​Tied by oil transportation routes

By Laura Suleimenova

Falling oil prices, as well as sharp deterioration in relations between Russia and the Western countries can reduce profitability of oil and gas industry in Kazakhstan. Kashagan oil with its high prime cost ($100 per barrel) at the times of prolonged oil price drop is not in demand. The completion of Future Growth Project in Tengiz is postponed for nearly two years, and Russia doesn't like the idea of Kazakhstan about construction of its own gas-processing plant in the West Kazakhstan Oblast, operating on raw materials from Karachaganak gas-condensate field.

"ONE BILLION- AND NOT A CENT LESS!"

According to updated estimate and schedule of works presented by Tengizchevroil to its shareholders in November of last year, the costs of TCO's projects titled “Wellhead Pressure Management/ Future Growth Project" (WPM/FGP) doubled in cost and the terms of its implementation were postponed for two years.

So, if in April, 2014 its cost was $23,7 billion, in November of the same year it reached $38,8 billion. In particular, the cost of FGP facilities increased from $11 billion to $14 billion, WPM facilities - from $10,4 billion to $22,4 billion. The commissioning dates of FGP are postponed from 2019 to 2021.

It is clear, that the Kazakhstan party is not delighted with such sharp rise of costs of those projects. To recall, Kazakhstan's KMG company owns 20% of shares in TCO, and expenses of our party in the project have increased in proportion to this share. Other shareholders are: Chevron – 50%, ExxsonMobil – 25% and LukArco – 5%.

During his last visit to Atyrau the RoK Minister of Energy Vladimir Shkolnik said that currently the work is ongoing on optimization of FGP towards reduction of its cost.

However the Kazakhstan party today is more concerned with another thing. According to information of Ak Zhaik newspaper, KazMunayGas has already warned Tengizchevroil about inadmissibility of considerable decrease in revenues from TCO to the RoK budget during project construction period. In particular, TCO was proposed to reconsider project financing terms during WMP/FGP construction activities, so that KazMunayGas received dividends in the amount not lower than $1 billion.

Earlier KMG suggested TCO to use borrowed funds ($8-11 billion) as a financing source and even signed the Memorandum, where the amount of loan, sources of means and financing terms were defined.

TCO plans to make a final decision on financing until the end of 2015.

TCO LOOKS FOR WAYS TO BY-PASS RUSSIA

In case the relations between the West and Russia will further deteriorate, then there is a possibility of escalation of sanctions war, hypothetically – up to a stop of export of Kazakhstan oil and gas through the Russian territory.

The main route of transportation of Tengiz oil is CPC oil pipeline that goes through Russia, and railway routes to Odessa and Taman. It is not by chance that in recent years TCO tries to diversify export deliveries by studying various markets, including the Pacific Rim.

In November of last year in his interview to the Kazakhstan newspaper “Panorama", TCO's CEO Tim Miller informed that they have a team that doing research of the issue of possible consequences for TCO's activity of the anti-Russian sanctions.

"They studied how it may end and what we should do in such situations. Presently, this team is continuing its work. They do monitoring. And, respectively, they develop alternative decisions aimed at mitigation of possible consequences of such sanctions. And we have already took some of the mitigation measures that the team proposed in relation to transportation of the liquefied petroleum gas. We changed the transportation route of this product that helped us to avoid consequences from sanctions. Of course, it will be good for us if we have alternative directions", - said Miller.

To the journalist's question, whether TCO considers as an alternative the Chinese direction (after "KazTransOil" will complete the reverse of Atyrau - Kenkiyak oil pipeline), Miller answered: -"Yes. We pay attention to the safety of this route, its reliability and commercial side. And we continue to consider all possible routes".

In 2013 TCO resumed transportation of oil via, so-called, Southern route – Baku- Tbilisi- Ceyhan pipeline (BTD), that was interrupted in 2008 because of high tariffs for transfer.

Along the Southern route the Tengiz oil is exported from Kazakhstan through Aktau port across the Caspian Sea to Baku port and further via oil pipeline of Baku – Tbilisi – Ceyhan to Batumi port on the Black Sea, or to Ceyhan port on the Mediterranean Sea for further deliveries to the international markets.

TCO chartered the Aktau tanker belonging to Kazmortransflot for transportation of oil from Aktau to Baku.

It is interesting to know that on February 23 of this year on Chevron's website there was information about completion of railway system upgrade at Tengiz as per the requirements of railway transportations of the USA and Kazakhstan TCO safety rules.

According to information, total length of railway is 290 km., including 96 km of the main trunk line and 194 km of access lines and sidings.

If at the beginning of Tengiz field development the rail cars park contained six locomotives that have already served their terms and needing major repair, then today there are 30 locomotoves. Since 1995 TCO shipped via railway 492,2 million barrels of oil.

It is remarkable that the railway together with CPC, is positioned by the company as the main means of transportation of oil that unlike pipelines, allows to support deliveries of different types of raw materials, despite weather conditions, planned and unplanned repairs.

ORENBURG'S STRANGLEHOLD

According to AkZhaik information, the long discussed issue of construction of Karachaganak gas processing plant and main gas pipeline "Aksai - "Bukhara-Ural" isn't resolved until today. These projects are connected with each other, since they make the basis for the 3rd phase of expansion of the largest oil-gas condensate Karachaganak field that is scheduled for commencement in 2017.

Although, the plant design engineering and state expertise's conclusion were ready in 2012. In March of 2013 the RoK ex-Minister of oil and gas Sauat Mynbayev, during his visit to Moscow, suggested the Russian side to make changes to the Agreement between RoK and Russian Federation regarding gas offtake for the future plant. However the Russian side declared that modification, offered by the Kazakhstan party, will require denunciation of the current agreement and signing of a new one. In this connection the Kazakhstan party had fears about possible refusal or restriction of acceptance of Karachaganak gas by the Orenburg refinery.

To recall, the transportation system "Kacharaganak – Orenburg" consists of five pipelines 140 kilometers long and used for transportation of hydrocarbons from the Karachaganak field to Orenburg refinery. The purchase and sale contract for gas from Karachaganak field was signed in June, 2007 between Karachaganak Petroleum Operating B.V. (KPO) - the operator of the Karachagansk project and KazRosGaz - the joint Kazakhstan-Russian venture.

Shareholders of KPO are "BG Group" (29,25%), "Eni" (29,25%), "Chevron" (18%) and "Lukoil" (13,5%). Since July 1, 2012 the Kazakhstan KMG company entered the consortium with its 10 % shares.

However the latest information from our sources are encouraging. Between KMG and Gazprom the difficult negotiations are ongoing. The consent on the main issue of extension of the purchase and sale contract has been reached, and further negotiations on final conditions are still under discussion.