Uncertainty, tension shroud Kazakhstan's Kashagan oil expansion

Kazakhstan's challenging Kashagan oil project in the Caspian Sea is dogged by uncertainty over planned production increases and particularly gas handling capacity, as authorities fear targets may be missed, relations with partners grow strained, and the possible outlines of a way forward emerge.

Kashagan, developed by a consortium of global majors plus China's CNPC and Japan's Inpex as well as KazMunaiGaz, is estimated at to be at 9 billion-13 billion barrels of reserves. It has long been viewed as one of the world's most complex oil projects; investment exceeded $50 billion by the time stable production was achieved in 2016.

Tensions over what is Kazakhstan's second-highest producing oil field are reflected in a national development plan signed July 30 by President Kassym-Jomart Tokayev, which stresses the "paramount" importance of increasing Kashagan output to 700,000 b/d by 2030 -- up from around 400,000 b/d -- and warns of problems with a lack of gas processing facilities.

The document notes oil and gas account for 50% of national exports, the largest part being the 1.5 million b/d CPC Blend crude grade, to which Kashagan is the second-highest contributor behind the Chevron-led Tengiz project.

The industry has long wrestled with how to handle the sulfurous gas associated with production from Kazakhstan's three largest oil fields. The third-highest producing field, Karachaganak, reinjected 12.7 Bcm of gas in 2023, or 57% of the gas it produced, and relies on gas processing facilities in neighbouring Russia; oil output from the field was 230,000 b/d.

A particularly fraught issue is how much gas reinjection is needed to maintain reservoir pressure over the life of projects, and how much to direct to a domestic market hungry for gas and still dependent on coal. Adding gas injection facilities at the offshore artificial islands built for Kashagan is pricey, but without a solution there can be no oil output increase.

Increasing pressure and uncertainty

Plans recently outlined by state gas company QazaqGaz for an increase in gas processing capacity on the Caspian seashore to handle Kashagan gas and send it to market reflect these concerns, but risk adding to confusion.

QazaqGaz is not a member of the consortium that operates Kashagan, the North Caspian Operating Company, unlike its oil counterpart KazMunaiGaz, and the views of NCOC are unclear.

In February, QazaqGaz signed a contract with Qatari contractor UCC Holding during a visit to the country by Tokayev for the construction of two new gas processing plants of 1 Bcm/year and 2.5 Bcm/year, respectively, with the first to be completed in 2026 and the second in 2028-29. Tokayev's office confirmed these were intended for Kashagan gas.

Sanzhar Zharkeshov, the CEO of QazaqGaz, asserted on July 16 that each additional 1 Bcm/year of gas processing capacity would increase Kashagan oil output by 25,000 b/d, in a seemingly automatic process. But there has been no public indication of support by NCOC for the plans, or approval for any upstream investment that might be needed.

Some analysts say the need to reinject gas into the reservoir is increasing, not diminishing, as oil reserves are tapped -- although some of the NCOC scenarios foresee the field producing into the next century.

NCOC is involved in one gas processing plant under construction, with a capacity of 1 Bcm/year; it was approved in 2020, as part of the initial Kashagan development and should enable a 25,000 b/d increase in oil output to around 430,000 b/d from mid-2026. But NCOC confirmed that plant is not connected to the new plants envisioned by QazaqGaz, and no decision has been taken on Kashagan's planned Phase 2 expansion.

The Phase 2 plans outlined in the annual report of KazMunaiGaz do include adding gas processing plants, but at 2.5 Bcm/yr and 6 Bcm/year these do not correspond with the agreement with UCC Holding.

QazaqGaz did not respond to a request for comment.

Analysts at S&P Global Commodity Insights say that a modified expansion plan that could raise crude output to 500,000 b/d under a "Phase 2A" to be completed in 2026 is under discussion, with a "Phase 2B" looking to achieve 710,000 b/d in 2032, but this has yet to be agreed.

When asked if it was involved in the agreements with UCC Holding, NCOC answered only indirectly. Phase 2 "of the potential Kashagan full field development is split into sub-phases. Successful implementation of these sub-phases could potentially increase the Kashagan oil production and is subject to a number of technical and non-technical considerations," NCOC said to Commodity Insights.

"Currently, the shareholders and operator of the North Caspian Project continue to discuss plans for further development, with the government of the Republic of Kazakhstan and other stakeholders," they added.

Payment stand-off

Lurking in the background is a dispute over the field's overall development costs, with the government reportedly claiming more than $150 billion from the consortium in costs it does not agree with, and the matter to be resolved at arbitration.

TotalEnergies CEO Patrick Pouyanne pledged in April 2023 to "fight" the claims, saying the partners, which also include ExxonMobil, Shell and Italy's Eni, were "really united."

Eni said in April 2024 that neither the basis of the claim or the amount were "reasonably substantiated or credible."

Commodity Insights' Eurasian Energy Research team said recently: "Kazakhstan once again is applying pressure on its most important upstream foreign investors. The country may even be pushing for entirely new arrangements that would give the government greater control over the assets."

CPC Blend was assessed by Platts, part of Commodity Insights, at a $1.77/b discount to Dated Brent Aug. 9.