ab                                                                                                                        ...
Oil & Gas 26 September 2003


Contents                                                                                    ...
Oil & Gas 26 September 2003


Oil and Gas Production
Production in barrels of oil equivalent

                            ...
Oil & Gas 26 September 2003


Oil
Kazakhstan is the world’s 19th largest oil producer and has the world’s 16th
largest pro...
Oil & Gas 26 September 2003


Reserves
Top 20 countries by oil/liquid reserves, 2002

                  250

             ...
Oil & Gas 26 September 2003


Tengiz is the world’s deepest, super-giant oil field, and its crude is of a high
quality, wi...
Oil & Gas 26 September 2003


North Caspian PSA: Kashagan
The operator is Agip Kazakhstan North Caspian Operating Company ...
Oil & Gas 26 September 2003


There are further prospects to be drilled on the acreage: the Kalamkas prospect
was announce...
Oil & Gas 26 September 2003


2001:       28km rail link from Aksai to Karachaganak field completed and new
            po...
Oil & Gas 26 September 2003


Karachaganak oil production, 1998-2005E

              250


              200


           ...
Oil & Gas 26 September 2003


Halliburton are to carry out engineering studies for a natural gas processing
plant and expo...
Oil & Gas 26 September 2003


Gas
Kazakhstan is currently only the 32nd largest gas producer in the world but has
the 17th...
Oil & Gas 26 September 2003


Currently around 75% of the total gas production comes from the Tengiz and
Karachaganak fiel...
Oil & Gas 26 September 2003


Hydrocarbon Policy
State Oil Company
Kazmunaigaz is the state oil company. It is a verticall...
Oil & Gas 26 September 2003


Oil Fund
Kazakh officials have studied the experiences of other countries that have found
th...
Oil & Gas 26 September 2003


Fiscal Terms
The fiscal terms for foreign oil companies are generally joint ventures, PSAs
a...
Oil & Gas 26 September 2003


The government, Ministry of Energy and Mineral Resources (MEMR) and
Kazmunaigaz are at odds,...
Oil & Gas 26 September 2003


Exploration and Licensing
History
The progress of Kazakhstan towards the position of a major...
Oil & Gas 26 September 2003


obliged to conduct seismic surveys and drill one or more exploration wells. In
exchange they...
Oil & Gas 26 September 2003


■   Repsol has concluded an agreement with the state oil company to develop
    the Amangeld...
Oil & Gas 26 September 2003


Infrastructure
Kazakhstan infrastructure

                                                  ...
Oil & Gas 26 September 2003


pipeline system (the Makhachkala-Tikhoretsk-Novorossiisk pipeline). Another,
larger quantity...
Oil & Gas 26 September 2003


Current oil pipelines
CPC

CPC participants

                   Participant                 ...
Oil & Gas 26 September 2003


Bosporus/Black Sea Issues

A major problem with additional Caspian oil exports heading west ...
Oil & Gas 26 September 2003


A 450km pipeline has been built at an estimated cost of $160m with a capacity
of 120,000 bpd...
Oil & Gas 26 September 2003


For its part, Russia itself has proposed multiple pipeline routes that use Russian
oil pipel...
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
Kazakhstan 26 Sep03
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Kazakhstan Profile for Investments

