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Azerbaijan, Kazakhstan Plot Expansion of BTC to Carry Kashagan Crude
Global Insight Perspective
World Markets Research Centre (WMRC) Daily Analysis
19 April 2005
By Andrew Neff
Significance
The heads of SOCAR and Kazmunaigaz have
voiced their support for a plan that would see the
1-million-b/d-capacity BTC pipeline expanded to 1.7
million b/d in order to serve as the main export
conduit for oil produced from the Kashagan field in
the Kazakh sector of the northern Caspian Sea.
Implications The plan would also entail a 700-km
pipeline link between the Kazakh port of Atyrau and
Baku, which - while solving Kazakhstan's problem of
finding an outlet for the voluminous quantities of oil
to be extracted from Kashagan - will likely run into
environmental opposition from Iran and Russia,
especially in lieu of a multilateral agreement on the
division of the Caspian.
Outlook
In addition to the likely roadblock that
Russia and Iran present in opposing subsea pipelines,
there are a number of hurdles to implementing the
Kazakh-Azeri plan, including the issue of transit
tariffs and the participation of the BTC and Kashagan
stakeholder groups.
Expanding Co-Operation and Pipelines
Until now, talk of linking future Kazakh oil
production with the soon-to-be-operational BTC
pipeline, running 1,760 km from Azerbaijan to Turkey
(see 'Related Articles' below), was mainly limited to
government circles. Moreover, the talks focused on
securing somewhere in the region of 100,000 to 200,000
b/d of Kazakh oil output to pump via the
US$3.6-billion pipeline, with the emphasis on boosting
its utilisation in the initial years to improve its
profitability. The Azerbaijan International Operating
Company (AIOC)'s development plan for the
Azeri-Chirag-Guneshli (ACG) structure has left
available space in the pipeline until at least 2008.
Azeri government officials, knowing this and bolstered
by political support from the US government, courted
the Kazakh government to provide incremental oil to
supplement the BTC.
The Kazakh government has long been coy when it comes
to pipelines and the direction of exports for its
anticipated future oil boom. While attempting to
assuage Azeri and US policymakers, the Central Asian
republic has quietly continued to pursue additional
export opportunities, including expansion of the
Tengiz-Novorossiisk pipeline to Russia, a
trans-Kazakhstan pipeline to China, and even oil swaps
with Iran. The 'western' route for Kazakh oil via the
BTC was never really in doubt, but then it was never
really viewed as the 'main export pipeline' for Kazakh
producers either.
While Kazakh and Azeri authorities have continued to
try to hammer out an agreement on transit tariffs via
the BTC to ensure it carries some Kazakh oil when it
comes online later this year, the current discussions
between SOCAR and Kazmunaigaz,
the national oil and gas companies of Azerbaijan and
Kazakhstan, respectively,
appear to give greater emphasis to Kazakh oil in the
pipeline. With the shift from the political to the
commercial arena, officials from both companies
confirmed that they are discussing a plan that would
entail a much larger volume of Kazakh oil - mainly
from the elephantine Kashagan field in the shallow
waters of the north Caspian - to flow to western
markets via the BTC. Furthermore, the plan under
consideration would see an actual 700-km pipeline laid
across the Sea, linking the Kazakh port of Atyrau with
Azerbaijan's capital, Baku, and an expansion of the
BTC to handle 1.7 million b/d.
BTC Shareholders
Company Share
BP 30.1%
SOCAR 25%
ChevronTexaco 8.9%
Statoil 8.71%
TPAO 6.53%
Total 5%
Eni/Agip 5%
Itochu 3.4%
ConocoPhillips 2.5%
Inpex 2.5%
Amerada Hess 2.36%
Shifting Commercial Winds
Previous discussions between Azeri and Kazakh
authorities envisioned a barge system of
transportation, carrying Kazakh oil across the Caspian
to be reloaded and exported via the BTC, with the
capacity of the controversial pipeline slated to
remain at 1 million b/d. So what has changed? Although
the political winds of change that have swept across
other former Soviet States have not hit Kazakhstan and
Azerbaijan, the commercial winds have shifted recently
in the two Caspian littoral states, perhaps altering
the outlook for greater trans-Caspian co-operation in
an oil transport system.
To begin with, Kazmunaigaz, after much protracted
discussion with Eni and the other Western oil
companies in the Agip North Caspian Operating Company
(Agip KCO), has finally secured its stake in the
development of the Kashagan field. BG Group's 16.67%
stake in the field will be split, with Kazmunaigaz
gaining an 8.33% stake while five of the international
oil companies (IOCs) share out the remaining 8.33%.
