ANALYTICS

Caspian oil producers face growing investor skepticism

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Three decades after gain­ing inde­pen­dence, Azerbaijan and Kazakhstan face a grow­ing strug­gle con­vinc­ing investors and mar­kets of the poten­tial for sig­nif­i­cant new oil oppor­tu­ni­ties in the Caspian region.

Recent months appear to have demon­strat­ed the reduced allure of a region once seen as a tro­phy of the end of the Cold War and col­lapse of Soviet rule. In November, Chevron sold its 9.6% stake in Azerbaijan’s main oil com­plex, Azeri-Chirag-Deepwater Gunashli (ACG), and ExxonMobil says it wants to sell its 7% stake, as both majors focus on shale resources at home.

Oil pro­duc­tion from the BP-oper­at­ed ACG has fall­en 8% in 2019 and is now around a third below 2010 lev­els, at 540,000 b/d in the first nine months of the year.

In Kazakhstan, pro­duc­tion is still con­sid­ered broad­ly on the rise, but a hard-bit­ten indus­try is increas­ing­ly skep­ti­cal of the cost of projects. Holders of Chevron stock react­ed bad­ly recent­ly to news of a $10 bil­lion increase in the cost of a project to expand the country’s largest pro­duc­er, the Tengiz field, along with a delay to the project.

It is per­haps unsur­pris­ing the indus­try has moved on from the days when the Caspian was seen along­side the likes of Angola as a solu­tion to a per­ceived threat of a peak in glob­al oil sup­plies.

Azerbaijan was always expect­ed to expe­ri­ence declin­ing crude pro­duc­tion in the 2010s, with the indus­try switch­ing its focus there to big gas projects that would off­set declin­ing oil rev­enues. Gas deliv­er­ies from the Shah Deniz field are expect­ed to reach Italy in October 2020 and the Absheron gas field is due on stream in the same year. The gas projects also bring some liq­uids pro­duc­tion. The Shah Deniz field has been pro­duc­ing around 77,000 b/d of con­den­sate in recent months.

While BP and oth­ers con­tin­ue to explore, the IMF expects ris­ing gas out­put to sup­port mod­est rates of eco­nom­ic growth in Azerbaijan, amount­ing to 2.5% annu­al­ly in the medi­um term, marred by what it recent­ly called “struc­tur­al rigidi­ties, gov­er­nance weak­ness­es, and lack of trans­paren­cy.”

KASHAGAN FLOWS

Kazakhstan at least has the advan­tage of ris­ing oil pro­duc­tion. Output from Tengiz is expect­ed to reach 900,000 b/d once the so-called “third-gen­er­a­tion” expan­sion project is up and run­ning in 2023.

And there are signs of improved reli­a­bil­i­ty at the trou­bled Kashagan project. Once dubbed a “fail­ure of the indus­try” by a chief finan­cial offi­cer of Total, Patrick de la Chevardiere, due to its $55 bil­lion price-tag, Kashagan pro­duc­tion lev­els have recent­ly exceed­ed 420,000 b/d.

Kazakhstan’s lim­i­ta­tions, how­ev­er, are becom­ing clear. At a strate­gic lev­el, there is evi­dence Russia retains sig­nif­i­cant con­trol. Once-pop­u­lar con­cep­tions that a crude pipeline could be built across the Caspian to Azerbaijan to aid Kazakh oil exports now appear far-fetched. Kazakhstan remains heav­i­ly reliant on the CPC pipeline across south­ern Russia to the port of Novorossiisk.

And while inter­na­tion­al oil com­pa­nies talk of con­trol­ling costs in the sec­tor gen­er­al­ly, that seems a for­lorn hope in Kazakhstan, with dis­sat­is­fac­tion at ris­ing costs extend­ing beyond Tengiz.

Tensions at Tengiz burst into the open in June when more than 40 for­eign work­ers were injured in an affray sparked by a for­eign work­er insult­ing a Kazakh co-work­er. The Kazakh author­i­ties were quick to blame their for­eign part­ners for pay dif­fer­ences between Kazakh and for­eign work­ers, and an alleged fail­ure to hire more Kazakhs.

Chevron, in turn, has high­light­ed the non-stan­dard aspects of the loca­tion, which has entailed, for exam­ple, build­ing new dock facil­i­ties to bring in mate­r­i­al for the expan­sion project.

KAZAKH UNCERTAINTY

Kazakhstan does appear to be tak­ing steps to stim­u­late pro­duc­tion at its numer­ous mature oil fields, with talk of tax breaks. State-owned KazMunaiGaz signed a coop­er­a­tion “roadmap” with Russia’s Tatneft in November, aimed at help­ing improve oil recov­ery at mature, heavy oil fields.

Both Azerbaijan and Kazakhstan’s crude have expe­ri­enced strong demand in recent months due to fac­tors such as a short­fall of Russian Urals crude at Novorossiisk, and a new cap on sul­fur lev­els in bunker fuel that lim­its appetite for sour­er crudes.

But the big pic­ture in the Caspian region is one of uncer­tain­ty and stag­na­tion in the face of geopo­lit­i­cal ten­sions, glob­al com­pe­ti­tion for invest­ment, doubts about resource demand, and poten­tial for polit­i­cal insta­bil­i­ty.

London-based think-tank Chatham House con­clud­ed in a report in November that the risks of polit­i­cal insta­bil­i­ty were increas­ing after Kazakhstan’s first polit­i­cal tran­si­tion in near­ly 30 years, as for­mer pres­i­dent and self-styled “leader of the nation” Nursultan Nazarbayev tries to “row back” from his han­dover to his des­ig­nat­ed suc­ces­sor, President Kassym-Jomart Tokayev.

If they were in any doubt, the report warned investors they could ill-afford to be com­pla­cent.

The state’s rela­tion­ship with the three super­giant oil projects is chang­ing,” it said, refer­ring to the Tengiz, Kashagan and Karachaganak fields.

The oper­at­ing envi­ron­ment is becom­ing more difficult…If the sta­tus quo endures, Kazakhstan will depend on, and like­ly squeeze, a few key oil projects even more.”

Original source: S&P Global Platts

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