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Kazakhstan 26 Sep03

  1. 1. ab Global Equity Research Global Oil Companies Major UBS Investment Research Sector Comment Oil & Gas Country Briefing: Kazakhstan 26 September 2003 www.ubs.com/investmentresearch Current oil production - 1,000,000 barrels per day Anish Kapadia anish.kapadia@ubs.com Landlocked Kazakhstan is the 19th largest oil producer in the world. It plans +44-20-7568 1235 to increase production to more than 2.5 million bpd over the next 10 years. Iain Reid Current gas production - 1.3 billion cubic feet per day iain.reid@ubs.com Kazakhstan is only the 32nd largest gas producer in the world, although it has +44 20 7568 4434 the 17th largest reserves. Development of its vast reserves has been restricted Neil Perry by the lack of routes to market. neil.perry@ubs.com +44 20 7568 4168 Kazakhstan Louise Hough louise.hough@ubs.com +44 20 7568 0448 FINLAND SWEDEN RUSSIA ESTONIA LATVIA BELARUS POLAND CZECH REP. UKRAINE KAZAKHSTAN HUNGARY MONGOLIA ROMANIA CROATIA YUGOSLAVIA BULGARIA GEORGIA KYRGYSTAN ITALY AZERBAIJAN UZBEKISTAN TURKEY TURKMENISTAN GREECE TAJIKISTAN CHINA SYRIA AFGHANISTAN IRAQ IRAN PAKISTAN NEPAL LIBYA EGYPT SAUDI ARABIA INDIA BURMA Source: UBS ■ BG has the largest proportional exposure to Kazakhstan – the country accounts for 20% of the company’s 2003E production. ChevronTexaco has 9% of its 2003E production coming from Kazakhstan, Eni 4% and ExxonMobil 2%. ■ Kazakhstan’s future development as an oil and gas producer will depend on government policy and the new hydrocarbon laws; these will have a key influence on future exploration and development. ■ The main challenge Kazakhstan faces is its lack of export infrastructure to cope with the increasing production. Overcoming this is key to Kazakhstan reaching its full potential and achieving its ambitious plans for the development of the country. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 33 1
  2. 2. Oil & Gas 26 September 2003 Contents page Oil and Gas Production 3 Anish Kapadia Oil 4 anish.kapadia@ubs.com +44-20-7568 1235 — Production ........................................................................................................................ 4 Iain Reid — Reserves .......................................................................................................................... 5 iain.reid@ubs.com — Major Fields ...................................................................................................................... 5 +44 20 7568 4434 Neil Perry — Karachaganak .................................................................................................................. 8 neil.perry@ubs.com Gas 12 +44 20 7568 4168 — Reserves ........................................................................................................................ 13 Louise Hough Hydrocarbon Policy 14 louise.hough@ubs.com +44 20 7568 0448 — State Oil Company ......................................................................................................... 14 — State Participation .......................................................................................................... 14 Fiscal Terms 16 Exploration and Licensing 18 — History ............................................................................................................................ 18 — Licensing ........................................................................................................................ 18 — Exploration...................................................................................................................... 19 Infrastructure 21 — Exports ........................................................................................................................... 21 — Current oil pipelines........................................................................................................ 23 — Proposed/Planned Pipelines .......................................................................................... 25 — Refining .......................................................................................................................... 30 Economy and Politics 31 UBS 2
  3. 3. Oil & Gas 26 September 2003 Oil and Gas Production Production in barrels of oil equivalent 1400 Thousand barrels of oil equivalent 1200 1000 800 600 400 200 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Gas Oil Source: BP Statistical Review of World Energy 2003 Kazakhstan’s hydrocarbon production has increased sharply in the last five years, mainly due to the rise in oil production, which has coincided with the construction of new export pipelines. Gas production has remained at a relatively constant level. There is currently a lack of profitable, accessible markets for gas and although the country produces more than it consumes, it still has the need to import gas from Uzbekistan as its own gas producing fields are not linked to the internal gas pipeline network. Major fields, 2003E production and companies involved Liquid Gas Oil and Gas Field ( bpd) (million cfd) (boe/d) Companies involved Tengiz 271 451 353 CVX, KMG XOM, LukArco Karachaganak 112 512 204 ENI, BG, CVX, LUK Uzen 105 113 125 KMG Aktobe 90 68 102 CNPC, Aktobemunaigaz Kumkol 94 30 100 PetroKazakhstan, LUK Manistau 96 18 99 KMG Turgai 57 3 58 PetroKazakhstan Emba 52 9 54 KMG, MOL Karazhanba 34 0 34 Nations Energy Kazger 32 1 33 Veba Oel, EEG, IFC Other 66 49 75 TOTAL 1,009 1,254 1,235 Source: UBS estimates (note KMG – Kazmunaigaz) ChevronTexaco is the largest foreign oil and gas producer in Kazakhstan accounting for almost 20% of the country’s hydrocarbon production. ExxonMobil accounts for 7% and Eni, BG and Lukoil account for approximately 5% each of Kazakhstan’s total production. UBS 3
  4. 4. Oil & Gas 26 September 2003 Oil Kazakhstan is the world’s 19th largest oil producer and has the world’s 16th largest proved oil reserves, accounting for 0.9 % of proven global oil reserves. Current oil production is approximately 1 million bpd of which 10% is condensate. Current exports are 800,000 bpd. Kazakhstan has the Caspian Sea region’s largest recoverable reserves and accounts for two thirds of current production in the region. Top 20 countries by oil/liquid production, 2002 10,000 9,000 8,000 Thousand barrels per day 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Kazakhstan Iran Iraq Algeria Angola UK USA UAE China Indonesia Brazil Nigeria Canada Kuwait Venezuela Saudi Arabia Libya Russia Mexico Norway Source: BP Statistical Review of World Energy 2003 Production Kazakhstan oil production 1985-2015E 3000 2500 '000s barrels per day 2000 1500 1000 500 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: BP Statistical Review of World Energy 2003 and KazTransoil Oil production was relatively constant up to 1998. From 1998 production has been increasing due to ramp up in production at the Tengiz and Karachaganak fields and new PetroKazakhstan (formerly Hurricane Hydrocarbons) fields coming on stream. From 1998-2015 production is expected to rise by approximately 130k bpd per annum as the country’s oil reserves and export infrastructure is put in place to develop the new oilfields, in particular Kashagan. UBS 4
  5. 5. Oil & Gas 26 September 2003 Reserves Top 20 countries by oil/liquid reserves, 2002 250 200 Billion barrels 150 100 50 0 Kazakhstan Iraq Iran Qatar Algeria UAE USA China Oman Brazil Nigeria Canada Kuwait Venezuela Azerbaijan Saudi Arabia Libya Russia Mexico Source: BP Statistical Review of World Energy 2003 Norway At the end of 2002 proved reserves were 9bn barrels of oil according to the BP Statistical Review of World Energy and probable reserves between 9-18bn barrels according to the EIA. However actual reserves could be much higher than this, with Kashagan alone accounting for up to 13bn barrels of probable reserves. Current reserve life is approximately 25 years (using the conservative 9bn barrels of oil reserves estimate). Major Fields Tengiz Participants: ChevronTexaco 50%; ExxonMobil 25%; Kazmunaigaz 20%; LukArco 5% Tengiz oil production 500 450 400 350 300 '000 bpd 250 200 150 100 50 0 1998 1999 2000 2001 2002 2003E 2004E 2005E 2006E 2007E Source: UBS estimates The Tengiz field, located in the swamplands along the northeast shores of the Caspian Sea, was discovered in 1979, a year after seismic exploration of the area began. The exploration and appraisal program was not completed until 1983 when 20 wells had been completed. Limited production started in 1991. In 1993 Chevron signed the TengizChevroil (TCO) joint venture to carry out full-scale development of the field. UBS 5
