IHS Global Insight Perspective
SOCAR and Kazmunaigaz have reached a series of agreements to expand their existing co-operation in order to ensure that additional Kazakh oil volumes can be exported via the Caspian Sea and across Azerbaijani territory onward to world markets.
The SOCAR-Kazmunaigaz agreements, including the planned joint use of infrastructure owned by SOCAR in order to facilitate the development of Kazakhstan's hydrocarbons, will further develop an existing inter-governmental agreement on Kazakh oil supplies to Azerbaijan.
The agreements between the two state-owned oil and gas firms should serve both countries' interests, giving Kazakhstan additional clarity on exports of future oil production from the Kashagan and Tengiz fields while ensuring Azerbaijan's prime transit role in the export of this growing output.
Building Bridges Across the Caspian
State oil and gas firms SOCAR and Kazmunaigaz took steps on Friday (2 October) to build on their existing co-operation and deepen their already-friendly relations. During a visit to Baku, the Azerbaijani capital, by Kazakh president Nursultan Nazarbayev, representatives of SOCAR and Kazmunaigaz signed a series of accords geared to facilitate the transportation of Kazakh oil supplies via the Caspian Sea and Azerbaijan onward to world markets. Agence-France Presse (AFP) reported that one agreement called for the two companies to "study the opportunity to jointly build a new pipeline from the Caspian coast near Baku to the Black Sea coast for the transit of Kazakh oil through Azerbaijani territory".
Any mention of construction of a trans-Caspian pipeline, be it to carry oil or gas, is likely to rile both Russia and Iran, the two Caspian littoral states that have objected to any subsea pipelines on environmental grounds and—not coincidentally—also have the most to lose (in terms of economic leverage, transit tariffs, and political influence over East Caspian producers) in any direct pipeline link across the sea. Kazakhstan and Azerbaijan are unlikely to actually realise the vision of an oil pipeline across the Caspian any time soon—particularly with Azerbaijan and Turkmenistan still at odds over their maritime border and no legally binding, multilateral agreement between the five littoral states covering a division of the sea's resources—but the latest agreement for them to study the "feasibility" of just such a pipeline indicates that they are not just dismissing the project either.
In the meantime, however, the SOCAR-Kazmunaigaz agreements show that the two state companies are moving forward to implement a more complex pipeline and barge transport system that will connect Kazakhstan's oilfields to Azerbaijan's export pipeline systems. With Kazakhstan anticipating a doubling of its oil production to 3 million b/d over the course of the next decade, the Central Asian state will need additional export capacity to get this output to markets. Azerbaijan, with its existing onshore and offshore oil and gas infrastructure, including the 1.2-million-b/d-capacity Baku-Tbilisi-Ceyhan (BTC) oil pipeline, is eager to ensure that the bulk of Kazakhstan's future oil production—and the transit revenues that this entails—flows via Azerbaijani territory. Already, some 100,000 b/d of Kazakh oil is exported via Azerbaijan, either via the BTC pipeline or via rail to Georgia's Black Sea ports.
Various Transport Options
SOCAR is keen to increase these volumes, making Azerbaijan a key transit state for Kazakh oil exports as well as a major producer in its own right (see "Related Articles"). Azerbaijan's resurgent oil boom has a finite lifespan, and even as throughput of Azerbaijani oil via the BTC is still increasing, volumes are expected to plummet from plateau levels by late next decade, giving Azerbaijan every incentive to lure Kazakh oil westwards across the Caspian in order to fill any available space on the BTC. Although there is talk of expanding BTC itself to accommodate volumes of up to 1.6 million b/d, another option is for additional Kazakh crude volumes to run via a combination of the 145,000-b/d Baku-Supsa pipeline and increased rail shipments through the expanded Azeri-Georgian rail network.
First of all, however, the Kazakh oil needs to find its way from oilfields to the Kazakh coast and then across the Caspian. Kazakhstan is already undertaking a project to build a new pipeline from Yeskene to a new port at Kuryk, from which the so-called Kazakhstan Caspian Transport System would then deliver the oil to Azerbaijan via a system of barges. The agreements between SOCAR and Kazmunaigaz would expand this to a Caspian Oil Transport System that includes Azeri infrastructure and onshore pipelines. A memorandum of understanding (MoU) signed by the two companies on Friday calls for "joint work on the technical and economic feasibility study for the TransCaspian project, a memorandum of understanding about cooperating in the oil pipeline Baku-Black Sea; and a memorandum about the joint use of gas and oil infrastructure that belongs to Socar for the development of Kazakhstan's hydrocarbon reserves". The overall transport system would see an expansion of Kazakh oil shipments via Azerbaijan to 500,000 b/d in the initial phase, rising to between 750,000 b/d and 1.2 million b/d. The cost of the trans-Caspian project, which would also entail new onshore pipelines in both countries and a purpose-built tanker fleet to deliver oil across the sea, has been estimated at more than US$3 billion.
Outlook and Implications
Additional details on implementing the transport project, including clarifying the role of foreign oil companies in Kazakhstan who are expected to supply the oil that will be sent to Azerbaijan via the system, must still be worked out. In all likelihood, the international consortium developing the Kashagan field—and potentially the Tengiz consortium as well—will be expected to help finance the cost of developing the system, perhaps in exchange for some equity share in the infrastructure put in place with their money. Kazmunaigaz has argued that it should hold a controlling stake in the Kazakh section of the system, while an international consortium already owns and operates the BTC pipeline, so the resolution of questions regarding the financing and equity structure of a merged trans-Caspian transport system is no small problem.
Nevertheless, both Azerbaijan and Kazakhstan have a strong incentive to get a deal done that will allow both SOCAR and Kazmunaigaz to play a larger role in the development and export of Caspian-region oil production. Both companies have taken a back seat to foreign firms in major oil development projects as their respective governments turned to international companies for desperately needed investment in the early post-Soviet years. Now, with both Azerbaijan and Kazakhstan continuing to emerge as major oil producers and exporters, SOCAR and Kazmunaigaz have a shared interest in increasing their own power. Whereas they are beginning to compete with each other outside of the Caspian region—particularly for refining and marketing opportunities in Europe—they can be better served in their home territory by joining forces, translating co-operation between Azerbaijan and Kazakhstan on the government level to the company level and ensuring that future oil production from Kazakhstan is sent across the Caspian for further export via Azerbaijan.
- Azerbaijan - Kazakhstan: 25 September 2009: Trans-Caspian Oil Transport System Progresses with SOCAR-Kazmunaigaz Venture
- Azerbaijan: 12 August 2009: The Rise of SOCAR and Azerbaijan on the Regional Stage
- Kazakhstan: 11 March 2009: Energy Minister Says Kazakhstan Wants 51% Stake in Caspian Oil Transport System
- Turkey: 4 November 2008: First Kazakh Oil Shipment Via BTC Reaches Turkish Port of Ceyhan
- CIS: 8 October 2008: BP Says Tengiz Crude to Begin Flowing Via BTC Pipeline This Month
- Kazakhstan: 25 January 2007: IOCs, Kazmunaigaz Sign Deal on Kazakhstan Caspian Transport System
- CIS: 9 June 2006: Kashagan Partners Eye US$4-bil. Trans-Caspian Oil Transport System to Connect to BTC Pipeline