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Same-Day Analysis

Kashagan Partners Eye US$4-bil. Trans-Caspian Oil Transport System to Connect to BTC Pipeline

Published: 09 June 2006
Several oil companies with a stake in Kazakhstan's massive Kashagan oilfield are contemplating a US$4-billion transportation system that would carry oil across the Caspian Sea, where it could be exported via Azerbaijan and the 1,770-km Baku-Tbilisi-Ceyhan (BTC) oil pipeline.

Global Insight Perspective

Significance

A feasibility study for a trans-Caspian pipeline and barge transportation system, which would export Kashagan crude via the Baku-Tbilisi-Ceyhan (BTC) oil pipeline to world markets, is under way, according to an official from Total.

Implications

The proposed transport system could take the bulk of output from the massive offshore Kazakh field to world markets via the BTC, although construction of any trans-Caspian pipeline is likely to be opposed by both Russia and Iran.

Outlook

The ambitious project will get a boost of support with the expected signing of a bilateral agreement between the Azeri and Kazakh governments later this month, but actual construction of the pipeline component of the transport system looks like a distant prospect without a multilateral agreement on the division of the Caspian.

An Outlet for Kashagan

With the long-awaited loading of the first tanker with BTC oil now finally achieved (more than one year after the 1,770-km pipeline was commissioned), the equally lengthy negotiations between Kazakhstan and Azerbaijan over the former's desire to join the project look set to finally be concluded. The Kazakh government has long sought to keep its export options open for its expected future oil output, but with the Kazakhstan-China and the Baku-Tbilisi-Ceyhan (BTC) pipelines now in operation, the Central Asian country is now looking to make a more solid commitment of oil volumes (see 'Related Articles' below). Interfax reported yesterday that Kazakh President Nursultan Nazarbayev will officially sign a bilateral agreement between the Azeri and Kazakh governments on 17 June that will see Kazakhstan officially join the BTC.

The Kazakh and Azeri governments have already signed a series of supply agreements under which Kazakhstan will supply oil volumes - initially 150,000 b/d, rising to 400,000 b/d - for re-export via the BTC, but exactly where those supplies will be coming from has been left unsaid. The unspoken assumption was that new oil from western Kazakhstan, probably some volumes from the country's massive Kashagan project, would be transported across the Caspian for re-loading in the BTC. Yesterday, an official from French supermajor Total gave voice to those assumptions, revealing that several Kashagan partners were mulling plans for a trans-Caspian oil transport system that would allow them to export oil via the 1-million-b/d-capacity BTC.

Speaking to reporters at a Caspian oil and gas conference in Baku, Alain Przrybysz said that the system under consideration would involve construction of an 800-km pipeline from the Kashagan field to the Azeri coast, as well as two terminals on both sides of the Caspian and a fleet of tankers to carry additional oil. The proposed "Kazakhstan Caspian Transport System" would cost up to US$4 billion and could be operational by 2010, according to Przybysz, allowing it to carry oil from the early stages of development of Kashagan, which is slated to come onstream by 2008. The Kashagan field, with proven reserves of between 9 and 13 billion barrels, is expected to boost output to a peak of 1.2 million b/d by next decade.

Feasibility Versus Reality

Kashagan-BTC Connection

Company

Stake in BTC

Stake in Kashagan

Eni

5%

18.52%

Total

5%

18.52%

ConocoPhillips

2.5%

9.26%

Inpex

2.5%

8.33%

Przybysz did not say how much oil the transport system would be capable of carrying, but the four companies that have stakes in both the Kashagan project and the BTC pipeline - Eni, Total, ConocoPhillips, and Inpex - together hold more than 50% of the Kashagan project. These companies' share of Kashagan oil would more than compensate for any shortcomings in BTC throughput, although BP - which is heading up the main Azeri offshore project that is providing the bulk of oil for BTC - has said it doesn't expect there to be any under-utilisation of the pipeline once the Azeri-Chirag-Guneshli (ACG) project reaches peak production of over 1 million b/d. The four Kashagan partners only have a combined 15% of capacity rights on the BTC in any case.