  6. 6. Oil & Gas 26 September 2003 Tengiz is the world’s deepest, super-giant oil field, and its crude is of a high quality, with a gravity of 46.9 API and a low sulphur content, although the crude requires significant processing to remove the substantial volumes of sulphur which contaminate the raw gas. ChevronTexaco has estimated recoverable crude oil reserves at 6-9bn barrels. In 2002, the consortium produced 285,000 bpd, which was a third of Kazakhstan's daily production. The venture has been recently clouded by a financial row with the government on how to finance a $3bn expansion plan. In January 2003, after contentious negotiations with the government of Kazakhstan, the TCO consortium members initiated the expansion project designed to boost production to approximately 400,000 bpd by 2006. According to ChevronTexaco, Tengiz could potentially produce 700,000 bpd by the end of the decade. As oil production reaches plateau, a gas production rate of 2 bcf/d could also be achieved. Since ChevronTexaco took over Tengiz, transportation and marketing issues have dictated the pace of the project. Until June 1995 all crude was transported via the Atyrau-Samara pipeline. After this, however, crude was also transported by road, rail and barge. Oil is now also routed to the Russian Black Sea port of Novorossiisk through the Caspian Pipeline Consortium (CPC) project (see Infrastructure). History 1979: First well drilled and tested oil at a depth of over 4000m 1991: Test production begins at 9,300 bpd 1992: Chevron signs a preliminary deal with Kazakh president for Tengiz 1993: TengizChevroil (TCO) joint venture signed with Tengizmunaigaz Production increased to 65,000 bpd 1996: Mobil obtains a 25% interest in field from Tengizmunaigaz 1997: Tengizmunaigaz sells a 5% interest in field to LukArco Tengiz Fiscal Terms We understand the TCO agreement incorporates a basic tax rate, three types of royalty (fixed, base and additional royalty), bonuses, delayed export payments and a social spending programme over 40 years. The base royalty is applied from 1997. The base royalty rate is 18%, until the project achieves a 17% nominal IRR; thereafter the rate increases to 25%. When the project reaches an IRR of 20%, 25% and 30% an additional royalty is applied of 5%, 15% and 20%, respectively. Income tax is at 30%. UBS 6
  7. 7. Oil & Gas 26 September 2003 North Caspian PSA: Kashagan The operator is Agip Kazakhstan North Caspian Operating Company (Agip KCO): Eni 20.3%, Exxon 20.3%, Total 20.3%, RD/Shell 20.3%, Inpex 9.4%, ConocoPhillips 9.4% (Following the pre-emption of the recent BG sale). The North Caspian Sea PSA, which covers 5,600km of the Caspian Sea, includes the Kashagan oil field, the Kalamkas oil discovery and the Kairan, Aktote and Kashagan SW prospects. Eni is the operator of the Offshore Kazakhstan International Oil Consortium (OKIOC), which was given the pick of the Kazakh offshore Caspian blocks by the government. The Kashagan field is located in the northern part of the Caspian Sea, near the city of Atyrau. This gigantic oil field, which is estimated to contain reserves of 9-13bn barrels of sour crude, is one of the largest discoveries made in the last 20 years. Eni is now the field’s sole operator and holds a 20.3% interest, following the pre-emption of BP’s, Statoil’s and BG’s sales of their interests. Appraisal of the discovery is continuing, although given the technical and environmental challenges of development we expect production to begin at end 2006/07 at relatively low levels. Given the size of the field, a peak of 1 million bpd is likely towards the end of the decade, if the political and technical issues can be resolved. At least one new export pipeline will probably be required (see infrastructure). Some $2.2bn has been invested in the field so far. Investment is thought to be planned at $1.1bn in 2004. We believe the consortium plans to spend $10bn in the first phase to produce 450,000 bpd by 2008. The first exploration well, Kashagan East−1, was announced as a discovery in July 2000, flowing at rates of 3,800 bpd and 7 million cfd of gas. A second well, Kashagan West−1, located approximately 40km from the first discovery, was tested in April 2001 at rates of up to 3,400 bpd and 7.6 million cfd of gas. The field is being appraised initially via a five-well programme utilising two rigs. In June 2002, following the two appraisal wells, Eni, the consortium operator, announced a range of recoverable reserves of 9-13bn barrels. The upper and lower ends of the range reflect the possible development scenarios. The lower end assumes that a natural depletion scheme is adopted, with no secondary recovery employed. The upper end assumes gas injection is used to enhance recovery. Even at the lower end of reserves the discovery is still one of the largest made since the 1960s. However, the technical and political obstacles to significant production from Kashagan are considerable. The associated gas contains a high proportion of poisonous hydrogen sulphide, which will mean that the oil will require significant processing to remove the sulphur before export. The water depth is very shallow and freezes during winter, which hampers access to the rig. A further problem is the abnormally high reservoir pressure of the field. UBS 7
  8. 8. Oil & Gas 26 September 2003 There are further prospects to be drilled on the acreage: the Kalamkas prospect was announced as a discovery in August 2002, although we believe the well was drilled more in accordance with the PSC requirements than from a real desire for additional reserves. We expect the Kairan and Aktote prospects to be drilled in the near future. Delays Eni had originally indicated that a pilot production scheme would be in place by end 2005, in accordance with the contract. However, due to the technical challenges the companies are facing, both Eni and Total have recently suggested first production would be pushed back to 2006/07. This has prompted Kazakhstan to demand compensation for lost revenue before it endorses any development plan. Karachaganak The joint venture company is called Karachaganak Petroleum Operating (KPO). The participants are: Eni 32.5%, BG 32.5%, ChevronTexaco 20%, Lukoil 15%. The Karachaganak field, discovered in 1979, is one of the world’s largest oil, gas and condensate fields covering 280 sq km. It is located onshore in north- west Kazakhstan, near the border with Russia's Orenburg field. According to BG, the field holds reserves of more than 2.4bn barrels of oil and 16 tcf of gas, recoverable over the 40-year life of the project. Condensate production from Karachaganak averaged roughly 100,000 bpd in 2002, representing 11% of total Kazakh liquid production. Gas production in 2002 accounted for over 40% of total Kazakh gas production. History 1979: World class field is discovered. Covers an area of 280 km2. 1984: Production begins of gas and condensate, exported to the Orenburg processing plant in Russia. 1992: Kazakhstan government starts negotiating a PSA agreement with Eni and BG. 1995: Production-sharing principles signed while negotiations continue. 1997: ChevronTexaco and Lukoil join the international consortium. A 40- year final production-sharing agreement (FPSA) is signed in November. Phase 1 completed. 1998: PSA becomes effective. 1999: A critical milestone is passed when the consortium signs an agreement to ship liquids via the CPC, enabling development of the field to proceed. 2000: Main works contract awarded. UBS 8
