AHEAD OF RUSSIA AND GRAND OLD EUROPE KAZAKHSTAN TAKES THE LEAD OVER PROJECTS ON DIVERSIFICATION OF ENERGY PRODUCTS, TRANSPORTATION ROUTES, BUT IS NOT IN A RUSH TO BECOME THE LEADER IN PRODUCTION

Kazakhstan, being one the countries where the largest world hydrocarbon reserves are concentrated, is going to become the largest hydrocarbon extracting country in the near future. The country currently holds the 12th position on explored oil hydrocarbon reserves (without the Caspian shelf reserves, which are not exactly proven yet), 15th position on gas and condensate reserves and 23rd on petroleum production. Kazakhstan owns up to 4% of world explored and proven resources. Over 200 oil and gas deposits in Kazakhstan are rich with 2.2 billion tons of recoverable resources and over 700 million tons of condensate. The annual petroleum production volumes in Kazakhstan have already exceeded 60 million tons. The resource potential of the country will allow reaching a higher production level in the near future. As the country claimed, by 2015 Kazakhstan intends to extract 120-150 million tons of oil and about 30 billion cu. m. of gas.

Within the CIS countries, Kazakhstan follows Russia on oil production volumes. Kazakhstan considers development of the petrochemical branch to be a key factor that stimulates development of the national economy. Thus, the petrochemical sector is viewed as the most perspective economic branch for the next 30 years. Kazakhstan surely associates the largest outlook related to increasing of hydrocarbon production volumes with implementation of the State Program on development of the Kazakh sector of the Caspian Sea (KSCS). In 2015, Kazakhstan, in compliance with the program will extract 20 billion cu. m. of crude gas from the Kashagan field, whereas the total output the country is expected to produce is 40-45 billion cu. m. a year.

The largest oil deposits at the Caspian Sea shelf (Kashagan) has turned out to be the largest oil discovery during the last 30 years. The resources of Kashagan field were primarily estimated at 12 billion barrels. It is the first discovery of such large reserves since North Scope field was discovered in Alaska in 1969. The reaction of the world petroleum companies was instantaneous. A new boom at the northern shelf that followed the boom at the Azerbaijan sector justified expectations. The discovered oil gave another reason to increase attraction of the Kazakh oil projects.

KSCS and Kashagan

Taking a great interest in onshore fields' development, the government of Kazakhstan did not ignore the Caspian Sea. The formation of the consortium to deal with development of the shelf had already begun in 1993. Before exploration of the first wildcat well, shareholders financed a large-scale seismic survey and geological and geophysical investigations in the major area of the Kazakh shelf. In November 1997, the consortium signed the Production Sharing Agreement with the government of Kazakhstan in Washington. Offshore Kazakhstan International Operating Company (OKIOC) was formed in September 1998 to carry out prospecting work within the PSA. The parent company included companies such as Agip (14.29%), BP Amoco (9.48%), BG International (14.29%), Impex North Caspian Sea Ltd (7.14%), ExxonMobil (14.29%), Phillips Petroleum Kazakhstan Ltd (7.14%), Shell Kazakhstan Exploration BV (14.29%), Statoil (4.79%), TotalFina Elf (14.29%).

The first sign regarding presence of large oil reserves in the Kazakh shelf of the Caspian Sea was in 2000. During the time, majority of experts and analysts gave skeptical forecasts and their comments were niggardly. However, the pessimistic forecasts did not prove. The subsidiaries within PSA on the North Caspian Sea and KazMunayGaz made a joint statement about commercial attractiveness of Kashagan field. Discovery of reserves in the Kashagan field located in the northern part of the Caspian Sea at about 70 kms to the southeast from Atyrau initiated development of the Kazakh sector of the Caspian Sea. But the implementation of offshore works faces a number of technical difficulties. On the one hand, difficult conditions of storms in the Caspian shallow water area require large infrastructure costs to establish well-run production facilities, including guarantees against ecological catastrophes. Appearance of such oil in the sea will result in death of seals and have other dire consequences. Whereas on the other hand, these are quite hard in-situ conditions (high temperature and pressure) that require additional work, increased construction costs and accident-free operation of wells.

