Kazakhstan unrest tests commodity power-house credentials

Kazakhstan has been thrown into political turmoil after fuel price riots in the first week of 2022 threatened the government in the second-largest oil producer among the non-member countries allied to OPEC.

Commodities investors are concerned as they have underpinned Kazakhstan's rise as a resource power-house. Chevron and partners at the highest-producing oil field, Tengiz, have had to adjust production levels due to the turmoil.

"Public unrest in Kazakhstan provides just the latest example of the political sensitivity of fuel prices, a dynamic which provides a tailwind to oil demand and influences energy policies throughout the world," Paul Sheldon, S&P Global Platts Analytics' chief geopolitical advisor, said.

The following are key facts:

Trade Flows

Kazakhstan's role as a major supplier of crude has heightened concerns over political risk.

• With the world's 12th largest proved reserves — around 30 billion barrels — oil output has tripled since 1991, to some 1.8 million b/d. Three fields account for over two thirds of this: Kashagan — on stream since 2016 — has touched its initial target of 370,000 b/d, Tengiz has a nameplate capacity of 600,000 b/d, which is expected to reach 850,000 b/d from around 2024, while Karachaganak oil output was 240,000 b/d in 2020. Platts Analytics expects oil output to reach 2 million b/d by 2024 and 2.6 million b/d by 2030. Other fields are declining, particularly onshore in the western province of Mangistau, where fuel price protests in the oil town of Zhanaozen sparked the recent unrest.
• Oil exports mainly comprise the CPC crude blend, loaded at the Black Sea port of Novorossiisk. CPC volumes hit a monthly record 1.65 million b/d in March 2020, before being restrained by Kazakh participation in OPEC+ quotas following the pandemic. Around 90% of CPC flows derive from Kazakhstan, with the remainder from Russian Caspian Sea fields. Kazakhstan also exports modest volumes direct to China and through Russia to the Baltic, with other shipments by rail, and across the Caspian to Azerbaijan and the BTC pipeline.

The country has grown to play an important role across commodity markets helped by its geostrategic location straddling growth markets in Asia.

• With gas reserves of more than 2 trillion cubic meters, commercial gas sales amounted to 32 Bcm in 2020, of which 14 Bcm was exported, split evenly between China and Russia, with rising output enabling greater supplies to China. Kazakhstan also plays an important role as the route for Turkmenistan's gas exports to China, which amounted to nearly 27 Bcm in 2020, according to the BP Statistical Review.
• Kazakhstan accounts for around 40% of world uranium supply. State producer Kazatomprom, which accounts for about half of total output, had a production forecast of 21,700-22,000 mt for 2021.
• Kazakhstan's crude steel production totaled 3.89 million mt in 2020, according to the World Steel Association. ArcelorMittal Temirtau, Kazakhstan's largest steelmaker and the only one operating blast furnaces and basic oxygen converters, made 3.24 million mt, and had a 2021 target of 3.4 million mt.

Kazakhstan is the world's third-largest ferroalloys producer in 2020 after China and South Africa, underscoring its diversification as a commodities supplier to global markets.

• Kazchrome, a subsidiary of Kazakhstan-focused ERG, made 1.84 million mt of ferroalloys. And Kazakhstan was the tenth largest copper producer in 2020, with 580,000 mt of output.
• With limited domestic demand, the metals sector is mainly focused on exports. Refined copper exports outside the immediate region (Russia, Armenia, Belarus and Kyrgyzstan) were around 450,000-500,000 mt in 2021.
• Forecast coal production of around 110 million mt in 2021 puts Kazakhstan second in Eurasian coal production behind Russia, with coal accounting for 70% of Kazakhstan's power supply.
• Kazakhstan is an important wheat supplier for Central Asia, with exports in the 2021/22 marketing year estimated at 7 million mt by the International Grain Council (IGC) and the main destinations being Uzbekistan, Tajikistan and Afghanistan.

Prices

The unrest has spilled over into several commodities and energy markets amid concern over supply disruption.

• CPC is Kazakhstan's most profitable crude export option, enabling access to global pricing. A light, low-sulfur crude, it tends to trade at a modest discount to Dated Brent, though not commanding the premiums enjoyed by nearby Azerbaijan's Azeri Light.
• Crude shipments through the Transneft system are less profitable due to the blending of Kazakh crude with Russian flows. Pipeline shipments to China are also seen as less profitable.
• For uranium, S&P Global Platts assessed the current month spot price of U3O8 to Canada at $45.50/lb at 1 pm ET Jan. 5, up 8% on the day, with market participants suggesting Kazakhstan's unrest had spurred prices higher.

Infrastructure

Central to the country's global significance as an energy supplier are major pipelines including its CPC link and lines into China.

• The CPC pipeline to Novorossiisk, owned by a consortium of companies and the Kazakh and Russian states, has been steadily expanded to handle growing oil volumes. As a route for Kazakh supplies it has out-competed the BTC pipeline from Azerbaijan to Turkey's Mediterranean coast, the latter only carrying modest Kazakh volumes.
• Direct oil shipments to China are via one of the world's longest pipelines, the 2,200 kilometer Atasu-Alashankou route. This has capacity to handle 20 million mt/year, but is underutilized.