Kazakhstan and Azerbaijan have culminated years-long negotiations with agreements to increase trans-Caspian oil exports across the Caspian Sea, supplementing Azerbaijani crude in the Baku-Tbilisi-Ceyhan (BTC) pipeline. Still more significant, redevelopment and expansion of ports on Georgia’s Black Sea coast now prepare the way for Kazakhstani crude to enter the Odessa-Brody pipeline (OBP), which will be reversed again so as to flow east-to-west, and so to reach world markets by way of Gdansk. This oil will come from the massive offshore Kashagan field or even the onshore Tengiz field itself.

Background to trans-Caspian oil exports

The Kashagan field in the Kazakhstani sector of the Caspian Sea remains the largest oilfield discovered since Prudhoe Bay, Alaska, in 1968. Measuring 25 by 45 miles, two and a half times the size of the nearby and better-known onshore Tengiz field, it is routinely ranked as the fifth or sixth biggest in the world and has the largest reserves of any oilfield outside the Middle East. These reserves are currently estimated at 38 billion barrels, of which up to 13 billion are judged recoverable. However, a combination of formidable technical obstacles has delayed the field’s entry into production.

For example, temperature extremes range from –25 to +100 degrees Fahrenheit (-30 to +40 Celsius). The waters are shallow, generally no more than 10-12 feet deep, and freeze over for at least four months of the year on average. Also, the reservoir itself is rather deep and under very high pressure. Moreover, the sulfur content is estimated to be between 16 and 20 per cent, and would corrode pipelines if not treated and removed beforehand. Finally, Kazakhstani law requires that the associated natural gas be captured rather than flared, and it also has provisions requiring appropriate care be taken not to damage the environment, including delicate, protected plants and animals.

About 80 percent of Kazakhstan’s oil has nowhere to go today, other than through Russia’s pipeline system. Half the remainder is exported through the Georgian Black Sea port of Batumi, the seaside capital of the Georgian autonomous province of Ajaria; the rest goes to China. So Kazakhstan has now decided to construct a 590-mile pipeline, for Kashagan oil in particular, running from Eskene, where Kashagan’s onshore processing facility will be located once full-field development gets under way, to the port of Kuryk, near Aqtau. Starting at 500,000 barrels per day (bpd), its volume would later be increased to 750,000 bpd; to this, another 400,000 bpd may be added by doubling the capacity of the Aqtau port itself.

This pipeline, provisionally estimated to cost US$3 billion, will be the main section of a projected Kazakhstan-Caspian Transportation System (KCTS) that will include expanded and upgraded ports as well as construction of tanker fleets and, if necessary, additional pipelines within Kazakhstan itself. Parties to this agreement are the national energy trust KazMunaiGaz (KMG), TengizChevrOil (TCO, the consortium developing the Tengiz field, led by Chevron), and Agip KCO (the consortium developing the Kashagan field, formerly led by Eni: comprising the national company KMG, holding 16.81%; Eni, Total, and ExxonMobil, and Shell, each holding 16.66%; and ConocoPhillips and Inpex, each holding 8.28%).

Increased trans-Caspian oil exports: The implications

Earlier this decade, when it was thought that Azerbaijani offshore oil might not be plentiful enough to fill the BTC to maximum capacity, and when Kashagan seemed on-track for early development, oil from Kashagan was considered a prime candidate for topping off the BTC. That is because the Kazakhstani government had been counting on Russia to make good on its promises to double the volume of the pipeline of the Caspian Pipeline Consortium (CPC) from 615,000 to nearly 1.3 million bpd, so as to accommodate increased production at the onshore Tengiz field. Yet despite such promises, as well as repeated public statements by Russian leaders at the highest level, Russia’s commitments to expand CPC pipeline volume have not materialized. Regardless whether this failure is due to internal Russian bureaucratic and interregional squabbling or to the unwillingness of the Russian leadership to act on its words, the result for Kazakhstan has been the same.

TengizChevrOil already exports about 120,000 bpd by trans-Caspian oil exports from Kazakhstan by barge to the Sangachal terminal at Baku, whence then overland by railcar to Batumi. Kulevi, on the Georgian coast near Poti on the Black Sea, is the site of a new export terminal opened only two months ago. It is planned to handle about 100,000 bpd of “late oil” from Azerbaijan to start with, but its capacity can be doubled within two years, and then doubled again if necessary to handle further oil from Kazakhstan. It is not out of the question that Kazakhstan later adds further elements to the Eskene-Kuryk pipeline, effectively expanding the KCTS so as to decrease its dependence on the pipeline of the Caspian Pipeline Consortium (CPC), which runs from the Tengiz into Russia and then across to Novorossiisk on the Black Sea.

Tankers from Batumi and Kulevi/Poti can take Kazakhstan’s as well as Azerbaijan’s oil to Ukraine over the Black Sea for insertion into the Odessa-Brody pipeline (OBP). This pipeline, finished in 2001, lay empty for three years because Russia refused to allow transit of oil from Kazakhstan that would have been destined for Europe. So instead of flowing southeast-to-northwest, the OBP has since 2004 instead flowed northwest-to-southeast, carrying Russian oil domestically inside Ukraine. Now that Kazakhstani oil will have another route to the OBP, its flow will be reversed back to the originally intended direction. From Brody, the oil will flow to Plock, Poland, since higher world prices have made this continuation of the OBP economically justifiable to construct; from Plock, an existing pipeline goes to the port of Gdansk and thence to world markets. Since Kashagan is now not planned to enter production until 2013, this project can, if necessary, use oil from Tengiz or even the Azerbaijani offshore in the meantime.

Conclusion: Prospects for trans-Caspian oil exports

Both Tengiz and eventually Kashagan oil could conceivably reach China. Already, a pipeline runs to the Caspian port of Atyrau from Kenkiyak in the Aktobe region of western Kazakhstan, where China has industrial interests in the country’s hydrocarbon industry. Also, the Kazakhstan-China pipeline finished in 2006 runs from Atasu in the center of the country to the Dushanzi refinery in China. Between Aktobe and Atasu, an existing pipeline already runs roughly halfway, from Kumkol to Atasu.

For China to receive Tengiz oil, then, it would need only to build the missing segment from Kenkiyak to Kumkol, and reverse the Aktobe-Atyrau pipeline so that it flows from west to east. The result could eventually boost Chinese imports of Kazakhstani oil from 100,000 to 400,000 bpd, but whether it happens, or how fast, depends crucially on the accessibility of oil from Kashagan. Kazakhstan’s decision in favor of the KCTS and its westward route for Kashagan suggests that the Kazakhstani leadership may not be too keen to repeat with China its mistake of depending too much on Russia.

The date for Kashagan’s first production was originally set at 2005, but this has been ratcheted back several times over the years until, less than ten days ago, the year 2013 was finally established. This is likely to be definitive, as Kazakhstani law will subject the members of Agip KCO to fines and penalties otherwise. Another field near Kashagan, called Kalamkas, has 500 million barrels of non-sulfurous oil that is relatively easy to lift, not to mention 3.5 trillion cubic feet (100 billion cubic meters) of natural gas. If it were desired to give KCTS an earlier launch, then Kalamkas could be developed faster than Kashagan and would produce 100,000 bpd within four years from the start of development.

[First published in Central Asia – Caucasus Analyst, vol. 10, no. 14 (9 July 2008): 3–5.