In the summer of 2009 another event was added to the list of Kazakhstan’s annual oil and gas conferences. At the end of June Singapore-based Terrapin organized the Oil & Gas Outlook Central Asia 2009 congress in Almaty. Unlike the traditional KIOGE conference in autumn, where, as a rule, major news-makers are the representatives of state authorities of Kazakhstan, the new forum is remembered for the presentations, delivered by foreign speakers…
The economic recession, produced by the global financial crisis, negatively influenced the size of demand for oil. Thus, according to Mark Luis, the Managing Director of the Energy Market Consultant (EMC), who opened the congress, by 2009 the daily global need in hydrocarbon dropped by 1.6 million barrels. Some experts believe that by the end of this year the economic recession will reach the bottom line and, therefore, the recovery of demand for hydrocarbons can be expected in 2010.
To a certain extent such forecasts are confirmed by the petroleum price dynamics that after last year’s dramatic fall by over $100 partially regained its position in 2009, going back to $70 per barrel. Nonetheless, according to Energy Market Consultants (EMC) estimates, further global decrease of demand for oil is still possible and could reach 4.3 million barrel/day by the end of this year. In this case, the growth of spare capacities in the field of hydrocarbon production and processing in OPEC countries will cause a downward pressure on the price of crude oil in the medium-term and, as a result, will affect the volume of investment in the oil industry.
It has to be noted that in the beginning of 2009 OPEC members already announced the cancelation or delay of implementation of about 40 industrial projects in the field of petroleum exploration, production and processing as well as oil pipeline construction to 2013. Prior to this event in the near future the countries, constituting this organization, were planning to conduct over 150 projects with a total value of about $500 billion, expecting that in 2010 the global oil consumption will exceed 90 million barrels/day while its price would not go lower than $80 per barrel in the next five years.
This rapid adoption of the investment "diet" is quite reasoned – the fall of prices led to lower profitability of oil companies and income levels, received by the state budgets of oil producing countries. However, in the opinion of Mr. Luis, the reduction of the capital investment volume will negatively affect the oil production volume and, in its turn, it could produce a serious imbalance between demand and supply in the mid of the next decade.
Thus, after 2010 the spare production capacities of OPEC will go down the number of semi-loaded oil refineries across the world will continue to grow. As a result, by 2020 the oil prices can dramatically respond to the emerging deficit and will jump to the level of $150 per barrel and, perhaps, will exceed that. Therefore, the period of recession, we are currently facing, may build the ground for the next cycle of petroleum price increase.
The EMC view on global prospects of future distribution of demand for hydrocarbon looks very vivid. The presented data says that the volume of oil consumption in the Atlantic basin (North and South America, Western Europe, the former Soviet Union countries and Africa) in aggregate will remain roughly flat in the next decade: 2008 – 53.9 million barrels/day, 2015 – 53.6 barrels/day, 2020 – 54 million barrels/day.
In this concern, the growth of global oil demand in the medium term will stimulate the developing markets of Asia (and China in particular, where the volume of daily oil consumption may increase by 2.5 million barrels in 2009-2015) as well as countries of Middle East. Overall, the oil demand dynamics to the east of Suez Canal is presented below: 2008 – 33.5 million barrels/day, 2015 – 38.2 million barrels/day, 2020 – 41.7 million barrels/day.
The question is which sources will cover these additional needs for oil. Today, the main hydrocarbon suppliers for Asian countries are OPEC member countries in the Middle East. Nevertheless, as it was mentioned above, OPEC reduces its investment in the growth of production. At the same time, it is expected that, given certain growth upstream, the Middle East will increase independent processing capacities. This means that in the next decade new Asian oil processing projects, oriented at Middle Eastern hydrocarbons, will face serious difficulties with loading and, therefore, they will have to look for new sources of hydrocarbon supplies from other parts of the world.
