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  KAZAKHSTAN International Business Magazine №1, 2004
 Delivering Value from Kazakhstan's Oil
Delivering Value from Kazakhstan's Oil
Using Wood Mackenzie’s extensive databases of regional reserves, production, exports and transportation infrastructure, we have produced an overview of Kazakhstan’s oil marketing potential over the next two decades. The key measure - export potential - has been derived from a field-by-field assessment of production potential and an evaluation of internal demand.
Within the export market, we have considered the many routes taken by Kazakhstan’s oil to market in 2002 and considered their future usage, examining the following criteria:
• Capacity - physical, logistical and geopolitical constraints
• Profitability - Transportation tariffs and other costs to the point of sale and the oil price achieved
Using this knowledge, we conclude by considering how use of export routes could be optimised in the future to provide maximum value to both producer and State.
Strong Near-term Growth Potential
Despite expectations of significant production increases in Azerbaijan (primarily from the Azeri-Chirag-Guneshli project operated by BP), Kazakhstan will still dominate the regional production picture for the next 20 years. The annual growth in regional production (based on a 5-year average) is likely to be 116% in 2003-2005, slowing to 107% by 2010 and 102% in 2015 (Chart 1).
Peak regional production is anticipated to be 3.9-4.0 million b/d in 2009-2012. Kazakhstan’s peak production of 2.4 million b/d, which is expected to occur in 2012-2015, will offset the forecast initial decline from Azerbaijan.
Ambitious Long-term Production Targets
In line with other countries in the region, Kazakhstan’s official production targets are usually regarded as aggressive. However, as experience grows and contractors and governments come to mutually beneficial agreements, short-term forecasts are now appearing quite achievable.
In fact, Wood Mackenzie’s forecast of production potential exceeds official targets - assuming that major project progress as planned. A comparison of Wood Mackenzie forecasts and official targets is set out in Table 1.
If there are no delays, Wood Mackenzie estimates that Kazakhstan could exceed its official production targets until 2005. However, in the medium and long term, Wood Mackenzie’s forecasts are significantly more conservative than official targets (Chart 2), for a number of reasons:
• Our field profiles are based on p+p (or ABC1) reserves only, whilst Government figures includes resources with a significantly higher degree of uncertainty.
• Only fields currently onstream or with a realistic chance of development in the next 5-10 years have been included (i.e. no yet-to-find estimates etc).
Possible Constraints
The primary constraint on liquids production in Kazakhstan is likely to be the limitations on gas utilisation. Limited local demand for associated gas production at key projects such as Tengiz, Karachaganak and Kashagan could inhibit the pace and scale of field developments or expansions. The Karachaganak partners have already indicated that the next expansion phase cannot take place until a secure gas marketing option is in place. This alone could remove 130-160,000 b/d from the production forecast in 2006-2011.
Crude Demand
Kazakhstan’s crude demand is currently in the region of 200,000 b/d, most of which is consumed on the domestic market, although small volumes of oil products are exported. Wood Mackenzie anticipates that domestic demand will increase by around 4% per annum until 2007, slowing to 3% per annum thereafter. It is assumed that continued improvements to the Kazakhstan economy will fuel demand in both domestic and industrial sectors.
However, there are other strategic factors which may increase domestic crude demand more rapidly. Two issues which are likely to be of key concern are:
• ensuring adequate use of domestic refining capacity, which fell from 92% usage in 1991 to a low of 30% in 1999 (Chart 3). This is expected to recover to around 44% in 2003, but there is clearly scope for further improvement - especially at the Pavlodar and PetroKazakhstan Oil Products (formerly Shymkent) refineries.
• maximising revenue from higher-value refined product exports, whilst keeping domestic prices under control.
Wood Mackenzie has considered three demand scenarios, in addition to its base case assumption, in order to assess the impact of increased domestic demand on export potential and targets (Chart 4):
• flat - refinery usage remains flat at 45% per annum;
• medium growth - refinery usage rises at 5% per annum from 44% in 2003 to a target of 80% usage in 2010;
• high growth - refinery usage rises at 10% per annum from 44% in 2003 to a target of 85% usage in 2007.
Calls for increased deliveries to domestic refineries are likely to be unpopular with producers as long as domestic prices are kept tightly controlled (and consequently, low). Despite the financial and logistical challenges posed by exporting crude over long distances to hard-currency markets, the higher net-back prices which can be achieved make this a significantly more lucrative option.
Export Volumes
Available Production
Based on our production forecast and the four demand cases above, Kazakhstan appears to have every chance of hitting its export targets of almost 1.0 million b/d (46 million tonnes) in 2005 and 1.8 million b/d (86 million tonnes) in 2010 (Chart 5). Even if steps are taken in this period to improve refinery usage in Kazakhstan, exports could still total 1.7 million b/d in 2010.
Importantly, even the most optimistic export scenario is still well within the maximum export capacity of existing transportation routes. In practice, however, this capacity is not available to all producers as the location of producing assets and export infrastructure does not always coincide.
