Oil Development in Kazakhstan Underscores Significance of Azerbaijan-Georgia Transit Corridor

Effective from November 1, Chevron’s subsidiary TengizChevroil is significantly augmenting oil shipments from Kazakhstan, via Azerbaijan and Georgia, to international markets. This development adds to the evidence that business confidence is returning to the Azerbaijan-Georgia transit corridor, in the aftermath of the Russia-Georgia war. The U.S. company operates Kazakhstan’s super giant Tengiz onshore field, with commercial reserves of 1.2 billion tons (8.5 billion barrels). It is described as Chevron’s largest single source of oil in the world (Business Week, September 22).

In October of this year, TengizChevroil finalized an agreement with the BP-led Baku-Tbilisi-Ceyhan pipeline company (in which Chevron is a minority shareholder) to increase the inputs of Tengiz oil into that pipeline. The reported target is 98,000 barrels per day (bpd) or some 14,000 tons daily, to be reached next year. Shipments during the remainder of this year are expected to run at approximately 70,000 bpd or some 10,000 tons daily.

The oil is transported from the Tengiz field by rail to the Caspian port of Aktau, then by small-capacity tanker ships across the sea to Azerbaijan at Sangachal, the starting point of the Baku-Tbilisi-Ceyhan (BTC) pipeline. Cross Caspian Oil and Gas Logistics operates this shipping line as well as an oil port and pipeline terminal at Sangachal, near BTC’s terminal there. Cross Caspian is a joint venture of Azerbaijan’s State Oil Company and the Dubai-registered Middle East Petroleum Farm.

The inputs from Kazakhstan help fill the Baku-Tbilisi-Ceyhan pipeline to its capacity of one million barrels per day or 50 million tons annually. The line was pumping some 800,000 to 850,000 bpd prior to the August war in Georgia. It was never directly affected by the Russian military operations, but it had to reduce the volume of shipments temporarily after an explosion on the pipeline’s Turkish section on August 5 and a gas leak at the ACG offshore oilfield in Azerbaijan in September. The pipeline is now returning to full operation and taking the additional inputs from Tengiz.

Apart from the pipeline, TengizChevroil relies on railroad delivery of its oil via Azerbaijan and Georgia, en route to Georgian terminals on the Black Sea. Those volumes are small, but the company is considering an increase in rail shipments through that corridor in 2009. With Russia blocking the expansion of the Tengiz-Novorossiysk pipeline’s capacity, or imposing onerous conditions for that expansion, the Azerbaijan-Georgia corridor is proving useful as an alternative option.

Oil production targets at Tengiz are reported to be 540,000 bpd to 620,000 bpd for the current phase of development and nearly one million bpd in a subsequent phase. The field’s development and production schedule have been held back for years, however, by Russia’s preconditions to capacity expansion of the pipeline to Novorossiysk. This situation persists, and Moscow has just strengthened its decision-making powers even further by acquiring Oman’s minority share in that pipeline company (Kommersant, November 5). In this situation, the Chevron company envisages the possibility of a major increase in its shipments from Tengiz to the Baku-Tbilisi-Ceyhan pipeline (Turan, APA, Reuters, November 3).

Total available capacity on the Baku-Tbilisi-Ceyhan pipeline is slated to increase through technical means (chemical agents, additional pumping capacity) to approximately 1.5 million bpd or some 75 million tons annually. That can provide a westbound outlet (as opposed to a Russian one) for part of the production from Kashagan, the other super giant oil field in Kazakhstan.

On October 31 the consortium in charge of developing Kashagan was restructured, the production-sharing agreement (PSA) updated, and a new schedule of the field’s development agreed by the companies and the Kazakh government. The consortium, Agip KCO, includes Italy’s ENI, Kazakhstan’s KazMunayGaz, the American companies ExxonMobil and ConocoPhillips, Total of France, the Anglo-Dutch Shell company, and Japan’s Inpex.

Under the agreements just signed, the KazMunayGaz share is being doubled to 16.81 percent, now reaching parity with the shares of ENI, ExxonMobil, Total, and Shell, each of which accepted slight reductions in their shares. The proportion of Kazakh managers is being increased substantially, including a first deputy head of the operating company. Kazakhstan’s income from the project (which had been fixed at 5 percent until now) will be tied to world oil price fluctuations of between $45 and $180 per barrel.

ENI remains the operator during an “experimental” phase, following which the other four major shareholders would each take charge of an area of responsibility. The start of commercial production is rescheduled to 2013, instead of 2010, for this 40-year project. First-phase production is now anticipated to rise from 75,000 bpd in the first year to 450,000 bpd or some 22 million tons annually by the third year.

With estimated commercial reserves of at least nine billion barrels (and geological reserves estimated at 38 billion barrels, Kashagan ranks as the richest oilfield discovered during the last 40 years worldwide. Opening a westbound outlet for Kashagan’s production through the Azerbaijan-Georgia corridor is becoming a major issue of energy security for the West (Kazakh TV Channel One via BBC Monitoring’s Global Newsline, October 31; Interfax, October 31).