Meanwhile, Mr. Luis informed that in the medium term the total production volume of non-OPEC countries will remain at the same level. At the same time, the lower oil output in such traditional oil regions as the North Sea will be compensated by new developing producers. EMC forecasts that in 2008-2015 the biggest decline of petroleum production will be observed in Great Britain, Norway, Russia and Oman. In the same period, a substantial leap forward is expected in USA, Brazil and mostly in Kazakhstan and Azerbaijan.
The Head of EMC believes that this gives the Caspian states unique opportunities. In the situation, when major sources of additional global demand will be limited in the energy resources supply, our region becomes one of a few (outside OPEC) where both significant growth of oil production and exports volume are predicted.
However, there is one obstacle. The lion share of new oil and gas projects at Caspian was launched by western transnational corporations and, therefore, the export flow of hydrocarbons are also oriented to the West. Nonetheless, in the future this balance of powers will change. The readiness for active participation in the development of the Caspian energy resources is demonstrated by national oil companies from the East that will put serious pressure on the leaders of regional states in order to redirect hydrocarbon supplies to their own domestic markets.
It has to be noted that the picture, drawn by the EMC representative, is not the matter of the distant future, but already a realistic scenario. The petroleum industry of Kazakhstan has been firmly dominated by Chinese CNPC, for a long time, which not only continues to purchase new producing assets, but also built the pipeline that transports our oil to China.
The speaker from PRC, registered in the congress agenda, never gave a speech; however, Tetsuya Furuhata, senior research fellow at Japanese Oil, Gas, and Metals National Corporation (JOGMEC), presented his vision of cooperation development with countries of the Caspian region. According to him, today, Japan takes up 5.8% and 3.1% of global oil and gas consumption and it imports 99% of oil and 96% of gas. Unlike in the case with natural gas, whose sources of supply is well diversified, the provision of oil in Japan directly depends on the countries of Near and Middle East (Saudi Arabia, UAE, Iran, Qatar, Kuwait, Indonesia and others). It is clear that in this situation the long term guarantee of energy security is a headache for the Japanese government. According to Tokyo energy policy, by 2030 the volume of oil, produced at the foreign fields, controlled by Japanese companies, must reach 40% of its total consumption volume. At the same time, major accent is put on diversification and stimulation of Japanese companies to develop new oil regions in Asia-Pacific countries, Russia and the Caspian states in particular.
The Caspian region has been monitored by Japan for a long time, but it still faces a number of complex issues. Mr. Furuhata says that due to their mentality, Japanese companies prefer the low-risk markets such as Middle and Near Eastern, South-East Asia and the North Sea. For Japanese businessmen the priority is a stable investment climate and clear rules of the game. Presumably, the conditions in the Caspian states do not fit in this value system.
The second aspect is the costs of hydrocarbon transportation. Thus, the supply of one barrel of Central Asian oil from the water area of Black Sea to the Japanese market is higher by $1.2 than the cost of Middle-Eastern oil from the Persian Gulf. One also needs to add the costs of a pipeline or railroad supply to the oil-loading ports. No doubt, the ideal option for Japan would be through Iran, but this alternative is limited due to a number of known political reasons.
Moreover, the JOGMEC representative highlights that crude Caspian oil is of over-high quality and, therefore, more expensive for Japanese oil refineries that were designed for high-sulphur oil from Middle and Near East. Thus, the average content of sulphur in the oil, currently imported by Japan, is 1.4-1.5% (while the Tengiz oil has 0.6%). It is worth mentioning that this urgent issue for the Kazakhstani oil industry – how to get rid of the sulphur – bewildered the Japanese gentleman. Ultimately, he said that "I never heard in Japan of this issue raised on a national level".
This way or another, Japanese oil companies are barely represented in our market. Only INPEX owns a minority stake (7.56%) in the Northern Caspian project although in Azerbaijan INPEX and Itochu has 10% and 3.9% respectively in ACG project as well as 2.5% and 3.4% respectively in BTC.