Available Capacity
Export capacity for Kazakhstan’s oil production is predominantly available via CPC and Russian pipelines, although rail and sea are also viable options. The nameplate capacity of each of these routes is illustrated in Chart 6.
CPC - Timing of Expansions?
The key element in the growth of Kazakhstan’s export capacity is undoubtedly the timing of CPC capacity expansions.
Wood Mackenzie’s assumption, based on the key shareholders’ equity production, is that capacity could be expanded to 760,000 b/d in 2005-06, 960,000 b/d in 2007-09 and reach the maximum 1,340,000 b/d by 2010.
Transneft Pipelines
Although Kazakh crude can be exported to a huge number of end-points through Russia’s oil pipeline network, the three exit points from Kazakhstan are via the Atyrau-Samara, Kenkiyak-Orsk and Karachaganak-Orenburg lines.
Utilisation of these varies widely with the availability of crude supplies and their potential competitiveness as export routes may decline as other options become available. Two factors which will reduce the overall level of utilisation of Kazakhstan’s export pipelines are:
• completion of the Karachaganak-Atyrau link into CPC, which will divert volumes away from the Karachaganak-Orenburg line. As there are no other convenient sources of supply for the latter, this effectively reduces the future utilisation of this line;
• completion of the Kenkiyak-Atyrau line; similarly, this line provides a more attractive option for producers currently supplying the Kenkiyak-Orsk line.
The Omsk-Chardzhev line (capacity 440,000 b/d) is deemed to have no useable capacity unless the northern section were reversed to allow exports to the Omsk refinery (and beyond). However, this would be at the expense of supplies which are currently swapped southwards to supply the under-utilised Pavlodar refinery and is thus thought unlikely.
The only limiting factor on use of the Atyrau-Samara route will be securing an agreement with Russia regarding volumes. The current agreement of 300,000 b/d will need to be increased in line with planned capacity expansions (to 500,000 b/d by 2005). This appears likely (although not certain), given Transneft’s desire to maintain some control over Kazakh exports.
Sea Ports
Use of Aktau as a conduit for exporting crude has risen considerably over recent years and the port was operating at 70% capacity in 2002. It is anticipated to continue to be well-used in the future but would require substantial upgrading to handle the planned 400,000 b/d which could transit the port to Baku for transportation via BTC. In the short-term, closure of two berths for repairs for a large part of 2003 will temporarily cut capacity by at least 50%.
Congestion on the rails is the biggest threat to crude cargoes, with the most frequent bottlenecks occurring in Georgia. Historically, Tengizchevroil has been the major user of rail export routes and, although its switch to CPC should free up capacity for others, smaller producers will not have the same benefits of scale as TCO. In addition, the number of rail tankers available is also reported to be declining as TCO withdraws these from service in Kazakhstan.
On the basis of the various practical constraints to throughput on each route, the actual export capacity is much closer to our base case exports forecast, as shown in Chart 7.
Need for Additional Routes
Despite the apparent surplus of export capacity, the much-discussed option to export Kazakh crude across the Caspian and then to Ceyhan via Azerbaijan’s BTC line is not necessarily in excess of requirements, providing it can compete economically with existing routes. Indeed, as a large-scale, independent route, it has some logistical and political advantages.
Usage of the 180,000 b/d Odessa-Brody pipeline to deliver Caspian crude to central Europe has been in discussion for many months now. This could be a useful exit point for Caspian producers if transit problems arise in the Bosporus, but is essentially an extension to current routes, rather than an independent alternative, as it does not add directly to Kazakhstan’s existing export capacity. Demand is already being noted with Polish refiner PKN Orlen (Plotsk refinery) having already signed a protocol of intent with Ukrtransnafta for 80,000 b/d of Caspian crude. Grupa Lotos (Gdansk refinery) signed a similar agreement for 60,000 b/d of Caspian oil. However, the 490 km extension from Brody to Plotsk will not be completed until 2006-07.
Export Value
Kazakhstan exported 39.5 million tonnes (304 mmbbi or 832,000 b/d) of crude in 2002, which Wood Mackenzie valued at almost US$5 billion. This equates to an average of almost US$126/tonne or US$16.33/bbl. By end-September 2003, exports were up 14% year-on-year and had achieved an average of US$20.46/bbl.
CPC has reinforced the Black Sea as the main exit route for Kazakhstan crude exports, with the top four exit points in 2002 all being Black Sea ports. Almost 60% of Kazakhstan’s total crude exports in 2002 went to just 10 exit points, shown in Chart 8.
Kazakh volumes via the port of Odessa in mid-2003 are lower than expected - a casualty of Russo-Ukrainian disagreements over the reversal and use of the Odessa-Brody line. Since 21% of Kazakh exports transited Odessa in 2002, this highlights the potential risks in Kazakhstan’s dependence on the Transneft system (Chart 9).