Thus, rather than not having enough oil for the BTC - the longstanding fear of pipeline planners - a trans-Caspian oil transport system could result in a situation where there is too much oil for BTC. No matter; the BTC Pipeline Company, anticipating just such a problem with a potential Kazakhstan-Azerbaijan oil supply agreement, has already said that capacity on the BTC could be expanded by looping the line and adding more pumping stations. Capacity could reach 1.7 million b/d, according to pipeline proponents. Chevron, which is operating the Tengiz oilfield development project onshore in western Kazakhstan, has also suggested it could export some oil volumes via the BTC as it continues to run into opposition from the Russian government in boosting capacity on the Caspian Pipeline Consortium's Tengiz-Novorossiisk pipeline.

In a nod to the complex geopolitics of the Caspian oil bonanza, Przybysz also said that the trans-Caspian transport system could be linked to the Russian, Chinese, and Iranian systems. This would allow Kashagan oil to flow via alternative pipeline systems and eliminate the need for an expansion of the BTC, but it would also likely raise objections from the U.S. government, which is strongly opposed to any Caspian oil flowing via Iran. On the other hand, a top Iranian official earlier this week turned heads with a declaration that Iran itself could join the BTC pipeline and thus export some of its own Caspian oil via BTC. Mahmood Khaghani, the chief of the Caspian department in the Iranian Oil Ministry, told reporters at the same Baku oil conference that improving relations between Azerbaijan and Iran could result in Iran pumping oil from the southern Caspian via BTC.

Outlook and Implications

Khaghani's scenario looks far-fetched, at best, at this point, given the tension between Iran and the international community over the former's nuclear ambitions, but also because Iran is still exploring for oil in its sector of the Caspian, with no production to speak of. Nevertheless, Khaghani's comments suggest a more optimistic view from Iran now that the BTC - long derided as an anti-Russian, anti-Iranian political pipeline supported by the U.S. - is now a reality.

However, unless Iran takes an equally realistic view in the debate over the division of the Caspian Sea, the prospect of a trans-Caspian oil pipeline delivering Kashagan oil to Azerbaijan for re-loading and export via the BTC is just as far-fetched. Having lost the "BTC war" to keep Azerbaijan from exporting its oil to world markets via Turkey (rather than via Russia or Iran), neither the Russian nor Iranian governments appear inclined to let Kazakhstan and its enormous oil volumes slip away without a fight. A resolution on the legal status of the Caspian Sea and a division of its resources is now being held up mainly by Iran's insistence on a share far larger than geography would indicate, but the debate over the division of the Sea has become a proxy battle over oil and gas transit revenues.

Both Iran and Russia remain opposed to trans-Caspian oil and gas pipelines on environmental grounds, but the real reason is that both are seeking to exercise control over the flow of oil and gas exports from Kazakhstan and Turkmenistan. Thus, until there is a multilateral agreement on the division of the Caspian by the five littoral states, a trans-Caspian oil transport system will necessarily be limited to barge traffic.

Related Articles

  • CIS: 7 June 2006: BTC Consortium to Pay BOTAS for Overruns; Exports to Be Temporarily Halted
  • World: 29 May 2006: First Tanker with Azeri Oil Begins Loading in Turkey
  • CIS: 11 May 2006: Kazakhstan Close to Joining BTC Pipeline
  • CIS: 15 February 2006: Transneft Links Approval of CPC Expansion to Bosphorus Bypass Pipeline
  • CIS: 12 October 2005: Azerbaijan, Kazakhstan Agree on Oil Supply Deal for BTC Pipeline
  • CIS: 25 May 2005: BTC Pipeline Officially Opened
  • CIS: 19 April 2005: Azerbaijan, Kazakhstan Plot Expansion of BTC to Carry Kashagan Crude
  • World: 18 April 2005: Will Caspian Oil Rush to World Markets?  
  • CIS: 5 April 2005: Unocal Acquisition Gives ChevronTexaco a Caspian Oil Bridge
  • CIS: 10 June 2003: Will They or Won't They? Kazakhs Showing Greater Interest in Using BTC Pipeline
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