Kazakhstan’s National Oil Company to Consolidate Bridgehead in Europe

Kazakhstan’s national oil and gas holding, Kazmunaigaz, has started its first-ever oil exploration drilling outside that country. Rompetrol Upstream, a division of Rompetrol Group, is drilling the Kaz-1 exploration well near Focsani in eastern Romania. The Rompetrol Group is a fully-owned subsidiary of Kazmunaigaz Processing & Marketing, which is a division of Kazmunaigaz. The Kaz-1 well, targeting a depth of 4,200 meters, operates in the first of Kazmunaigaz’s five Romanian concession perimeters.

As part of its acquisition of Rompetrol Group (see below), Kazmunaigaz acquired exploration and development licenses to five Romanian oil blocks. An exploration well is already in progress in northwestern Romania’s Satu Mare perimeter, operated by Canadian Unistar Resources in a joint venture with the Kazakhstan-owned Rompetrol. Two exploration wells are planned for either of these two blocks. However, Kazmunaigaz’s activities in Romania and farther afield in Europe concentrate on the downstream oil business.

According to Rompetrol Group CEO, Zhanat Tusupbekov, the Kazmunaigaz parent company envisions a “Caspian Basin-to-Europe Energy Bridge,” focusing on oil exports, refining and product marketing within Europe (Ziarul Financiar [Bucharest], Kazmunaigaz press release, July 31; Interfax Oil and Gas weekly report, August 6).

Kazmunaigaz acquired Rompetrol Group in two steps – 75 percent in 2007 and 25 percent in 2009 – for a total price estimated at more than $3 billion. This marked Kazakhstan’s largest investment abroad, and Kazmunaigaz’s first foothold in European Union territory. The Rompetrol Group is largely a creation of Romanian businessman Dinu Patriciu as main shareholder, chairman and CEO until 2009. The Group includes upstream, processing and downstream divisions.

Rompetrol Upstream is active in exploration and production drilling and well services in Romania and beyond. Rompetrol Rafinare consists of the Petromidia refinery on Romania’s Black Sea coast and the Vega refinery in the traditional oil-industry center Ploiesti, with annual processing capacities of 5 million and 2 million tons of crude, respectively; as well as the processing plant Rompetrol Petrochemicals. Rompetrol’s downstream assets – expanded internationally during the Patriciu era – include 1,063 fuel-retailing and service stations, of which 786 are in Romania (25 percent market share in the country), 135 are in France and Spain, 56 in Bulgaria, 29 in Moldova, and 57 in Georgia (Kazmunaigaz press release, July 31; Interfax Oil and Gas weekly report, August 6).

Last month, Rompetrol’s CEO Tusupbekov signed with Naftohaz Ukrainy vice-president Yevhen Korniychuk a memorandum of understanding (MOU) to establish a joint-venture chain of fuel retailing and service stations in Ukraine. Under the MOU, up to 700 stations would come under the control of the joint venture, mainly in areas around Kyiv and other major cities (Kazmunaigaz press release, July 19; Kyiv Post, July 20).

The Petromidia refinery and the Petrochemicals plant are co-located at Midia-Navodari near the Romanian port of Constanta. Their and the Vega plant’s capacities (see above) significantly added to Kazakhstan’s in-country processing capacities, which currently total some 15 million tons per year at the Atyrau, Shimkent and Pavlodar refineries (all operated and majority-owned by Kazmunaigaz Processing & Marketing). Kazmunaigaz supplies its three Romanian plants with crude oil from western Kazakhstan through the Caspian Pipeline Consortium’s (CPC) pipeline, in which Kazmunaigaz has a 19 percent interest, and onward by tankers from the Russian Black Sea port of Novorossiysk to Midia and Constanta. The Petromidia refinery is equipped with an offshore loading/unloading terminal eight kilometers out at sea, capable of receiving tankers of up to 160,000 tons, and connected by an underwater pipeline to the tank farm onshore. Larger tankers can be accommodated at the Constanta port, some 35 kilometers away and connected by an overland pipeline to Midia.

Rompetrol Group had posted healthy profit margins until the generalized financial-economic crisis hit the oil-processing sector in Europe. The Group is also apparently liable for $600 million in older debts to the Romanian state budget. The Romanian government converted that sum into a $600 million bond issue, susceptible to reverting to government shares. Kazmunaigaz has nevertheless financed technical upgrades at Rompetrol during the crisis, in anticipation of European recovery.

Kazakhstan emerged from the Soviet era with meager in-country oil-refining capacities, and lacking direct transport routes to Europe. The Astana government’s Comprehensive Plan for Development of Kazakhstan’s Oil-Processing Plants, 2009-2015, aims to advance Kazakhstan from the primary role as crude oil exporter to a commensurate role as refiner and distributor of products on European downstream markets. The state program for the industry sets goals to increase the depth of crude oil processing and upgrade the quality of certain refined products to EU standards. The Rompetrol Group’s aggregate assets constitute the first major bridgehead for Kazakhstan in EU territory.

Once European demand rebounds from the crisis, Kazakhstan will be well placed to capitalize on its assets in Georgia’s Black Sea port of Batumi and the resulting synergies. In early 2008, Kazmunaigaz acquired full ownership of the Batumi oil terminal and the operating rights to the Batumi Sea Port (see EDM, February 13, 2008). Batumi became Kazakhstan’s first international oil transport asset, and first Kazakh-owned outlet to the open sea, in contradistinction to the Russian-owned Novorossiysk. The Batumi terminal’s capacity is conservatively rated at 15 million tons per year for crude oil and refined products; but it remains under-utilized (as is the Azerbaijan-Georgia transit corridor) under the current crisis conditions.

Kazakhstan’s government and Kazmunaigaz, however, are planning for the post-crisis period. From a supply security standpoint as well as commercially, making full use of the Kazakh-owned Batumi terminal would seem clearly preferable to a disproportionate reliance on the Russian route and Novorossiysk. The two outlets need not be regarded as mutually exclusive. Availing itself of both options, Kazakhstan can achieve bargaining leeway and flexibility vis-a-vis transit countries on both routes. Back in 2008, Patriciu had described the Batumi-Constanta route as a bridge between Kazakhstan and Europe for the transport of oil (Trend Capital, February 9, 2008).

Kazmunaigaz is ranked as the third-largest oil producer in its country, after Chevroil and ExxonMobil. Looking ahead at the post-crisis period, oil production growth in Kazakhstan (including Kashagan offshore production) should increase trans-Caspian oil shipments, boosting the producers’ use of the Batumi export terminal. Kazakhstan could then fully capitalize on its ownership of the terminal, delivering crude oil and refined products by the most direct route to Kazmunaigaz’s downstream assets and customers in Europe.