002, the Karachaganak field had about 100,000 b/d of gas condensate production. All the Karachaganak gas condensate produced in 2002 was sent to the processing facilities associated with the Orenburg field, located just across the border in Russia. Since April 2003, another export option is the recently completed CPC pipeline.
The consortium developing northwestern Kazahstan's oil includes Chevron and Mobil. Development of offshore oil under the Caspian Sea has been slow because of a lack of agreement among the surrounding nations. In 1997, Kazakhstan and Turkmenistan signed a communiqué to divide their sections of the Caspian Sea along median lines, and in 1998, Kazakhstan signed a bilateral agreement with Russia dividing their part of the northern Caspian seabed along median lines. Kazakhstan also has a bilateral agreement with Azerbaijan, setting the Caspian offshore oil boundaries by medians. The one country that has not cooperated in a Caspian boundary settlement is Iran; in July 2001, an Iranian gunboat forced a BP exploration vessel out of a disputed offshore area licensed to BP by Azerbaijan, but claimed by Iran. In April 2002, the countries bordering the Caspian met to discuss boundaries, but they were unable to reach agreement. However, in May 2002, Kazakhstan and Russia moved ahead with their own bilateral agreement evenly dividing the northern part of the Caspian. They plan to jointly develop the disputed Kurmangazy field. This will allow Kazakhstan to proceed with developing its own part of the Caspian offshore area.
As for its own petroleum needs, Kazakhstan's consumption of crude oil has drastically decreased since it became an independent country; the consumption in 2001 was only about half of what it was less than a decade earlier.
Kazakhstan has three major oil refineries, with a combined refining capacity of 427,000 b/d. Pavlodar refinery supplies the western region, Atyrau supplies the western region, and Shymkent supplies the southern region. Pavlodar's crude comes from a pipeline from Western Siberia, while Atyrau is supplied with domestic crude from northwest Kazakhstan and Shymkent's crude comes from the Kazakh fields at Kumkol, Aktyubinsk, and Makatinsk. In 2002, the three refineries processed a total of 143,000 b/d of crude (38,000 b/d at Pavlodar, 27,000 b/d at Atyrau, and 78,000 b/d at Shimkent).
A major modernization was undertaken at the Atyrau refinery. In 1998, Marubeni Corporation of Japan signed an agreement with the government of Kazakhstan to do a feasibility study for the modernization. The Japan Bank for International Cooperation financed the performance of the feasibility study. In January 2002, the government of Kazakhstan authorized the modernization work to proceed. Japan Gas Corporation collaborated with Marubeni in carrying out the work.
In January 2012, the Oil and Gas Journal estimated Kazakhstan's proven natural gas reserves at 85 trillion cubic feet (Tcf). Natural gas production in Kazakhstan is almost entirely associated gas. Most of Kazakhstan's natural gas reserves are located in the west of the country, with about 80 percent of total natural gas reserves located in four fields: Karachaganak, Tengiz, Imashevskoye, and Kashagan. However, the pipeline infrastructure for moving the gas is lacking and a lot of gas is being flared.
The main area for associated natural gas is the Karachaganak field in northwest Kazakhstan, which contains more than 40% of Kazakhstan's total reserves. In 1997, an international consortium with firms from the U.S. (Texaco), Italy (Agip), the United Kingdom (BG), and Russia (Lukoil) signed a production sharing agreement to develop the field for 40 years and invest $4 billion by 2006.
There are also gas-producing areas in the Tengiz, Zhanazhol, and Uritau fields. The associated gas field at Tengiz is the second largest producer of natural gas in Kazakhstan. There are also undeveloped offshore gas areas in the Caspian Sea near Russia that are not currently linked to pipelines. Kazakhoil and Phillips have agreed to conduct a feasibility study on constructing a $500 million gas liquefaction plant at Atyrau by 2004. The plan is to move the liquefied gas by rail.
Kazakhstan is also planning to develop the Amangeldy and Ayrykty gas fields in the southern part of the country. These fields have total estimated natural gas reserves of over 777 billion cubic feet (Bcf). In August 2001, Kazakhstan began drilling wells in the Amangeldy deposit. It is expected that the development of this gas field will cost $770 million.
Natural gas producted in the west of Kazakhstan is exported to Russia. Meanwhile, 40% of the Kazakh domestic gas consumption is imported from Turkmenistan, Uzbekistan, and a small amount from Russia. Disruptions sometimes occur -- in 1998, Uzbekistan temporarily cut off the gas supply because of unpaid bills. In November and December of 2001, natural gas consumers in southern Kazakhstan suffered interruptions of service because of a dispute with Kyrgyzstan over Kyrgyz diversion of gas from a pipeline
Kazakhstan's one nuclear power plant was a 350 megawatt (MWe) unit located outside Aktau in the Mangyshklak Oblast on the shore of the Caspian Sea in western Kazakhstan. This unusual plant was a BN-350 sodium-cooled fast breeder reactor, the first of a series of fast breeder reactors developed in the former Soviet Union. It achieved first criticality in 1973 and had suffered several accidents during its lifetime, the most serious in 1974 when a depressurization led to a water-sodium explosion as water from the tertiary circuit entered the secondary circuit with the sodium coolant. The explosion cracked the casing of the heat exchanger. This plant was finally shut down in April 1999 after almost 26 years of operation.