At last, it is oil composition itself which is high in sulfur content and most likely contains mercaptan similar to that present in Tengiz field oil. Such oil cannot be pumped through pipelines without preliminary special processing. This problem can be solved in two ways. The first is oil purification from mercaptans before pumping through pipelines. The second is a complete technological circle on deep processing of oil and associated gas - petroleum refineries, petrochemical enterprises, plastic, fertilization, etc. High mercaptan presence (15-20%) causes serious danger due to deeper occurrence of petroleum compared to the Tengiz field and large area of the field. Any technological problem can easily result in an ecological catastrophe. However, in expert opinion, applied technologies will allow minimizing this risk. Climatic conditions in the northern part of the sea considerably differ from those in the Azerbaijan sector. In winter, frequent strong winds bring ice floes onto shallow-water area (the water depth is only four metres or even less) which can ruin offshore derricks. With a view to prevent destruction of derricks Agip Company, the subsidiary of Italian ENI, which was commissioned to develop this field, constructed concrete island drilling structures. The Caspian Sea being landlocked also adds certain problems from an organizational point of view.

However, high oil prices of energy products at the world markets stimulate implementation of such large and difficult investment projects. Having completed long-term negotiations which resulted in obtaining the right on primary purchase of partners within the project, the national company KazMunayGaz managed to enter the North Caspian Consortium at the same price. After this purchase the consortium was formed as follows:

ENI - 18.52%

ExxonMobil - 18.52%

ConocoPhillips - 9.26%

KazMunayGaz - 8.33%

Inpex - 8.33%

Total - 18.52%

Shell - 18.52%

The pilot commercial development project of Kashagan is planned to be implemented in the northeast area of the field, where the oil was extracted from the first wildcat hole drilled in 2000. In line with the schedule, Agip KCO will implement the pilot project in three stages that provide construction of various facilities and the production level (Table 1). The structures of the pilot commercial development project will operate at full-load in 2013, though earlier the shareholders and the government of Kazakhstan expected to reach this production level in 2010. In the opinion of a few experts, the pilot commercial development can be delayed until 2016 due to geological, natural and technical difficulties.

According to the project, thee artificial extracting islands will be constructed during the pilot commercial development: A and D before 2007. One more extracting module _5 will be built up from 2008 to 2013. These three modules will operate the area equal to about 20% of the contractual territory of the North Caspian Consortium. Field pipelines will connect the production islands and the Common Hydrocarbon Refinery. Raw crude transported through these pipelines will be separated into oil and gas. Liquid fraction and some amount of gas will be delivered to the shore. The rest of the gas will be injected back into the strata.

From the shore, hydrocarbons will be delivered to the Oil-and-Gas Complex Processing Plant to be dried and purified from high sulfur content. Pipelines connecting the Common Hydrocarbon Refinery and Oil-and-Gas Complex Processing Plant is expected to have the following parameters: The throughput capacity of the oil pipeline will be 22.5 million tons a year and 6.6 billion cu.m through the gas pipeline. One more pipeline will transport gas back to the production islands to be used by oilmen for production and domestic needs. Its throughput capacity is expected to consist of 1.8 billion cu.m annually.

Offshore facilities are obviously of great importance to the North Caspian Consortium and its operator Agip Co. This conception on implementation of the pilot commercial development is explained by the intention to produce and utilize at the same place to reduce charges on hydrocarbon and wastes transportation.

Risks related to environment protection, technology and difficult production processes caused due to severe climatic conditions jointly resulted in US $15 billion to be used on development of the field, Paolo Scaroni, the President of Italian ENI, the leading partner within the International Consortium on Kashagan development told journalists. But this figure is not final, according to specialists, the total amount of investments in Kashagan will exceed this sum at least twice, as the real commercial condition of 2006 considerably differ from conditions of 2002-2003, when the main characteristics of the pilot commercial development were worked out. Since then, the US dollar used by Agip KCO for calculations underwent devaluation by over 10%. The world prices on hydrocarbons considerably climbed up and caused an increase in prices on oil equipment and services. The consortium gas had an opportunity to start the pilot commercial development a year or a year and a half earlier but failed, as it lost time because of disputes with the government of Kazakhstan and shareholders.

As an example, the North Caspian project demonstrates that more the time between stages of preliminary calculations and practical works, more is the difference between scheduled and real prices, cost and the level of the contract's profitability.