  9. 9. Oil & Gas 26 September 2003 2001: 28km rail link from Aksai to Karachaganak field completed and new power station opened. 2002: Condensate exports reach new record of 130k bpd. 2003: Completion of phase 2. First oil flows from Karachaganak Processing Complex to the CPC. Development The consortium members aim to increase output from Karachaganak to 200,000 bpd by the end of 2003 following the completion of the second development phase, and to 240,000 bpd by 2008. Current plans are to develop Karachaganak in three phases. The second phase is close to completion at a cost of over $4bn, currently the biggest international investment in Kazakhstan. Phase 1 (1992-1997) This consisted of the refurbishment of the production facilities and well workovers. Phase 2 (1998-2003) The main element of phase 2 was the installation of a new processing plant for gas, including condensate separation and removal of the significant sulphur content from the liquid stream. This was completed at the beginning of August 2003 and will allow the field to significantly increase its production. It has a processing capacity of 260k bpd of oil and 1.4 bcf/d of gas, of which 0.6 bcf/d are reinjected. In April 2003, a 650km pipeline spur southward to Atyrau was completed to connect the Karachaganak field to Kazakhstan's primary export pipeline, the Caspian Pipeline Consortium (CPC) project. On July 15th the first export oil flowed from Karachaganak and the first oil sales via CPC were expected by the end of the third quarter of 2003. At peak, the consortium plans to export 140,000 bpd of crude through the CPC. In September 2003, first shipments of liquids from Karachaganak were delayed temporarily due to the oil entering the system becoming contaminated with caustic soda. Following the connection to the CPC, Karachaganak liquids should realise prices closer to international benchmarks, in contrast to the current price, which is a c40% discount from sales to Russian buyers in Orenburg. Karachaganak’s initial production rights through the CPC pipeline will be 130k bpd. A tariff of $3.50/bbl is payable for transport. The balance of the liquids (70k bpd) will continue to be sold via Orenburg. UBS 9
  10. 10. Oil & Gas 26 September 2003 Karachaganak oil production, 1998-2005E 250 200 150 '000s bpd 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 Source: Lukoil and UBS estimates Phase 3 Phase 3 is intended to boost liquids production to over 250k bpd but, more significantly, raise gas export capacity. This will be expanded to 500 million cf/d, with eventual sales of around 1.5 bcf/d envisaged. The major problem, however, is finding a market for the gas. Following the completion of phase 2, the foreign investors and the government are said to be at odds on how to proceed with the project. The investors want to ensure recovery of their investment, limit the costs in the next few years to operating expenditure and aim for positive free cash flow and cost recovery as early as next year. Following the completion of phase 2, there has been a significant increase in the liquid output but not the gas output of the field. The gas that is being sold is still only achieving Russian domestic prices due to a lack of other export options. The consortium intends to re-inject 50% of gas production to maintain high reservoir pressures and therefore high liquid production rates. It also avoids alternative expensive lift methods and reduces sulphur disposal costs. We believe the foreign companies therefore want to hold off on moving onto phase 3 and implement what they call phase 2M, which encompasses drilling more wells to maintain liquids production. However President Nursultan Nazarbayev has urged the consortium to move swiftly towards phase 3 of the project and has demanded that a feasibility study for phase 3 be ready by this autumn. The government wants phase 3 to be completed in 3-5 years, which could delay profitability in the project until the end of this decade. However, the companies have argued that going ahead with phase 3 will cause well management problems and recoverable liquid reserves could be significantly reduced if the full cycling process of re-injecting the gas is not used. The government justifies its stance, however, as a price worth paying in order for it to make a strategic breakthrough into the European gas market. It is willing to go along with restricted crude growth rates for the sake of higher gas revenues. However it is doubtful that the Karachaganak participants will agree with this. UBS 10
  11. 11. Oil & Gas 26 September 2003 Halliburton are to carry out engineering studies for a natural gas processing plant and export pipeline at the Karachaganak field. The proposed gas project will cost an estimated $1.0-1.27bn and the plant will have an annual throughput of some 5 bcm. Kazmunaigaz’s chief executive Zhakyp Marabayev said in a statement that construction of the plant and pipeline had to start in 2005 as part of the third phase of Karachaganak's development. He also said the gas project will allow Kazakhstan to start gas exports to Europe via Russia's gas pipeline network. Karachaganak Fiscal Terms The Karachaganak contract is a PSC. No royalty is paid. Income tax is at 30%. The maximum cost oil recovery is limited to 60% of revenue. Oil remaining after cost recovery is split between the contractor and the government according to the profitability of the project as detailed below: Profit oil/gas split Real IRR State Contractor <0% 20% 80% <10% 40% 60% <15% 50% 50% <20% 60% 40% >20 80% 20% Source: UBS estimates and Wood Mackenzie UBS 11
  12. 12. Oil & Gas 26 September 2003 Gas Kazakhstan is currently only the 32nd largest gas producer in the world but has the 17th largest gas reserves in the world, accounting for 1.2% of proved global gas reserves. A new law was passed in 1999 to stimulate production. Current production is approximately 1.3bn cubic feet per day. Kazakhstan was until recently a net gas importer (mainly coming from Uzbekistan). Top 35 countries by gas production, 2002 60 50 Billion cubic feet per day 40 30 20 10 0 Kazakhstan Iran India Qatar Argentina Italy Algeria UK Brunei USA Australia UAE Indonesia China Oman Oth.Pacific Nigeria Canada Pakistan Thailand FSU Other Eur. Egypt Venezuela Netherlands Saudi Arabia Ukraine Bangladesh Trinidad & Uzbekistan Turkmenista Germany Mexico Malaysia Norway Source: BP Statistical Review of World Energy 2003 Production Production has increased steadily over the last ten years but is still at relatively low levels in relation to its reserves. The main obstacle to Kazakhstan’s exploiting its vast gas reserves is finding an export route to market. The head of the Ministry of Energy and Mineral Resources wants companies to consider four options to develop the reserves: (1) for re-injection in oil fields to enhance production, (2) purification and sale on the market, (3) for power generation, and (4) for production of chemical products. Gas production/consumption 1985-2002 1.4 1.2 Billion cubic feet per day 1.0 0.8 0.6 0.4 0.2 0.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Gas Consumption Gas Production Source: BP Statistical Review of World Energy 2003 UBS 12
  13. 13. Oil & Gas 26 September 2003 Currently around 75% of the total gas production comes from the Tengiz and Karachaganak fields. There is a lack of profitable, accessible markets for gas. If markets can be found for Kazakhstan’s gas, production could increase significantly over the next decade, as the country has ample gas reserves to exploit. This will be wholly dependent on the construction of suitable infrastructure pipelines to get the gas to market (see infrastructure). Reserves At the end of 2002, proved reserves were 65 tcf. Current reserve life is approximately 135 years. Top 20 countries by gas reserves, 2002 1,800 1,600 1,400 1,200 Trillion cubic feet 1,000 800 600 400 200 0 Iran Iraq Qatar Kazakhstan Algeria UAE USA Australia Indonesia Nigeria Canada Egypt Venezuela Saudi Arabia Netherlands Russia Uzbekistan Turkmenistan Malaysia Norway Source: BP Statistical Review of World Energy 2003 UBS 13