Overall, the diversification of energy sources for Tokyo is vitally important. Therefore, Mr. Furuhata announced that in a case the Caspian states show a real interest in long term cooperation with a large and stable consumer of energy resources such as Japan, JOGMEC, as the state structure, is ready to take a significant share of risks of private Japanese companies if they decide to participate in regional projects on exploration and production (E&P).
The same problems in the energy sector are faced by South Korea that, not having its own oil fields, was able to build powerful oil processing and petrochemical industry. Today, this state consumes about 3 million barrels of oil equivalent and 4 billion cubic feet of gas per day that makes it the fifth largest oil importer and seventh largest energy consumers in the world. At the same time, their own resources can supply only 5.72% of Korean needs in energy sources. This imbalance is growing every year.
In order to achieve a stable and sustainable energy supply Seoul constantly monitors the situation in the global market and recently launched the third Grand Plan E&P Business. It stimulates both the national oil company and private enterprises to expand their participation in foreign E&P projects. With the purpose to support exports of investment the government of South Korea offers subsidies to the companies, developing energy resources outside of the republic, and their size is constantly growing. According to Ryou Sangsoo, the General Director of the Caspian branch of Korean National Oil Company (KNOC), in 2008 South Korea invested about $4 billion for these purposes, which is 57.6% higher than in 2007. Moreover, this year the volume of investment in the oil and gas projects will be increased to $5.2 billion. Besides that South Korea established a Resources Development Fund that attracts not only governmental money but also institutional investors. As a result, by the end of 2008 over 60 Korean companies had stakes in 155 oil and gas projects in 53 countries of the world while their total reserves reached about 950 million barrels of oil and 150 million tonnes of gas.
One of the key issues for Seoul is the diversification of energy dependence from Middle East. Nearly 83% of raw material for the local petrochemical industry is imported from this region. Therefore, if earlier Koreans were focusing on new projects in South-East Asia, Western Africa and Middle East, the Grand Plan views South America, CIS countries and Central Asia as priority.
Korea has already achieved certain success in our market and this is the reason why Japan "has real doubts". In 2005 KNOC launched its representative office in Almaty and in 2006 it opened one in Tashkent. According to Mr. Ryou Sangsoo, today, the company already participates in two projects in Uzbekistan and four ventures in Kazakhstan while the volume of its investment in geologic exploration and operational costs reached $200 million last year.
The list of Kazakhstani assets of KNOC includes the blocks of ADA (total area of 2630 square kilometers) and Egizkara (1727 square kilometers) in the Aktobe Oblast. In both projects KNOC partners with LG International and Kazakhstani private investors. At the moment, the projects are under exploration, although the oil was already discovered at ADA field and today it is transferring into the exploitation phase. Also, as a part of the Korean companies consortium, KNOC is running a 2-D seismic survey, located at the Southern-Karpovskoe gas field in the south-east of Kazakhstan. The partner in this project is Kazakhstani Meridian Petroleum.
Finally, in May of this year KazMunayGas National Company transferred 27% in the contract for exploration of the Zhambyl area (1935 square kilometers) with probable reserves of over 120 million tonnes of oil to the Korean consortium, headed by KNOC. In accordance with the contract conditions the Korean side must fully finance the works on geologic exploration in the amount of $41 million. Moreover, the contract assumes the payment of a subscription bonus by Koreans in the amount of $3 million. The first exploratory well must be drilled in 2011. If the drilling is successful, according to KNOC estimates, during the entire period of exploitation the investment in this project may reach $15 billion.
It has to be noted that unlike Japan, South Korea is not too concerned about transportation and marketing of produced oil. Mr. Ryou Sangsoo says that, overall, Caspian hydrocarbons can always be sold to Europe and the proceeds can be used to purchase crude oil in the nearer markets for own needs.
There is a belief that the mineral resources of Kazakhstan have been divided by the first wave western investors a long time ago. Therefore, it may seem that Asian countries are somewhat late for division of the raw material pie. However, this is a premature conclusion since in its aspiration to gain the status of one of the world’s oil output leaders Kazakhstan emphasizes the potential of the Caspian shelf; presumably, major discoveries are still expected in the future.
