Wood Mackenzie Says Kazakh Pipeline Decisions Imperative

Today at KIOGE 2009, Ian Thom, Lead Caspian Upstream Research Analyst for Wood Mackenzie will present an independent assessment of the export infrastructure issues Kazakhstan faces as it seeks to become a top ten global oil producer, and one of the top three non-OPEC contributors to production growth, alongside Canada and Brazil.

"The stakes are high for Kazakhstan as the development of export routes will have a fundamental impact on its oil sector for many years to come. And decisions on sanctioning the huge capital investment for these routes will be required soon to expand capacity in the short and medium term," explains Thom.

Illustrating the urgency of the decisions in the next few years Thom says, "Across the export system as a whole, the routes are operating close to their full capacity, and the fact that operators already use more costly rail to transport 200,000 barrels a day (b/d) of oil shows that pipeline expansions are required soon."

The Kazakh government has several competing priorities to consider, which Wood Mackenzie's presentation outlines: increasing physical volumes at the most cost effective pace; diversification of export routes; and maximizing the value of exports. "This is a difficult balancing act. Increasing pipeline and spare rail capacity may secure physical export capacity but it comes with additional costs. Maximizing the value of exports requires the highest netback routes, which conflicts with the desire for diversification," Thom reasons.

Kazakhstan already has plans to expand its existing infrastructure, such as expanding the Atyrau-Samara route and the Caspian Pipeline Consortium (CPC) route, as well as investing in expanding rail capacity with the Eskene West Rail Project (EWRP). Furthermore new projects include developing the Kazakhstan Caspian Transportation System (KCTS) -- a new southern route via Azerbaijan. Wood Mackenzie concludes these measures will add sufficient capacity to meet its production potential of 3.5 million b/d by 2025 but warns of delaying decisions: "It should be possible to accommodate the forecast production however prolonged discussions on tariffs, capacity rights, throughput guarantees, financing and operational aspects could threaten to delay the sanction of forthcoming upstream development phases and the long-term build up of production.

"Developing the new, large-scale export infrastructure, which we estimate could cost US $10 billion or more, will be driven by production increases from the two super giant fields Kashagan and Tengiz and will require collaboration between the project partners and the Kazakh government, as well as with transit countries and third party pipeline owners. Without tangible progress in securing export routes and capacity, the project partners may be reluctant to sanction further phases at Tengiz and Kashagan," Thom concludes.

Wood Mackenzie's analysis shows three crucial periods of production growth, each of which will make significant demands on export infrastructure and capacity: the first is 2013 when Kashagan Phase 1 is expected to start producing; secondly towards 2020, Kashagan Phase 2 and expansion at Tengiz could combine to add over 1 million b/d in what will be the greatest production growth period; and thirdly in the longer term, Kashagan Phase 3 and other developments will take production to a forecasted peak of 3.5 million b/d in 2025.