CNPC Cashing Into Kashagan

BMI View : CNPC's success in clinching ConocoPhillips' stake in Kashagan over Indian rival ONGC supports our view of a conscious attempt by the Kazakh government to strengthen its energy ties with China. This could see more oil from Kashagan flow east to China, especially when the Atyrau-Alanshankou line is completed as part of the country's goal to raise oil exports to the Asian giant. Central and Eastern European countries hoping to benefit from new supplies coming online in Central Asia could thus be disappointed.

China appears to have edged out India in the fight for an 8.4% stake in the Kashagan oil field, one of the largest fields in the world. Kazakh national oil company (NOC) KazMunaiGaz (KMG) confirmed that its Chinese counterpart China National Petroleum Company (CNPC) has been chosen to take over the stake that US major ConocoPhillips is giving up. This leaves Indian NOC ONGC , which was also eyeing the same share, empty-handed. Other partners of the field are Eni , ExxonMobil , Royal Dutch Shell , Total and Inpex Corporation .

Given the strong hand of the Kazakh state in the country's oil and gas industry, we had anticipated this result as part of Kazakhstan's attempts to strengthen its political and economic ties with Beijing and to increase its exports to the large Chinese oil and gas market ( see 'Strengthening Hydrocarbons Ties With China', April 17; and 'Gas To China Adds To Russian Woes', May 31). With regard to China, this will be one of the largest acquisitions that CNPC has made to date. Quoting KMG's chief executive Lyazzat Kilnov, Reuters reported that CNPC will pay more than US$5bn for the stake.

Supporting Flows East

Kashagan is set to produce an initial volume of about 180,000 barrels per day (b/d), and its producers aim to raise output to 370,000b/d in Phase II of its development. The start-up of the field is one of the largest contributors to the growth we expect to see in Kazakh oil production, from 1.60mn b/d to 2.25mn b/d, over our forecast period from 2013 to 2022.

Kashagan Start-Up To Help Push Production HIgher
Kazakh Oil Production, 2012-2022 ('000b/d)

According to its operator North Caspian Operating Company , oil produced from Kashagan will be exported via pipelines and rail . S upplies can be delivered both to the western markets in Europe and to eastern markets in Asia. Crude destined for Europe can be transported via the Western Caspian Pipe Consortium route that travels from Atyrau to the Russian Black Sea port at Novorossiysk. Another possible western export route is to deliver crude to Russia's Transneft oil pipeline system.

The Atyrau-Alanshankou pipeline is also being built to support exports to the east. This line will link oil from Atyrau to the existing Atasu-Alanshankou pipeline that delivers Kazakh crude to China. The consortium is also exploring the possibility of developing another route that could involve a subsea pipeline transport oil to Azerbaijan, which will be fed into the Baku-Tbilisi-Ceyhan (BTC) pipeline to Turkey.

CNPC's entry could siphon much of Kashagan's output to China. In March 2013, state-owned KazTransOil had disclosed its intentions to raise oil exports to China by 20% to 401,644 b/d via the Atasu-Alashankou line over 2013. Although the Kazakh firm did not state where this increase of about 66,940b/d will come from, it is likely that Kashagan, which started initial production in late June, will provide some of this additional volume to China given CNPC's entry into the field.

This eastern flow is part of a bid to reduce the country's reliance on Russia for refined petroleum products. Kommersant reported that part of Kazakhstan's plan to deliver more crude oil in China is with the hope of importing refined products from China at a lower price than current product imports from Russia . While this could benefit Kazakhstan, lower-than-expected flows to the western markets as a result of the priority given to China would mean that Central and Eastern European countries hoping to reduce their reliance on Russian crude oil through increased flows of Central Asian oil, promised by large projects such as Kashagan, would likely be disappointed.

This article is tagged to:
Sector: Oil & Gas
Geography: Kazakhstan, China

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