In the best case scenario we will see the first Kashagan oil no earlier than in 2013; in addition, the grandiosely presented in 2003 State-Run Program of Development of Kazakhstani Sector of the Caspian Sea (KSCS) has long since been delayed both terms-wise and on output figures, mentioned there. The exploratory drilling, conducted in 2008 and 2009 by Russian companies at a number of the shelf fields, gave no results. This all significantly undermines the optimism in relation to "big Caspian oil" and, therefore, negatively impacts the investment attractiveness of the offshore projects. Moreover, some Russian experts more frequently note that the reserves of the Caspian shelf fields are greatly overestimated.
It could be easier to refer to a technological gap between Russian oil companies and their western counterparts. Nonetheless, given the shrinkage of global demand for oil, the unfavorable price situation as well as their own financial problems, the western companies practice a more and more meticulous approach towards the formation of their investment programs, including ones in Kazakhstan. At the same time, the Far East countries, which suffered significantly less from the economic crisis, still possess enormous financial resources and, hence, they may become a real alternative upon the selection of partners on KSCS blocks that have not been distributed yet.
According to Mr. Furuhata, major advantages of cooperation with Japanese companies are in the following order: 1) the opportunity for stable sales in Japan and Asia, 2) strong technical support from leading engineering companies (JGC, Chieda, Toyota engineering and etc) and 3) the access to the strong Japanese financial sector. South Korea is also ready to share its money, experience and know-how. Mr. Ryou Sangsoo mentions that Korean companies totally understand such initiatives as increasing the Kazakhstani share, training of domestic personnel and the development of local communities. Moreover, most likely these countries will become more responsive in order to combine joint oil and gas projects with the establishment of modern industrial plants in Kazakhstan and in other sectors of the economy.
What is more, Japan, oriented at long term interdependence with its suppliers also practices the transfer of a stake in its oil processing and sales companies in exchange for access to energy resource development. Thus, 15% of shares in Japanese Showa-Shell Oil Company, which holds 12.5% of the domestic oil products market, are currently owned by Saudi Aramco. Under a strategic partnership IPIC, the national investment company of Abu-Dhabi emirate, gained a 20% stake in Cosmo Oil that occupies 13.4% of Japanese market. Mr. Furuhata states that this cooperation allows to extend the license terms for exploration and production of oil in the Middle East.
By the way, Arab investors turned out to be most compliant partners for Kazakhstan. In mid-June KazMunayGas National Company, ConocoPhillips and Mubadala Development Company (state-owned joint stock company, headquartered in Abu-Dhabi) finished the deal on joint development of the N offshore oil and gas field, whose recoverable reserves are estimated at 270 million tonnes of conditional oil. The parties agreed that project management at the exploration phase will be conducted by the joint operator, where KMG owns 51% while ConocoPhillips and Mubadala Development Company own 24.5% each. In the future, in the production period KazMunayGas will become 100% owner of the operating company. Maksat Idenov, the first Vice-President of KMG, shared in an interview to RusEnergy Russian agency that for the first time the subsoil use contract was signed by Kazakhstan based on non-discriminative conditions. Once all the investors’ expenses are reimbursed, the lion share of future profits from oil sales will go to the state budget and another part to KazMunayGas while the remaining part will go to foreign partners. Moreover, Kazakhstan will be paid a subscription bonus and discovery bonus. However, the main thing is that this contract is not stabilized by law. If the oil price goes up the republic will have a right to introduce any taxes in order to keep the project at profit while the future profit will be honestly and equally divided by the investors. It has to be mentioned that besides the American-Arab consortium, British-Dutch Shell, our old partner on Kashagan, also contended to participate in the project; however, the Shell conditions did not satisfy Astana.
Summarizing, we can make a conclusion that under current conditions the old phrase "An old friend is better than two new ones", perhaps, should not be considered as the postulate, applicable to Kazakhstani oil interests.