  14. 14. Oil & Gas 26 September 2003 Hydrocarbon Policy State Oil Company Kazmunaigaz is the state oil company. It is a vertically integrated state oil and gas company created in February 2002 by merging the state-run Kazakhoil (oil), TransNefteGaz (oil and natural gas transport, made up of KazTransOil and KazTransGaz), Kazakhstanugol Corporation (state coal company) and Kazakhstan Electricity Grid Operating Company (KEGOC) The companies were merged to reduce administration costs, to create a company with a much larger asset and to allow this company to participate on future projects on behalf of the state and to allow development of the service sector. The net profit of Kazmunaigaz rose by 30% y/y to 45bn tenge ($306 million) in the first half of 2003, according to Kazmunaigaz Managing Director Daniyar Berlibayev. Kazmunaigaz produced 150k bpd of liquids in the first half of this year, a 5.5% rise compared with January-June of 2002. He said the firm's consolidated assets now exceeded $5bn. State Participation The Ministry of Energy and Mineral Resources (MEMR) is in charge of the hydrocarbon industry in Kazakhstan, although its authority is diluted by the powers of the president. The Minister of Energy and Natural Resources is Vladimir Shkolnik. In 2001 there was foreign direct investment of $3bn in the oil and gas sector of Kazakhstan. The MEMR has a three-stage plan for development of the sector. MEMR three-stage development plan Stage Dates Development Investment Stage 1 2003-2005 Creation of comprehensive conditions $4.4bn Stage 2 2006-2010 Accelerated development $8.6bn Stage 3 2001-2015 Production stabilisation $13.5bn Source: MEMR The ministry envisages $28-30bn is needed to improve export routes. It envisages the existing transport system is sufficient for all oil production up to 2009. After this a new pipeline will be needed in 2009 and then again in 2011. Current transmission capacity is 310m barrels of crude, 5 bcm of export gas and 110 bcm of transit gas. Government’s estimated future production Oil Gas 2005 1.2m bpd 1.2 tcf/y 2010 2.3m bpd 1.6 tcf/y 2015 3.5m bpd 1.84 tcf/y Source: MEMR UBS 14
  15. 15. Oil & Gas 26 September 2003 Oil Fund Kazakh officials have studied the experiences of other countries that have found themselves in a similar position of suddenly becoming rich in natural resources. Surprisingly, however, the impact in some cases has been lower growth rates, poor governance and increased corruption. The Kazakhstan authories have said they would like to avoid this and have set up a national oil fund in the mould of Norway’s, which has amassed $2.3bn since 2001. The budget is based on a $19 per barrel oil price. When the oil price is higher than this the excess income goes into the fund. When the price goes lower than the one defined by the state budget, certain amounts from the oil fund are forwarded for financing the budget. The oil fund was created to perform two main functions. The first one is to accumulate financial resources for future generations. The second function is the stabilising one. In the case of fluctuating prices for raw material resources, the fund covers shortages in the state budget. Foreign Oil Company Disputes There have been numerous squabbles over the interpretation of contracts, taxes, environmental fines and project deadlines. Foreign executives have grumbled about unfair Kazakh practices, including attempts to alter or renegotiate established contracts. A government initiative to raise hydrocarbon taxes could further intensify concerns about the Kazakh investment climate. Recent disputes include: ■ Kazakh officials have become embroiled in disputes with foreign oil executives over development deals. In June, for example, Nazarbayev threatened Eni, RD/Shell and Exxon over the perceived slow pace of development at the Kashagan field off Kazakhstan’s Caspian Sea coast. ■ The government has withdrawn two tax exemption certificates from the partners in Kashagan, and they may now be forced to pay hundreds of millions of dollars in back taxes. It is thought that Nazarbayev is unhappy about the pre-emption of the Chinese companies bids for BG’s stake in the field. ■ ChevronTexaco had a dispute over the Tengiz development last year. The company refused to proceed to the second stage of development as the government objected to the method of finance, which reduced taxes. The company also faced a $70m environmental fine. The matter was resolved with ChevronTexaco and the government agreeing on the amount of tax payable and the fine was reduced to $7m. ■ PetroKazakhstan was blocked by the government from obtaining a minority stake in the CPC pipeline. UBS 15
  16. 16. Oil & Gas 26 September 2003 Fiscal Terms The fiscal terms for foreign oil companies are generally joint ventures, PSAs and exploration/field concessions. In 1999 a law was passed requiring oil companies to include natural gas utilisation projects in their development plans. There is a general reluctance on the part oil companies working in the Caspian to publish the terms of their contracts with Kazakhstan. A government initiative to raise energy-sector taxes could heighten corporate concerns about the Kazakh investment climate. Speaking at a joint session of parliament on June 30, new Kazakh Prime Minister Daniel Akhmetov told legislators that a government working group would prepare amendments to the country’s tax code by September 2003. Akhmetov also characterised some existing oil-and-gas contracts as outmoded, but added that the government would not seek to rework deals made with foreign companies. State Programme to Develop the Kazakh Section of the Caspian Shelf President Nazarbayev approved a law (Decree No.1095) in May 2003 to allow full-scale development of Kazakhstan’s offshore hydrocarbon resources. Kazakhstan is currently drafting statutory acts to build legal guarantees into offshore E&P projects, which are to be tendered in the near future. They involve making radical amendments to the country’s legislation. The aim of this is to improve the terms of offshore petroleum operations and the investment climate in the country. The government is planning to make changes to licensing and the procedure for offshore petroleum operations, taxation, currency regulation and control over imports and exports by foreign oil companies. The government will also require oil companies to supply hydrocarbons for processing at existing and future oil and gas facilities. New Laws There is a new investment law and there are new tax structure proposals. Nazarbayev pledged on 18th June that all future contracts would be transparent, but this would not apply to previously negotiated contracts. Under the new laws governing foreign investments, the government is given more control. In addition, domestic and international companies are put on a level footing. The government also wants to simplify the money collection process. The government has in the past had problems collecting money, including disputes with foreign partners over the structure of taxable income (as in the cases of PetroKazakhstan or the KCO, for example). In September 2003, parliament is reviewing a package of proposed amendments to the existing hydrocarbon tax code. The government is looking to increase its revenue from oil production from the current $0.15-0.18 per $1 of income to $0.3-0.4 per $1 of income, according to Zeynulla Kakimzhanov, chief executive of the Investment Fund of Kazakhstan. UBS 16
