Kazakh, Azeri 2020 crude output to fall on coronavirus impact, OPEC+ deal

Moscow — The energy ministries of Kazakhstan and Azerbaijan said Friday that they have begun implementing crude production cuts under the latest OPEC+ agreement.

The cuts are set to contribute to an overall drop in crude production in 2020, although some analysts see the demand and economic impact of the coronavirus pandemic as playing a bigger role.

"We do not anticipate that either Kazakhstan or Azerbaijan will voluntarily curtail significant volumes," Paul Sheldon, chief geopolitical advisor at S&P Global Platts Analytics. "However, economic curtailments may be framed as voluntary in the former Soviet Union and many other regions, especially as storage approaches tank tops in May and June."

The impact of the coronavirus on demand and resulting price volatility is a major risk for both countries, which are dependent on oil and gas revenues. The IMF estimates fiscal breakeven oil prices for 2020 at $78.5/b for Azerbaijan and $88.5/b for Kazakhstan.

The coronavirus pandemic is also pushing up production costs, and raises the risk that a major outbreak could hit production at large projects with large workforces.

Kazakhstan

Kazakhstan's baseline for the latest round of production cuts is set at 1.709 million b/d. Its new output targets are 1.319 mil b/d in May and June, 1.397 mil b/d in July to December and 1.475 mil b/d in 2021 and through April 2022.

Platts Analytics forecasts that Kazakhstan may use scheduled maintenance at its three giant fields Tengiz, Kashagan and Karachaganak to support compliance.

Kazakhstan's energy ministry said Friday that it plans to implement production cuts at medium and large fields in May and June. Smaller projects are also expected to see output declines, but this will be due to poor economics, it said in a statement.

Akbar Tukayev, deputy director at the Kazakh Institute of Oil and Gas, said the biggest declines will be in the Aktobe and Kyzylorda regions. He expects that to result in a decline in exports of around 5-7%, but it will have a bigger impact on deliveries to oil refineries.

"First of all, the reduction in production will affect supplies to Kazakhstan's oil refineries, as refineries are already overstocked -- storage facilities are full, and refining volumes have decreased," he said.

Kazakhstan has also introduced a lockdown to stop the spread of the coronavirus, which has already been detected among workers at the giant Tengiz field.

"This will lead to a decrease in production, and restrict oil producers' and oilfield services companies' operations," Tukayev said.

Azerbaijan

Azerbaijan's production baseline under the latest OPEC+ agreement is set at 718,000 b/d. Its target output is 554,000 b/d in May and June, 587,000 b/d in July to December and 620,000 b/d in 2021 and through April 2022 is 620,000 b/d. This cut will be divided proportionally across producers, the energy ministry said Friday.

"Production cut quotas were divided in proportion to the production volumes of SOCAR's oil and gas companies and production sharing agreements in our country, as well as oil producers operating under such agreements," the ministry said in a statement.

On Thursday Socar said the plan was to "reduce production at oil and gas fields that are mainly onshore and have high production costs, and to continue production at offshore fields with higher profitability." Socar is choosing where to cut production based on economics, technical considerations, safety and potential damage to fields.

Chris Tooke, associate director, political risk, at consultancy GPW Group, said safety concerns could complicate cuts at Azerbaijan's biggest producing project, Azeri-Chirag-Gunashli.

"There are also safety issues that may delay shutdowns of wells where there are high-pressure reservoirs like ACG in Azerbaijan and Kashagan in Kazakhstan," he said. "This may shift more of the burden to the Guneshli field in the shallow water area of the Caspian -- this is Socar's biggest fully-owned asset, so if much of the reduction comes from here, the burden will indeed fall on Socar."

Socar said output there will fall by 76,000 b/d in May and June. It will then increase output by 27,000 b/d up to the end of 2020. From next year it will add 26,000 b/d of production.

"Other operating companies will initially reduce production by 3,000 b/d, increase by 1,000 b/d in July-December, and increase by another 1,000 b/d next year," Socar said.