State-Run Program of Development of Kazakhstani Sector of the Caspian Sea
State-run Program of Development of the Kazakhstani Sector of the Caspian Sea (hereinafter referred to as the Program) was elaborated with due consideration of the Government Program for 2002-2004, Strategy of Energy Resources Exploitation, and Strategic Plan of Development of the Republic of Kazakhstan up to 2010.
The ultimate goals of the Program have been defined as contribution to sustainable economic growth and upgrade of life quality of the Kazakhstani citizens through rational and safe development of the Caspian hydrocarbons; and encouragement of related sectors’ development.
By 2002, most O&G fields under development had reached peak levels of annual production. Further growth of ashore production output was first of all linked to intensified development of such oilfields as Tengiz and Karachaganak. At the same time, research has shown that major gains in explored reserves and in hydrocarbons production are expected to take place in the Caspian aquatic area. According to world practice, starting from the point of exploration works in off-shore, it normally takes 8-10 years to get to the commercial production stage.
The Program covers 2003-2005 and provides forecast for up to 2015. The Program takes into account growing importance of off-shore O&G, and integrates principles of rational subsoil use and environmental safety requirements. The Program envisages turning of the KSCS into a major hydrocarbons production zone in Kazakhstan.
Apart from development of O&G in the KSCS, the Program provides for development of associated production, social and environment-protection facilities.
For the recent 30 years there have been certain trends formed that have the global GDP growing 3,3% per annum, with the demand for oil as the major energy source growing by 1% per annum. Hydrocarbons consumption lagging behind from GDP growth is attributed to resource-saving programs implemented primarily in industrialized nations. At the same time, the share of developing countries in the global GDP and in hydrocarbons consumption has been steadily increasing. This adds to the problem of hydrocarbons supply sufficiency.
According to international experts, with the current trends maintained, the global explored oil resources will only suffice for the next 40-50 years. Inclusion of the KSCS (Kazakhstani Sector of the Caspian Sea) resources into the global explored reserves has become a major component of global energy strategies. Kazakhstan is to be ready for flexible mix of strategies of systematic relocation of oil production to the Caspian aquatic area with speed-up of selected promising projects.
Proximity to such dynamically developing nations as Russia and China opens wide opportunities for Kazakhstani hydrocarbons exports. To ensure entering into the markets of the two countries, it is vital to develop and enhance trunk pipelines system.
Legal status
Emergence of independent states in the post-soviet territories entailed search for solutions to multiple problems arising upon gaining sovereignty by the once Soviet republics. One of the problems was territorial issues. Caspian littoral states faced the necessity to ensure fair and civilized delimitation of the Caspian Sea. If up to 1991 the Sea had belonged to only 2 states, now its waters wash the coastlines of 5 sovereign states – Russia, Iran, Azerbaijan, Kazakhstan and Turkmenistan.
As of today, the Kazakhstani Sector of the Caspian Sea is regulated by the following agreements: November 29, 2001 Kazakhstan and Azerbaijan signed agreement on delimitation of the Caspian Seabed, with a Protocol to the Agreement being signed in Baku February 27, 2003. In the nearest time, Kazakhstan, Azerbaijan and Russia hope to sign agreement on the junction point of lines delimiting adjacent zones of the seabed and subsoil of the Caspian Sea, which will finalize the process of legal registration of the national sea bottom sectors of the three states. Should the delimitation of the sea bottom and subsoil be successfully finalized, the Kazakhstani sector will be the greatest in territory terms and will make up about 30%, while Azerbaijani sector will total 21%, Turkmenistan’s sector - 20%, Russian sector - 17% and Iranian sector 12%.
Speed-up of elaboration and adoption by all of the littoral states of the Frame Convention on the Legal Status of the Caspian Sea incorporating issues of the seabed delimitation is an important political move in putting in place legal ground for the Kazakhstani sector exploration.
Investments
Up to recently, investments into development of the Caspian hydrocarbons potential were channeled within the frameworks of two projects – Northern Caspian Project and KazakhOil – JNOC Project. Northern Caspian Project is a logical continuation of the works started in 1993 by the International Consortium; it has been implemented on the basis of the PSA signed [on sea blocks] by Kazakhstan. As of December 31, 2002, investments within the Northern Kazakhstan Project reached USD 1 714,9 million.
Works on the KazakhOil – JNOC Project started in March 1999. Expenses totaled USD 50 million. According to the basic agreement signed by KazakhOil and JNOC there was geological exploration performed, including areas Terenozek – Prorva and Northern Slope of the Bozashin Arch located in hard-to-reach zones of the intermediate part of the Caspian Sea.
KSCS development calls for solutions to problems reflecting inter-industry nature of tasks of long-run extension of maritime O&G operations, dependence of many development parameters on the composition of hydrocarbons and on geologic and technical conditions at the oilfields.
Main targets in KSCS development:
- Gains in explored hydrocarbons resources and bringing of production to a stable high level;
- development of multimodal system of hydrocarbons transportation;
- reprofiling and modernization of domestic machine-building enterprises;
- development of the maritime fleet and sea ports;
- build-up of the local engineering capabilities; training of domestic specialists;
- enforcement of health protection and environment protection measures;
- development of petrochemistry enterprises.