The growing importance of CPC, to the detriment of more expensive rail options, is also a clear trend in 2002. The most direct example is rail deliveries to Novorossiisk which were 38% down year-on-year in 2002 and are following a similar trend in 2003.
Market prices
In order to provide a reasonable basis for estimating net-back values, a number of oil price streams have been used. The main points of sale for Kazakh crude in 2002 are given in Table 2.
Costs and Net-backs
The built-up cost of transporting Kazakh crude from Atyrau or Orsk via the 10 most-used routes in 2002 is given in Chart 10. Costs include the relevant rail and/or pipeline tariffs, handling, port charges, duty and tanker to the point of sale (if applicable). The net-back for each of these routes is also shown, based on the market prices listed above.
It should also be noted that this is an average cost and that individual producers will have specific circumstances which allow them to improve on this average.
Of those routes studied, CPC is estimated to have yielded the highest net-back price in 2002 US$20.31 per barrel.
Several other routes (to Novorossiisk or Iran) return net-backs in excess of US$19.00/ bbl.
However, tariff increases on a variety of routes in 2003 are already cutting into producers’ profit margins.
Pipeline Tariffs
Although pipeline transport is more cost-effective than rail, Transneft pipeline tariffs have increased at least twice in the 12 months to July 2003 to help cover repayments on loans taken out to fund Baltic Pipeline System (BPS) expansion.
For example, tariffs on the Samara-Novorossiisk route have risen from ca. US$0.65/bbl in July 2002 to US$1.02/bbl in July 2003 - a 57.4% increase. Similarly, the cost of the Samara-Odessa route has risen by almost 20% to US$0.38/bbl.
The implications of any future cost overruns on the BPS expansion project are clear, as is the impact of any other large-scale rehabilitation or construction project which Transneft might choose to undertake and pass on the costs through increased third-party tariffs in its pipeline system.
Tanker Costs
Most of the export routes used by Kazakh crude (72% in 2002) ultimately rely on tanker transport from Black Sea ports.
Aside from bad weather disruption affecting ports such as Novorossiisk, tanker costs have also risen in the last year, following new Turkish legislation from October 2002 banning larger tankers (ca. 50,000 t and over) from the Bosporus Straits at night and stricter enforcement of the use of pilots. This results in longer waiting and journey times and higher charges.
For example, the cost of exiting the Black Sea to Augusta in 2002 was in the range US$0.70-1.12/bbl, depending on the size of tanker used. These costs have risen by an average of 32% in the first 8 months of 2003 to US$0.95-1.47/bbl. Each rise in costs improves the competitive position of the many ‘Bosporus bypass’ options currently under discussion.
Railway Costs
Sheer traffic volume and competition for space from the wide range of other rail users mean that rail transport is likely to continue to be relatively expensive. On the other hand, construction of new loading and unloading racks at a number of terminals suggests that shippers are prepared to bear the higher costs in order to secure an export route for unblended crude.
Given the range of options and netback value available to Kazakhstan’s oil exporters, it is clear that a careful choice of route is vital to maximising the prospective value from each project. The impact of this is even greater when consolidated at a national level and will become even more so as export volumes increase.
Using Wood Mackenzie’s base case estimate of net export potential in 2010 (1.86 million b/d), we calculate that using the optimum combination of 2002 routes, Kazakhstan’s exports could be worth US$13.6 billion dollars (US$20.00/bbl). However, the same volumes, exported via the poorest value routes in 2002, would net only US$9.3 billion (US$13.72/bbl).
This provides a US$4 billion incentive to both producers and government to make the right choices and timely investments. This would assure Kazakhstan a place on the ranks of globally significant oil exporters.
Wood Mackenzie has been providing its unique range of Consultancy Services and Research Products to the Energy and Life Sciences industries for over a quarter of a century. Headquartered in Edinburgh, Scotland, Wood Mackenzie also has offices in London, Houston, Boston, Moscow, Sydney, Tokyo and Beijing.
With our foundation in quality analysis, our detailed industry understanding and our wealth of experience, Wood Mackenzie is able to offer clients a unique skill combination that sets us apart from other consultants.
Global organisations constantly seek quality advice and products critical to their ongoing survival and competitive advantage, which is why, if they are in the energy, pharmaceuticals, biotechnology and animal health sectors, they turn to Wood Mackenzie. We have built an outstanding global reputation as a world class provider of consultancy and analytical expertise to these sectors. Our competitive advantage comes from 25 years of hands-on experience and a team of over 190 professionals drawn from a variety of backgrounds who bring with them a wealth of industry and client knowledge.

Table of contents
Volvo in Kazakhstan  Ingemar Wenngren 
Exhibitions are Our Business!  Edward Strachan 
Subsoil Use Contracts: Issues of Legal Classification and Systematization  Yuri G. Bassin, Maidan K. Suleimenov, Erlan B. Osi 
A Tax for Diversification, or Diversified Tax?  Janat Berdalina, Natalya Yemelyanova 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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