  17. 17. Oil & Gas 26 September 2003 The government, Ministry of Energy and Mineral Resources (MEMR) and Kazmunaigaz are at odds, however, over the new terms that will be adopted. Kazmunaigaz and MEMR want a more liberal regime of reforms to be implemented to encourage accelerated growth on the Caspian shelf. However, the final terms that are adopted will most probably be determined by the interests of influential political and financial groups rather than those that are most economically beneficial to the country. The minister of finance presented the new “Model 3” subsurface-use contract to Parliament in June 2003, and highlighted that it had been developed to replace the PSA regime. However, Kazmunaigaz, which is in favour of keeping the PSA scheme, pointed out that the drawbacks that the Ministry of Finance brought up could easily be ruled out by state intervention. Kazmunaigaz was part of the working group looking at the proposals, and the improvements to the PSA it suggested are thought to have been adopted. The Model 3 contract is based on various other tax regimes: those of Norway and the UK, for example. From the preliminary material available from public comments and draft versions of the model, the payment scheme is as follows: ■ A subscription bonus ■ An oil extraction tax on a sliding scale based on the oil price, between 0-31%. It would be based on the price of a standard crude or crude blend and is said to be a replacement of the royalty payment. However, there are many uncertainties as to how the price will be determined. These include whether transportation costs would be netted back, whether quality is taken into account, the date it is priced on, and whether there is a single price or a different price for each field. It is not yet certain whether the tax would be deductible for corporate income tax and excess profit tax purposes. New tax rate for subsurface users Oil price ($/bbl) Tax rate < $12 0% $12-$15 10% $15-$20 17% $20-$25 24% >$25 31% Source: Ministry of Energy and Mineral Resources ■ An excess profit tax, which would apply to the net income of an oil company after the payment of corporate income tax, which the minister of finance proposed should be 15%. Adjustments will be made: 10% of the remaining unrecovered costs or, if costs have been fully recovered, 10% of the increase in fixed assets value. ■ All other taxes and payments (such as corporate income tax, VAT, state duties) would be made, except for a commercial discovery bonus, royalty and share of state under production sharing. UBS 17
  18. 18. Oil & Gas 26 September 2003 Exploration and Licensing History The progress of Kazakhstan towards the position of a major oil-producing country started more than a century ago. Oil was first found in the Pre-Caspian Basin in 1899, but this discovery didn’t result in any commercial development. Following this, detailed exploration was carried out, leading to the first commercial oil field in 1907, and first production in 1911. Licensing Caspian Shelf The Caspian shelf is a poorly studied area encompassing an area of 100,000 square kilometres, in which geologists have allotted over 30 blocks and almost 120 prospective structures. Only two fields have been discovered so far – Kashagan and Kalamkas. The government has staged a number of roadshows over summer 2003 as part of the state programme to develop the area. Currently there are approximately 23 non-allocated prospects with identified major and medium-sized potential structures. The government hopes to close several dozen contracts, which would be awarded on a tender basis. There are plans to put up for tender the well-studied and ready blocks, as well as the least- studied blocks. The Caspian shelf development programme calls for the first blocks to be auctioned at the beginning of 2004, Kazmunaigaz will then conduct tenders for partnerships and define plans of development. In 2005, the government will issue tenders directly to foreign companies. Details of the plan remain sketchy. Shkolnik said it had yet to be determined whether interested oil firms, expected to include the world’s biggest, would bid on blocks based on commitments to drill and conduct seismic surveys, or via cash bids or other offers. "This is a matter of negotiation and it depends on every block. According to the programme that we are talking about here, there will be a process of negotiations, upon which the conditions will be set," Shkolnik said through an interpreter. The state is looking to free itself from geological risks and reduce its investment obligation as much as possible by requiring all financing to be provided by the project developers. There will be specific contracts, and clear-cut obligations and commitments. There will be varying exploration periods of ten years or more. The key terms of the tenders are being formulated and will include a minimum investment commitment, a signature bonus, gas and sulphur utilisation proposals, social infrastructure spending, and other provisions. The well-studied blocks will be tendered individually for exploration and production contracts. The successful companies will be required to commit to perform geophysical studies and drill one or more exploration wells. If commercial reserves are discovered, all exploration and appraisal costs will be reimbursed to the company. The less well-studied blocks will be grouped together into exploration investment projects. The winners of these will be UBS 18
  19. 19. Oil & Gas 26 September 2003 obliged to conduct seismic surveys and drill one or more exploration wells. In exchange they will be entitled to choose one or two blocks on the licensed acreage to conclude an E&P contract. Royalty terms under the plan are also undecided, but he said firms would be expected to help fund some social programmes. Another open question is the percentage of acreage to be divided between Kazmunaigaz and firms tendering directly. The government is considering making the creation of gas utilisation processing facilities and refining facilities a requirement for participation in offshore projects. However, companies involved in the Kazakh shelf area would be reluctant to invest further capital than required to run their core business. An Eni spokesman was quoted as saying that it would not be possible to make plans for infrastructure capacity on the basis of E&P projects that had not been completed, due to the risks of building greater capacity than needed. For example, the cost of construction of coastal facilities in Kazakhstan is estimated at over $400m. Furthermore, gas utilisation facilities will cost in the region of $200-250m. Planned wells to be drilled Date Number of wells to be drilled 2003-2005 20 2006-2010 345 2011-2015 758 Source: Kazmunaigaz To achieve the forecast production in 2015, it is proposed that over 1,100 oil and gas wells from platforms and artificial islands are drilled up to 2015. Each platform or artificial island will drill 16-20 producing and injection wells. Exploration Oil- and gas-bearing regions cover an area of about 1.7m sq km, or approximately 62 % of the entire territory of Kazakhstan. Oil and gas fields are found in six of the 14 administrative regions of Kazakhstan. But 70% of hydrocarbon reserves are concentrated in western Kazakhstan. There are number of projects currently in place. ■ Kazmunaigaz plans to start exploring four oil fields on the Caspian Sea shore in 2004, a spokesman said in August. One of the fields, Darkhan, situated in the northern part of the Caspian coast, has estimated reserves of between 440 million and 1.1bn metric tons of oil. The other three fields – Ulytau, Nursultan and Rakushechnoye-More – in the southern part of Kazakhstan's sector of the Caspian, are estimated to hold 1bn tons of oil, the spokesman said. Exploration work, including drilling exploratory wells, will take four years, he said. UBS 19