The agreement allows the government, through
Kazmunaigaz, to ensure a direct state role in the
development of the country's largest oil project.
Kashagan has estimated recoverable oil reserves of 7
to 9 billion barrels, and is expected to produce 1.2
million b/d of oil by 2016 at its peak.
Shortly thereafter, US supermajor ChevronTexaco, which
is the largest foreign investor in Kazakhstan,
announced its plan to acquire Unocal for US$18
billion. The acquisition will allow ChevronTexaco to
take on Unocal's stake in both the AIOC and the BTC
consortium, giving the supermajor a timely pick-up as
AIOC begins ramping up production in advance of the
BTC's commissioning. While not a stakeholder in Agip
KCO, ChevronTexaco is the operator of the
Tengizchevroil (TCO) consortium in western Kazakhstan,
and the fight over the expansion of the Caspian
Pipeline Consortium (CPC)'s Tengiz-Novorossiisk
pipeline has raised serious concerns for
ChevronTexaco's ability to export its future output
from that project. Hence, the acquisition of Unocal
and its BTC stake gives the number-two US oil company
a measure of export security for its Tengiz output.
The decision by ExxonMobil and Devon Energy not to
export their share of AIOC oil via the BTC will free
up additional space in that pipeline, which
ChevronTexaco may be keen to secure for itself.
Outlook and Implications
Before contractors begin putting together proposals
for contracts to expand the BTC and construct a subsea
pipeline linking it with Atyrau, however, it should be
noted that a number of potential obstacles remain.
Firstly, there is still no firm guarantee from the
Kazakh government or Kazmunaigaz on the volume of oil
to be transported. SOCAR president Natiq Aliyev said
that, as of 2010, Kazakhstan would be transporting
500,000 b/d of oil from the Kashagan field via the
BTC, rising to 1-million b/d at peak production.
However, Kazmunaigaz's managing director Kairgeldy
Kabyldin was notably less enthusiastic, although he
promised that an agreement would be signed by
September. Still, several previous timelines for
inking a Kazakhstan-Azerbaijan oil export/transport
agreement have lapsed.
Secondly, even a political agreement between the
Kazakh and Azeri governments likely will not be
sufficient to construct a subsea pipeline linking
Atyrau and Baku. In the absence of a multilateral
agreement on the division of the Caspian Sea and
clarification of its legal status, both the Iranian
and Russian governments have raised objections to
subsea oil and gas pipelines via the Caspian in the
past, ostensibly on environmental grounds. Russia's
environmental objections ring hollow, however, as gas
giant Gazprom has already laid a gas pipeline across
the Black Sea and plans to lay another subsea pipeline
in the Baltic. Rather, environmental concerns mask the
true nature of Russian and Iranian disagreements over
trans-Caspian pipelines - the loss of oil and gas
transit revenue and corresponding influence. A
Kazakhstan-Azerbaijan pipeline link would deny both
Russia and Iran the chance to reap oil transit
revenues from Kazakh oil exports, as well as (at least
in the mind of Russian and Iranian policymakers) serve
as a de facto victory for the US government in the
'Great Game' of Caspian pipelines. Thus, united
Russian and Iranian opposition may derail any
potential Atyrau-Baku link - at least until the
Caspian littoral states agree on the division of the
Sea's resources.
Thirdly, the expansion of the BTC and the inclusion of
Kashagan oil via the pipeline will require consent
from the stakeholders in both consortia. BTC
stakeholders - four of which are also Kashagan
shareholders (representing 15% of BTC's ownership) -
may not have the stomach for additional investment in
the pipeline at this time after the cost overruns,
environmental headaches, and human rights
controversies that have surrounded the BTC thus far.
For their part, Kashagan shareholders (aside from
Kazmunaigaz at least) may not be so keen on mixing
their oil with Azeri Light via the BTC.
Given the questions surrounding alternative export
pipelines and the risks involved in relying on Russia
and China as markets, however, the Agip KCO consortium
members may look more favourably on the BTC transport
route, especially if they are able to secure transit
tariffs equivalent to BTC shareholders. Considering
that the main problems of building the BTC have
already been dealt with, BTC stakeholders may also see
the addition of Kashagan oil and the necessary
expansion of the pipeline as beneficial, as the
expansion of capacity on the BTC will be a relatively
simple affair of adding pumping stations.
Nevertheless, with the legal status of the Caspian
still in doubt and the BTC still not yet operational,
there are serious obstacles still to overcome to
expand the BTC and connect it to Atyrau; Kazmunaigaz
and SOCAR may have to wait to cross that Caspian
bridge when they come to it.
