Kazakhstan revives interest in BTC years after rejecting it
By Kerim Sultanov
News.Az presents an interview with Oleg Chervinsky, oil and gas analyst, publisher of Petroleum journal, and the Telegram channel “Oil and Gas of Kazakhstan. Facts and Comments”.
Q: What are the main tasks and objectives for Kazakhstan's national companies in the context of increasing oil supply volumes in 2024?
A: The changing geopolitical situation in the world has highlighted Kazakhstan's vulnerability, as it relies on Russia for more than 90% of its oil exports. In 2022, following the start of the war in Ukraine, the Caspian Pipeline Consortium's Tengiz-Novorossiysk pipeline faced three separate restrictions, lasting from several days to several weeks. The reasons cited were adverse weather conditions, a broken mooring device, and the need to clear WWII-era mines from the waters of the Novorossiysk port. These interruptions led to cuts in production at Kazakhstan’s largest fields, Tengiz and Kashagan, which transport almost all their volumes through the CPC. Hypothetically, if the CPC were to halt operations for even a month (due to sabotage or drone attacks at the Marine Terminal in Novorossiysk), Kazakhstan’s oil industry would collapse. Thus, in the summer of 2022, President Kassym-Jomart Tokayev instructed the government and the national company KazMunayGas to urgently develop alternative oil export routes.
This primarily involves the Caspian route and extending the pipeline to China. Additionally, a second issue has emerged for Kazakh oil producers. The oil extracted in the country, when mixed with Russian oil in the Atyrau-Samara pipeline, has traditionally been sold as Urals blend, whose price has dropped below Brent due to sanctions. In June 2022, Kazakhstan introduced its own crude blend, KEBCO (Kazakhstan Export Blend Crude Oil). While chemically similar to Urals, KEBCO is not subject to sanctions, making it highly demanded in Europe and more expensive than Brent. Kazakhstan is now successfully selling this blend to Germany and Romania, with Hungary and Croatia also expressing interest. Another challenge for Kazakhstan in diversifying export routes is the need to upgrade the Aktau port to increase its capacity and the lack of a domestic tanker fleet. Anticipating "big" Kashagan oil, Kazmortransflot had once built a sufficient number of tankers and support vessels. However, after the Kashagan consortium chose the CPC as their export route, these tankers were sold off, and now KazMunayGas, in cooperation with a UAE partner, is beginning to rebuild the fleet.
Q: How might the planned rise in oil supply volumes through the Baku-Tbilisi-Ceyhan route affect the economic and geopolitical situation in the region?
A: This would create a real alternative to the Caspian Pipeline Consortium, through which more than 80% of Kazakhstan’s oil is currently exported. In March of this year, the heads of KazMunayGas and SOCAR clearly expressed their intention to deepen bilateral cooperation in this field. The negotiations resulted in an agreement to gradually scale up the volume of Kazakh oil transit through Azerbaijan and a memorandum of strategic cooperation on the sale of Kazakh oil. The significance Kazakhstan attaches to this cooperation is underscored by the fact that the documents were signed in the presence of both countries' presidents.
The agreement on phased volume increases provides for boosting the shipment of Kazakh oil via the Aktau-Baku-Tbilisi-Ceyhan route to 2.2 million tons per year. The initial agreement signed in 2022 specified the transportation of 1.5 million tons annually. The development of this export route is constrained by the high tariffs for third-party shippers through the BTC pipeline, in addition to the infrastructure's unpreparedness for larger volumes. As part of the signed agreement, the parties agreed to continue discussing tariff reductions and the transportation of Kazakh oil via the Baku-Supsa route. The strategic cooperation memorandum set out the general conditions and principles for the purchase and sale of Kazakh oil for further refining at SOCAR refineries, and subsequent trading on regional and global markets.
Q: What are the main advantages and potential challenges for Kazakhstan and Azerbaijan associated with increasing oil transit through the Aktau-Baku-Tbilisi-Ceyhan route?
A: If you recall, Kazakhstan was once invited to cooperate in building the Baku-Tbilisi-Ceyhan pipeline, but the first president, Nursultan Nazarbayev, opted for the Caspian Pipeline Consortium instead. When the Kashagan consortium was preparing to begin commercial production, KazMunayGas and SOCAR jointly developed the Kazakhstan Caspian Transportation System project, which included the construction of the Eskene-Kuryk pipeline, an oil terminal at the Kuryk port, the modernization of the Sangachal terminal in Azerbaijan, and other work. This required significant investments, which the Kashagan shareholders, having already invested about $60 billion in the field’s development, were unwilling to make. After the CPC expansion project, the consortium allocated necessary pipeline capacities for Kashagan oil at a favourable tariff, negating the need for an alternative route through Azerbaijan.
However, as I mentioned, politics intervened, and the issue of alternatives is back on the agenda. Measures are being taken to increase Kazakh oil shipments through BTC. But we must be realistic – the route through Baku and Ceyhan will never fully replace exports via Novorossiysk unless a major force majeure occurs. The simple reason is the tariff. The transit tariff through the Tengiz-Novorossiysk pipeline, according to open sources, is three times lower for Kazakh shippers than the Aktau-Baku-Tbilisi-Ceyhan route. Moreover, the main shippers of the CPC are also key shareholders of the CPC. Thus, the BTC route will be supplementary or a reserve route, at least at current tariffs. Additionally, as my Azerbaijani colleagues mentioned, the throughput volume for Kazakh oil through the BTC pipeline is limited to 3 million tons due to concerns that higher volumes would deteriorate the quality of the Azeri Light blend, consequently lowering its price, which is not in the interest of Azerbaijani shippers.
Q: What steps are needed to resume the operation of the Baku-Supsa pipeline?
A: As far as I know, the pipeline is currently idle, so a technical audit is necessary to understand its condition and the required investment for resuming operations. There was information about illegal taps and oil theft on the section passing through South Ossetia during the pipeline’s operation. If true, this issue needs to be addressed and resolved.
Q: How critical is the resumption of the Baku-Supsa pipeline currently, and what factors determine this necessity?
A: As I mentioned earlier, the heads of the two national companies confirmed in March their readiness to continue consultations on cooperation to resume the Baku-Supsa pipeline. Behind the scenes, there was talk of potentially transporting 3 million tons of Kashagan oil through this pipeline. Honestly, I am sceptical about this probability. Let me explain why. No bank will finance any pipeline project without long-term guarantees of oil shipments from shippers. Can Baku-Supsa, operated by BP, obtain such guarantees from the Kashagan consortium shareholders, who are primarily interested in the CPC and BTC routes? I highly doubt it. This might only happen when the Kazakh government forces the Kashagan shareholders to implement Phase 2 of the field’s development, leading to a sharp increase in production volumes and a shortage of transport capacity. Not before that…
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