  20. 20. Oil & Gas 26 September 2003 ■ Repsol has concluded an agreement with the state oil company to develop the Amangeldy field, which is located onshore in the Chu-Sarysu Basin. It will cost $770m to fully develop. This is one of seven fields that the partnership is looking to develop. The Kazakh state committee of resources estimates combined reserves of around 880 bcf of gas. Repsol envisages production starting in 2004. Following the development of this field, Repsol will commence drilling on the Anabay, Ayrakty and Kumyrly discoveries. ■ In June 2003 Kazmunaigaz and Lukoil signed the Agreement on Principles of Cooperation in Exploration and Production of Hydrocarbons in the Kazakh Sector of the Caspian Sea. This covers the joint project to develop the Tyub-Karagan and Kazakhstan blocks in the north-eastern Caspian shelf. This followed on from the Memorandum of Understanding in the Area of Cooperation in Exploration and Production of Hydrocarbons in the Kazakh and Russian Sectors of the Caspian Sea agreed in February 2003. Kazmunaigaz and Lukoil are to establish a JV in Kazakhstan to perform seismic analysis and drill two exploration wells on the Tyub-Karagan and Kazakhstan blocks. ■ As part of the North Caspian PSA, there are further prospects to be drilled on the acreage: the Kalamkas prospect and the Kairan and Aktote prospects are to be drilled in the near future. UBS 20
  21. 21. Oil & Gas 26 September 2003 Infrastructure Kazakhstan infrastructure Omsk Refinery RUSSIA BELARUS RUSSIA Moscow Samara Refinery Karachaganak Oil Field Pavlodar Orsk Refinery Refinery -SAMARA Astana Aktobe PIPELINE ATYRAU UKRAINE Atasu MONGOLIA Kenkiyak ELI NE Atyrau Kumkol CHINA PIP Oil Field Kashagan Tengiz Aralsk Oil Field Oil Field Karakoin Krasnodar PIP KAM E E CPC PIPELIN IN Oil Field EL Aral Dzhusaly Druzhba Novorossilisk Sea Black Sea Aktau- Almaty GEORGIA Shymkent Tbilisi CA Shagyr Refinery Bishkek Istanbul SU SPIA PIP B-SE N KYRGYZSTAN Baku ELIN A UZBEKISTAN Tashkent E Yerevan ARMENIA AZERBAIJAN TURKMENISTAN TURKEY INE Ashkhabad IPEL Chardzhou TAJIKISTAN CHINA Caspian Sea NP N E Dushanbe PIPELI BTC IRA Ceyhan Existing Pipelines Tehran SYRIA Kabul Proposed Pipelines Islamabad Railroad LEBANON AFGHANISTAN Mediterranean Sea Capital Cities IRAN Oil Fields SOUTH UT ISRAEL IRAQ ASIA PI JORDAN PE PELINE PAKISTAN NEPAL Katmandu Persian Red SAUDI ARABIA Gulf Sea Gulf of Oman INDIA U.A.E. OMAN Arabian Sea Source: UBS Exports Kazakhstan is landlocked, so it requires extensive export options to send oil and gas to world markets. Russia is Kazakhstan’s primary export outlet, via three export pipelines. Besides pipelines, Kazakh exports are sent for swaps in Iran, via rail to Russia, and across the Caspian by barge. Kazakhstan is Russia’s rival in delivering FSU oil to world markets, but the competition is complicated, as currently most export routes run through Russia. In spring 2003, Russia’s cabinet refused to increase Kazakh volumes flowing through its pipelines. This meant for Kazakhstan an increase in more expensive forms of transport, such as rail or tankers. About 10,700 km of pipelines are operational in Kazakhstan, principally in the west of the country. Existing pipelines are used to deliver oil to the three Kazakh refineries (in Atyrau, Shymkent and Pavlodar), and to the refineries located in southern Russia and the Ukraine, as well as to international markets. A quantity of oil is shipped by tankers to Baku, where it is transferred into Azerbaijan's UBS 21
  22. 22. Oil & Gas 26 September 2003 pipeline system (the Makhachkala-Tikhoretsk-Novorossiisk pipeline). Another, larger quantity of Kazakh oil is transported by rail to western Europe. Oil is exported via the Kazakh port of Aktau, which underwent a $100 million upgrade in 2000 to increase its handling capacity from 60,000 bpd to 160,000 bpd, and barged to Makhachkala before joining the Makhachkala-Tikhorestk- Novorossiisk pipeline. Although the Aktau port is expected to experience a drop in transhipment levels with the opening of the CPC pipeline, it will remain a strategically important route for the export of oil that is not acceptable in quality for the CPC pipeline or the Atyrau-Samara pipeline. Proposed/Planned Pipelines One of Kazakhstan’s key challenges is to expand its export pipeline infrastructure to cope with the planned increase in oil and gas production. Kazakhstan has to decide in which direction to expand its pipeline infrastructure. It has the option to join the Baku-Ceyhan pipeline to access the increasingly competitive western European market. It can head north and expand its pipeline network into Russia, but Russia is struggling with its own export capacity limitations. Oil demand over the next 10 to 15 years in Europe is expected to grow by little more than 1 million bpd. East into China, where there is no lack of demand, is a further option, but the cost of the pipeline would call for substantial guarantees of oil or gas. Kazakhstan’s preferred route is a pipeline to Tehran in Iran, but plans for this are on hold due to US-Iranian tensions. A further ambitious plan would be to supply the Asian market with a pipeline into Pakistan or India, but this would be very dependent on the political stability of the region. Vladimir Shkolnik, the energy minister, said that by 2009 Kazakhstan would probably need to link to the Baku-Ceyhan pipeline, and that by 2012 Kazakhstan would have to decide in what direction to expand its oil export capacity further – to China or Iran. Nazarbayev has also touted a variety of export routes. "A very profitable route is the one from Kazakhstan through Iran to the Persian Gulf," he said. He also raised the possibility of building a pipeline from Kazakhstan to western China. Kazakhstan's natural gas-producing areas are not linked to its internal pipeline network, and the country suffers from a lack of export infrastructure. In order to reach its natural gas exporting potential, therefore, Kazakhstan must either negotiate to export via the Russian natural gas pipeline system or develop new ways of getting its natural gas to customers. UBS 22
  23. 23. Oil & Gas 26 September 2003 Current oil pipelines CPC CPC participants Participant Interest Russia 24% Kazakhstan 19% ChevronTexaco 15% LukArco 12.5% Rosneft-Shell 7.5% ExxonMobil 7.5% Oman 7% Eni 2% BG 2% Kazakh Pipelines 1.75% Oryx 1.75% Source: CPC In March 2001, the CPC commissioned its $2.5bn, 1.34m bpd pipeline, pumping oil from Tengiz to Novorossiisk. After several problems, first oil was loaded onto a tanker at Novorossiisk in October 2001. The current capacity of the pipeline is 560k bpd, and it is envisaged that the line will reach capacity in 2004. The CPC Crude Oil Pipeline System will open new possibilities for the export transportation of Tengiz and other Kazakh oil field production, as well as Russian oil. The current plan to extend the pipeline is shown in the table below. CPC planned expansion phases Phase Completion date New Capacity (000s bpd) 1 2005 763 2 2008 964 3 2012 1,185 4 2014 1,346 Source: CPC In the first quarter of this year, exports were at 275k bpd. In the final quarter of 2003, exports will rise to 415,000 bpd as the CPC pipeline has been linked with Karachaganak. In April 2003 the 650km, 240k bpd, pipeline spur southward to Atyrau was completed, connecting Karachaganak to the CPC. Kazakhstan also opened a pipeline connecting north-western oilfields with the oil hub of Atyrau. The 450 km pipeline will now link the Kenkiyak wells with the Atyrau-Samara and the CPC pipelines. In line with government estimates, the new pipeline will transport 120,000 bpd this year. The annual capacity will gradually rise to 240,000 bpd by 2006. UBS 23