Global Insight Perspective
World Markets Research Centre (WMRC) Daily Analysis
19 April 2005
By Andrew Neff
Significance
The heads of SOCAR and Kazmunaigaz have
voiced their support for a plan that would see the
1-million-b/d-capacity BTC pipeline expanded to 1.7
million b/d in order to serve as the main export
conduit for oil produced from the Kashagan field in
the Kazakh sector of the northern Caspian Sea.
Implications The plan would also entail a 700-km
pipeline link between the Kazakh port of Atyrau and
Baku, which - while solving Kazakhstan's problem of
finding an outlet for the voluminous quantities of oil
to be extracted from Kashagan - will likely run into
environmental opposition from Iran and Russia,
especially in lieu of a multilateral agreement on the
division of the Caspian.
Outlook
In addition to the likely roadblock that
Russia and Iran present in opposing subsea pipelines,
there are a number of hurdles to implementing the
Kazakh-Azeri plan, including the issue of transit
tariffs and the participation of the BTC and Kashagan
stakeholder groups.
Expanding Co-Operation and Pipelines
Until now, talk of linking future Kazakh oil
production with the soon-to-be-operational BTC
pipeline, running 1,760 km from Azerbaijan to Turkey
(see 'Related Articles' below), was mainly limited to
government circles. Moreover, the talks focused on
securing somewhere in the region of 100,000 to 200,000
b/d of Kazakh oil output to pump via the
US$3.6-billion pipeline, with the emphasis on boosting
its utilisation in the initial years to improve its
profitability. The Azerbaijan International Operating
Company (AIOC)'s development plan for the
Azeri-Chirag-Guneshli (ACG) structure has left
available space in the pipeline until at least 2008.
Azeri government officials, knowing this and bolstered
by political support from the US government, courted
the Kazakh government to provide incremental oil to
supplement the BTC.
The Kazakh government has long been coy when it comes
to pipelines and the direction of exports for its
anticipated future oil boom. While attempting to
assuage Azeri and US policymakers, the Central Asian
republic has quietly continued to pursue additional
export opportunities, including expansion of the
Tengiz-Novorossiisk pipeline to Russia, a
trans-Kazakhstan pipeline to China, and even oil swaps
with Iran. The 'western' route for Kazakh oil via the
BTC was never really in doubt, but then it was never
really viewed as the 'main export pipeline' for Kazakh
producers either.
While Kazakh and Azeri authorities have continued to
try to hammer out an agreement on transit tariffs via
the BTC to ensure it carries some Kazakh oil when it
comes online later this year, the current discussions
between SOCAR and Kazmunaigaz,
the national oil and gas companies of Azerbaijan and
Kazakhstan, respectively,
appear to give greater emphasis to Kazakh oil in the
pipeline. With the shift from the political to the
commercial arena, officials from both companies
confirmed that they are discussing a plan that would
entail a much larger volume of Kazakh oil - mainly
from the elephantine Kashagan field in the shallow
waters of the north Caspian - to flow to western
markets via the BTC. Furthermore, the plan under
consideration would see an actual 700-km pipeline laid
across the Sea, linking the Kazakh port of Atyrau with
Azerbaijan's capital, Baku, and an expansion of the
BTC to handle 1.7 million b/d.
BTC Shareholders
Company Share
BP 30.1%
SOCAR 25%
ChevronTexaco 8.9%
Statoil 8.71%
TPAO 6.53%
Total 5%
Eni/Agip 5%
Itochu 3.4%
ConocoPhillips 2.5%
Inpex 2.5%
Amerada Hess 2.36%
Shifting Commercial Winds
Previous discussions between Azeri and Kazakh
authorities envisioned a barge system of
transportation, carrying Kazakh oil across the Caspian
to be reloaded and exported via the BTC, with the
capacity of the controversial pipeline slated to
remain at 1 million b/d. So what has changed? Although
the political winds of change that have swept across
other former Soviet States have not hit Kazakhstan and
Azerbaijan, the commercial winds have shifted recently
in the two Caspian littoral states, perhaps altering
the outlook for greater trans-Caspian co-operation in
an oil transport system.
To begin with, Kazmunaigaz, after much protracted
discussion with Eni and the other Western oil
companies in the Agip North Caspian Operating Company
(Agip KCO), has finally secured its stake in the
development of the Kashagan field. BG Group's 16.67%
stake in the field will be split, with Kazmunaigaz
gaining an 8.33% stake while five of the international
oil companies (IOCs) share out the remaining 8.33%.