The order of the KSCS resources development will be based on uniform allocation of blocks to subsoil users in northern, central and southern parts of the sea. Blocks adjacent to protected natures sites, recreation zones, defense sector facilities and large population clusters can be an exception.
The Government shall be in charge of defining blocks to be offered for tenders, and of defining the order and conditions of setting them forth for tenders.
The order of setting of blocks forth for tenders is a package of procedures targeted to ensure staged and rational development of production potential; the package includes defining of blocks’ territory, arrangement of tenders and negotiations with prospect investors.
At the present time, there are about 23 undistributed blocks, exploration of some of them is planned to be financed out of the state budget. To define the most suitable subsoil users for both exploration and development, the plan is to offer for tenders at least 3 blocks per annum. At the same time, there will be blocks offered for additional exploration. Thus, the initial stage will cover 7-8 years (up to 2010), in the course of which necessary amendments could be inserted in the schedule of development up to 2015 with a view of transportation and marketing issues.
On-land production has been performing by 33 companies at over 100 oilfields located in 5 oblasts. Major gains in production take place at Tengiz, Karachaganak, Uzen and some other oilfields.
Research showed that substantial gain in hydrocarbons production is expected to take place in the KSCS. Recoverable reserves of the KSCS stand at 8 billion tons. At the first stage – up to 2005 – major works included drilling of exploratory wells in blocks of first priority.
Forecast KSCS resources allow bringing production at the KSCS oilfields to 100 million tons per annum and maintaining the said level for 25-30 years. Ad-initium extractable resources at the Kashagan oilfield make up somewhat 1,7 billion tons. Annual production at Kashagan will make up: 0,5 million tons in 2005, 22 million tons in 2010, and 60 million tons in 2015. Production at other blocks of first priority is expected to start in 2009-2010.
According to preliminary estimates, the Program implementation will allow bringing production at maritime oilfields to 0,5 million tons in 2005, 40 million tons in 2010, and 100 million tons by 2015.
Export routes
As KSCS oilfields get developed, the need for diversification of export routes keeps growing. Enhancement of export routes implies multimode transportation of hydrocarbons, with efficient combination of capabilities of pipe, railway and sea transport.
Below is the list of current and prospect routes for transportation of hydrocarbons from the KSCS oilfields:
- Main oil pipe Uzen – Atyrau – Samara. One of transit export routes for Kazakhstani oil via Russia. Given planned growth of oil production in Western Kazakhstan, there is a plan of staged build-up of the pipe’s carrying capacity.
- Baltic Pipelines System is a promising route to increase Kazakhstani oil supply to the market of East Europe and Baltic States.
- Caspian Pipeline Consortium (CPC). Given the attractiveness of the Mediterranean market for high-quality grades of Kazakhstani oil, CPC is a major export route. In this connection, carrying capacity of the pipe is planned to be expanded to 58 million tons by 2008, and to 67 million tons by 2011.
- Sea port of Aktau. Oil transfer capacities of the port and/or those of the Aktau port branches in the bays of Bautino and Kuryk is planned to be increased to 8 million tons per year.
The current transport systems will be sufficient for export of domestically produced oil up to 2009.
When in 2009 oil production in Kazakhstan hits the target of 92 million tons per year, including 21 million tons at KSCS, there will be a need for construction of the first new export pipeline. When production hits the mark of 140 million tons per year, including 54 million tons at the KSCS, there will be a need for construction of a second new export pipeline by 2012.
In this context, the following oil transportation routes are being considered:
- Aktau – Baku (Baku – Tbilisi Ceyhan (BTC) pipe).
- Project Western Kazakhstan – China. Access to the Chinese market and to Asia Pacific market for the Kazakhstani as a promising export route.
- There’s a master agreement between the Kazakhstan Ministry of Energy and Mineral Resources and the CNPC to construct a pipeline running from Western Kazakhstan to Western China.
- Project Kazakhstan – Turkmenistan – Iran. According to preliminary research, this route is economically viable to export Kazakhstani oil to the Gulf countries. The project stipulates that the oil pipe starts in Western Kazakhstan and runs via Western Turkmenistan to northern Iran.
Financial Strategy
In 2006-2010, investments into the KSCS development are expected to reach USD 0,3 billion, and another USD 15,6 billion in 2011-2015 (with the exchange rate being KZT 161 = USD 1).
The core of the financial component of the Program is full assumption of exploration-related risks by subsoil users and investors up to the approval of the first plan of development.
To ensure gains in O&G production, it is possible to attract additional financial resources from Kazakhstani sources through issues of debt by subsoil users. The securities can be then purchased by domestic accumulation pension funds, second-tier banks, and other financial institutions, as well as individuals.
Maximum possible attraction of internal investment capabilities for the Program implementation should be a priority component of the financial strategy.
The Program implementation allows bringing oil production in the KSCS to 100 million tons in 2015. Assumed gas production will make up 63 billion cubic meters in 2015.
Performance of oil operations in the KSCS calls for vast investments: the need for investments in 2006-2010 will reach KZT 1545 billion ($10,3 billion).
Inflow of major part of oil revenues is expected upon completion of the first and second stage of development. At the third stage, the state budget is expected to enjoy substantial revenues coming from maritime operations.