  24. 24. Oil & Gas 26 September 2003 Bosporus/Black Sea Issues A major problem with additional Caspian oil exports heading west is the increasing congestion in the Bosporus Straits. Turkey has raised concerns about the ability of the Bosporus Straits, already a major chokepoint for oil tankers, to handle additional tanker traffic. Most of the existing Russian oil export pipelines terminate at the Russian Black Sea port of Novorossiisk, requiring tankers to transit the Black Sea and pass through the Bosporus Straits in order to gain access to the Mediterranean and world markets. Already, Turkey has stated its environmental concerns about a possible collision (and ensuing oil spill) in the Straits as a result of increased tanker traffic from the launch of the CPC. As a result, there already are a number of options under consideration for oil transiting the Black Sea to bypass the Bosporus Straits. Atyrau-Samara Kazakhstan's other major oil export pipeline is a northbound link to the Russian distribution system, Atyrau-Samara. The pipeline runs 1,800 miles, from Uzen in south-western Kazakhstan to the Caspian port of Atyrau, before crossing into Russia and linking with Russia's pipeline system at Samara. The pipeline's capacity is 300,000 bpd. Before the CPC pipeline was completed, almost all of Kazakhstan's exports were distributed through this system. As the CPC project grows with Kazakh production, absolute volumes though Atyrau-Samara are expected to grow, but this pipeline will become relatively less significant. For example, in 2001, Atyrau-Samara transited virtually all of Kazakhstan's exports, whereas in 2003, according to the Kazakh Ministry of Energy and Mineral Resources, Atyrau-Samara will account for less than half of Kazakhstan's export oil transit. In recent years, Kazakhstan's exports via the Atyrau-Samara pipeline have been limited by Kazakhstan's annual oil export quota through the Russian pipeline system, which competes with Russian oil exports. Other Pipelines Another export pipeline is the Kenkyak-Orsk line that transports oil from western Kazakhstan to Russia. This pipeline runs from the Aktyubinsk fields to the Orsk refinery in Russia, and has a capacity of 130,000 bpd. Kazakhstan and Russia plan to swap 50,000 bpd of oil, with Kazakhstan supplying oil to the Orsk refinery in Russia and receiving an equivalent amount through the Omsk- Pavlodar pipeline for processing at the Pavlodar refinery in Kazakhstan. The Kumkol-Aryskum-Maibulak (KAM) pipeline is a 177km pipeline connecting the KAM and Kumkol fields to a new rail terminal at Dzhusaly in the south-west. From here it travels to export terminals on the Caspian Sea. The initial capacity of the line is 100,000 bpd. The pipeline reduces the export transportation distance by 1,300km and associated costs by $2.0-2.50/bbl. Previously crude had to be shipped 640km to the Shymkent refinery, then another 620km west by rail. The pipeline is a joint venture between Turgai Petroleum and PetroKazakhstan. UBS 24
  25. 25. Oil & Gas 26 September 2003 A 450km pipeline has been built at an estimated cost of $160m with a capacity of 120,000 bpd connecting the Kenkiyak north-western wells with the Atyrau- Samara and CPC pipelines. The annual capacity is planned to gradually rise to 240,000 bpd by 2006. The pipeline is 51%-owned by Kazmunaigaz and 49% by CNPC. They operate the line jointly. This is the first stage in a proposed pipeline to China (see below). Proposed/Planned Pipelines Baku-Tbilisi-Ceyhan (BTC) In September 1998, 12 countries (including Kazakhstan) signed a multilateral agreement known as the Baku Declaration to develop the transport corridor through closer economic integration of member countries, rehabilitation and development of new transportation infrastructure, and by fostering stability and trust in the region. The planned Baku-Ceyhan Main Export Pipeline to transport oil from Azerbaijan to Turkey and then to European consumers is the main component of this cooperation. The $3bn, 1m bpd BP-operated pipeline is expected to be completed by the end of 2004. Kazakhstan is looking to use this potential spare capacity as an exit route for its crude to Europe. Kazakhstan can send crude to Baku through the construction of a Caspian sub-sea pipeline. However, this method is currently less feasible (see below) than the preferred method of shipping the oil across the Caspian Sea by tanker. The Kazakh energy ministry expects the link to be needed after 2009 when it forecasts over 2m bpd of oil production. The project would require new large oil terminals in Kazakhstan and Azerbaijan (the upgrade of the Baku port) and the expansion of the Kazakh Caspian tanker fleet. KazTransoil plans to build a new export terminal in the Caspian Sea port of Kuryk, 50km south of the Aktau oil port, to ship oil in tankers to Baku, where it will join the pipeline. Kuryk will be capable of carrying 100,000 bpd in 2005, with that figure rising to over 400,000 bpd in 2007. Kuryk would also be able to supply the Russian port of Mahachkala and the Iranian port of Neka. KazTransoil is also planning to build a new 700km pipeline from Atyrau to Zhetybay to pump oil from the Kashagan fields. After the Kuryk terminal is completed, a 70km pipeline between Zhetybay and Kuryk will be built to divert crude. Foreign oil companies in Kazakhstan may agree on the details of joining the BTC on October 25th 2003, according to the head of Kazmunaigaz, Kairgeldy Kabyldin. Total, ConocoPhillips, Eni and Japan’s Inpex, none of whom have operations in Azerbaijan, agreed last year agreed to join the pipeline. Russian Pipeline In June 2002, Kazakhstan and Russia signed a 15-year oil transit agreement under which Kazakhstan will export at least 350,000 bpd of oil annually via the Russian pipeline system. UBS 25
  26. 26. Oil & Gas 26 September 2003 For its part, Russia itself has proposed multiple pipeline routes that use Russian oil pipelines to transport oil to new outlets being developed on the Baltic and Black Seas. In addition to the Caspian Pipeline Consortium’s Tengiz- Novorossiisk pipeline, Russia's Baltic Pipeline System became operational in December 2001, and the country is working with Croatia to connect the Adria pipeline with the southern Druzhba pipeline. Reversing the flows in the Adria pipeline and tying it to the southern Druzhba route will allow oil exports from the Caspian to run via Russia's pipeline system, across Ukraine and Hungary, and then terminate at the Croatian deep-sea Adriatic port of Omisalj. In addition, Russia already has the most extensive natural gas network in the region, and the system's capacity could be increased to allow for additional Caspian region natural gas exports via Russia. However, there are political and security questions as to whether Kazakhstan should rely on Russia as its sole export outlet. Ukraine Pipeline Kazakhstan is interested in gaining access to oil terminals in the Baltic Sea for its exports, and Kazakhstan has been ready for a number of years to supply oil to Lithuania, but deliveries have been delayed due to the lack of an agreement with Russia on transportation tariffs. In June 2003 the governments of Kazakhstan and Ukraine met and agreed to conclude a deal on the terms for transportation of Kazakh crude across Ukrainian territory. The major agreement coming out of the talks was for Kazakhstan, effective 2004, to use the Ukrainian Odessa (Black Sea) to Brody, trans-Ukrainian pipeline and participate in the development of the route. This would, with further upgrades to the pipeline, allow access to the more lucrative northern European market and the Baltic Sea, while avoiding crossing Russia. The Odessa-Brody pipeline would be extended on to Plotsk (Poland) and then Gdansk (Baltic Sea), with a capacity of 800k bpd. Kazakhstan intends to be an investor in this project. Kazakhstan promised to finance the project to allow two-way operation of the Yezhny crude terminal to load and accept crude and also to build a parallel 52km section of the Odessa-Brody pipeline to accept 180k bpd. Kazakhstan has already agreed to send 30k bpd through the pipeline next year, and this figure will rise to 160k bpd. The Ukrainians are also studying the option of connecting their pipeline at Brody to the CPC, which would provide a direct route for Caspian crude to hit the European market. The two countries agreed to promote co-operation in the field of oil transportation systems and ensure free and uninterrupted transit of oil through the pipeline systems in the two countries. This is the first time that Kazakhstan has assumed specific commitments to invest in transportation in another country and marks a significant export policy change. UBS 26

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