The following works are currently implemented at Kashagan within the State Program on Development of the Kazakh sector of the Caspian Sea:

• construction of facilities at artificial production islands

• construction of the first stage of the offshore gas refinery located in Yeskine settlement

• construction of interconnectors and other infrastructure facilities

The following works are completed on geological survey projects:

• seismic survey was carried out at the contract area Zhambay Yujniy and Yujnoye Zaburunye

• ecological and seismic survey for 1057 km was implemented jointly with KazMunayGaz in Atash area

• the first wildcat well was drilled at Tyub-Karagan field; preliminary works are being implemented at Atash field for the purpose of drilling a wildcat well

• production sharing agreements on the projects in the Caspian Sea are being worked out for singing

The project on formation of the national tanker fleet of Kazakhstan is being fulfilled now to expand its export potential. Two tankers were constructed and launched from Vyborg building docks in December 2004 and May 2005. Despite some delay in implementation of the State Program on KSCS development according to which production at Kashagan had to be started in 2005 but expected to begin in 2008, in 2005 oil production in Kazakhstan grew by 5% compared to 2004. All projects of such levels and scale face similar difficulties. In 2005, Kazakhstan extracted around 1.3 million barrels a day (or 61 million tons a year), gas - 28.7 billion cu. m. In compliance with the forecasts, in 2010 Kazakhstan will produce about 1.8 million barrels a day (or 90 million barrels a year), gas - 52.5 billion cu. m. By 2015 the volume of oil production will reach 3 million barrels a day (or 150 million tons a year), gas - 79.4 billion cu. m.

Energy resources transportation

The companies operating in Kazakhstan are expected to start the commercial production at the oil fields located in the Caspian shelf of the company in 2007-2008. According to the State Program on Hydrocarbon Resources Development in the Caspian shelf, by 2015 oil recovery level at the fields of the Kazakh sector of the Caspian Sea will comprise of no less than 100 million tons out of a total of 150 million scheduled to be produced in the republic.

To date, the maximum allowable oil production level that will not harm marine environment has not been defined yet. Kazakhstan did not allot reserves of the offshore water areas where any activity must be prohibited.

The total throughput capacity comprises:

• oil pipelines - over 850 thousand barrels a day (or 42.5 million tons a year),

• Aktau port - 240,000 barrels a day (up to 12 million tons a year)

• export gas pipelines - 7.0 billion cu. m. a year.

• transit gas pipelines - 110.0 billion cu. m. a year.

The following projects on export transportation of oil are being implemented due to growth of hydrocarbon production:

• Expansion of Atyrau-Samara oil pipeline from 15 to 25 million tons a year

• Stepwise expansion of CPC oil pipeline from 28.2 to 67 million tons a year

• Project on Aktau (port Kurik)-Baku-Tbilisi-Ceyhan system construction

• Project on Kazakhstan-Turkmenistan-Iran oil pipeline construction is being studied

• Central-Asia - the central gas transportation system is being upgraded to increase its throughput capacity up to 117 billion m3 a year.

• The variant of Kazakhstan-China gas pipeline construction to provide natural gas supplies is being currently worked out.

• The construction of Atasu-Alashankou export oil pipeline from Kazakhstan to China is being implemented since September 2004.

• Construction of Atasu-Alashankou oil pipeline will bring Kazakhstan both strategic and tactic dividends

Thus, despite certain delays in implementation of projects at the shelf, within the last three years Kazakhstan considerably also progressed in searching of new export routes, which are currently defined in three directions - through Russia to Europe, through Azerbaijan to Turkey and to the East (China). The latter two projects, which are being currently implemented, prove real progress of Kazakhstan in diversification of export routes that seemed impossible 5 years ago. Kazakhstan is ahead of Russia, which is just working out the Eastern Siberia - Pacific Ocean route, as it has already constructed the oil pipeline towards the Chinese market. To some extent Kazakhstan left behind strategists that stuck defending internal national priorities of the European states and do not have courage to implement common for EU energy security strategy. But Kazakhstan is still dependent upon geo-economic preferences of its northern neighbour Russia that is absolutely un-interested in increasing the export potential of its strategic partner and simultaneously growing competition at the world markets.

But needs in new oil and gas sources keep on growing and nobody presently wants to "put all eggs into one basket". Thus, with a view of more active implementation of its State Program on KSCS development, Kazakhstan should develop its transport routes contributing to free export of energy products to open markets more actively. This in turn, will stimulate growth of hydrocarbons production and increase investment attractiveness of prospecting at the Caspian shelf.