The agreement allows the government, through
Kazmunaigaz, to ensure a direct state role in the
development of the country's largest oil project.
Kashagan has estimated recoverable oil reserves of 7
to 9 billion barrels, and is expected to produce 1.2
million b/d of oil by 2016 at its peak.
Shortly thereafter, US supermajor ChevronTexaco, which
is the largest foreign investor in Kazakhstan,
announced its plan to acquire Unocal for US$18
billion. The acquisition will allow ChevronTexaco to
take on Unocal's stake in both the AIOC and the BTC
consortium, giving the supermajor a timely pick-up as
AIOC begins ramping up production in advance of the
BTC's commissioning. While not a stakeholder in Agip
KCO, ChevronTexaco is the operator of the
Tengizchevroil (TCO) consortium in western Kazakhstan,
and the fight over the expansion of the Caspian
Pipeline Consortium (CPC)'s Tengiz-Novorossiisk
pipeline has raised serious concerns for
ChevronTexaco's ability to export its future output
from that project. Hence, the acquisition of Unocal
and its BTC stake gives the number-two US oil company
a measure of export security for its Tengiz output.
The decision by ExxonMobil and Devon Energy not to
export their share of AIOC oil via the BTC will free
up additional space in that pipeline, which
ChevronTexaco may be keen to secure for itself.
Outlook and Implications
Before contractors begin putting together proposals
for contracts to expand the BTC and construct a subsea
pipeline linking it with Atyrau, however, it should be
noted that a number of potential obstacles remain.
Firstly, there is still no firm guarantee from the
Kazakh government or Kazmunaigaz on the volume of oil
to be transported. SOCAR president Natiq Aliyev said
that, as of 2010, Kazakhstan would be transporting
500,000 b/d of oil from the Kashagan field via the
BTC, rising to 1-million b/d at peak production.
However, Kazmunaigaz's managing director Kairgeldy
Kabyldin was notably less enthusiastic, although he
promised that an agreement would be signed by
September. Still, several previous timelines for
inking a Kazakhstan-Azerbaijan oil export/transport
agreement have lapsed.
Secondly, even a political agreement between the
Kazakh and Azeri governments likely will not be
sufficient to construct a subsea pipeline linking
Atyrau and Baku. In the absence of a multilateral
agreement on the division of the Caspian Sea and
clarification of its legal status, both the Iranian
and Russian governments have raised objections to
subsea oil and gas pipelines via the Caspian in the
past, ostensibly on environmental grounds. Russia's
environmental objections ring hollow, however, as gas
giant Gazprom has already laid a gas pipeline across
the Black Sea and plans to lay another subsea pipeline
in the Baltic. Rather, environmental concerns mask the
true nature of Russian and Iranian disagreements over
trans-Caspian pipelines - the loss of oil and gas
transit revenue and corresponding influence. A
Kazakhstan-Azerbaijan pipeline link would deny both
Russia and Iran the chance to reap oil transit
revenues from Kazakh oil exports, as well as (at least
in the mind of Russian and Iranian policymakers) serve
as a de facto victory for the US government in the
'Great Game' of Caspian pipelines. Thus, united
Russian and Iranian opposition may derail any
potential Atyrau-Baku link - at least until the
Caspian littoral states agree on the division of the
Sea's resources.
Thirdly, the expansion of the BTC and the inclusion of
Kashagan oil via the pipeline will require consent
from the stakeholders in both consortia. BTC
stakeholders - four of which are also Kashagan
shareholders (representing 15% of BTC's ownership) -
may not have the stomach for additional investment in
the pipeline at this time after the cost overruns,
environmental headaches, and human rights
controversies that have surrounded the BTC thus far.
For their part, Kashagan shareholders (aside from
Kazmunaigaz at least) may not be so keen on mixing
their oil with Azeri Light via the BTC.
Given the questions surrounding alternative export
pipelines and the risks involved in relying on Russia
and China as markets, however, the Agip KCO consortium
members may look more favourably on the BTC transport
route, especially if they are able to secure transit
tariffs equivalent to BTC shareholders. Considering
that the main problems of building the BTC have
already been dealt with, BTC stakeholders may also see
the addition of Kashagan oil and the necessary
expansion of the pipeline as beneficial, as the
expansion of capacity on the BTC will be a relatively
simple affair of adding pumping stations.
Nevertheless, with the legal status of the Caspian
still in doubt and the BTC still not yet operational,
there are serious obstacles still to overcome to
expand the BTC and connect it to Atyrau; Kazmunaigaz
and SOCAR may have to wait to cross that Caspian
bridge when they come to it.