In September 2000, the Kazakh government shelved plans to build a new 1,900 MWe nuclear power plant in the east near Lake Balkash. This decision was taken because of cost and safety concerns, as well as public opposition. The facility was planned to have six Russian VVER-640 reactors and would have cost about $5 billion.
Gas Pipelines and Distribution System
Kazakhstan has two separate domestic natural gas distribution networks, one in the west, which services the country's producing fields, and one in the south, which mainly delivers imported natural gas to the consuming regions. The lack of internal pipelines connecting Kazakhstan's natural gas-producing areas to the country's industrial belt between Almaty and Shymkent has hampered the development of the country's natural gas resources. Southern Kazakhstan receives much of its natural gas supplies from Uzbekistan via the Tashkent-Shymkent-Bishkek-Almaty pipeline even as the country exports gas from its northwestern region. KazTransGas, a subsidiary of KMG, controls and manages the country's gas pipeline transportation system.
Kazakhstan had a major need for more gas pipelines. There are six gas pipelines that connected Kazakhstan to other central Asian republics and Russia, but the gas producing regions in the western part of Kazakhstan were not connected to the relatively populous southeast and industrial north parts of the country. There are two separate gas pipeline networks; Kazakhgaz does distribution in the west and Alaugaz does distribution in the southeast. It is estimated that this internal pipeline linking the gas-producing areas of Kazakhstan with the gas-consuming areas would cost $1 billion to build, and there has been no decision so far to implement the proposed pipeline.
In June 2002, Kazmunaigaz created a joint venture with Russia's Gazprom. The new company, KazRosGaz will arrange for Kazakhstan to pipe its natural gas through the Russian pipeline system for the first time. This arrangement will start out with the capability to transport 125 Bcf of natural gas. It could increase to as much as 1.77 Tcf in the future.
Kazakhstan awarded a 15-year contract to Tractebel of Belgium to manage distribution systems for western Kazakhgaz and southern Alaugaz, starting in July 1997. After long negotiations of disputes, Tractebel agreed in March 1998 to invest $1.0 to 1.5 billion for construction, repair, and planning costs. This includes a $150 million gas line in southern Kazakhstan to bypass Kyrgyzstan.
In April 2001, the state-owned company KazTransGaz was given the mandate of managing Kazakhstan's regional natural gas networks and modernizing natural gas pipelines. Under the February 2002 decree of the President of Kazakhstan, the state oil and gas companies were combined into the new firm Kazmunaigaz. Kazmunaigaz took over the operations of the gas pipelines and all assets of KazTransGaz, including over 5,400 miles of main pipelines and 26 compressor stations with 308 gas transportation units.
Various natural gas pipelines have been proposed to transport gas throughout Asia. A 5,000-mile China Pipeline option is being studied for bringing 1 Tcf of gas from Central Asia to China via Kazakhstan. Another alternative is a pipeline to Turkey, which had a preliminary feasibility study by Exxon, Mitsubishi and others. There is also a possibility of twin oil and gas pipelines being constructed across the Caspian Sea from Kazakhstan to Baku. In December 1998, Kazakhstan signed an agreement with Royal Dutch/Shell, Chevron, and Mobil to do a feasibility study of this option.
The lack of oil pipelines also keeps Kazakhstan from adequately exploiting its oil and transporting it to world markets. Since Kazakhstan is landlocked, the pipelines have to go through neighboring countries. At present, most of the oil has to go through the Russian pipeline system. It then goes by rail through Russia to the Black Sea and the Baltic, or by barge across the Caspian Sea to Baku, Azerbaijan. Tengizchevroil is considering exporting oil via the existing Tengiz-Aktau pipeline, whose $100 million upgrade would increase its capacity to 160,000 b/d from the current level of 60,000 b/d.
In 1997, Kazakhstan signed the Caspian Pipeline Consortium (CPC) agreement. The consortium includes Russia, Oman, and several oil companies, such as Chevron and Mobil. Under the agreement, a pipeline has been built from the Tengiz oil field on the northeast shore of the Caspian Sea to Novorossiisk in Russia, on the Black Sea. A 900-mile section of the CPC Pipeline, from the Tenghiz oil field to the Russian Black Sea port of Novorossiisk, was completed in March 2001 at a cost of $2.6 billion and was officially opened in November 2001. The capacity is expected to increase eventually to 1,340,000 b/d; in 2002, the pipeline carried 260,000 b/d. With the CPC Pipeline in place, the transport cost of Tengiz oil is now reduced to $3 per barrel from the $6 per barrel it had previously cost to transport the oil by rail.
It is expected that the CPC Pipeline will also be used for transporting natural gas liquids from the natural gas production plant at Karachagnak. Kazakhoil, Kaztransoil, British Gas, Lukoil, AGIP, and Texaco have built a spur pipeline to transport the condensate from Bolshoy Chagan (near Karachagnak) to Atyrau, where it connects with the CPC pipeline. This condensate pipeline was completed in April 2003.
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