Commodities 2023: Kazakhstan eyes bigger market role in wake of war fallout, coup attempt

Kazakhstan and its flagship CPC Blend oil exports emerge from a turbulent and bloody 2022 in better shape than many would have expected, with exports high and set to rise, and political stability increased.

The year gone by has seen heightened risk to the stability of CPC crude exports, starting with bloody unrest in Kazakhstan in January 2022 that was accompanied by upstream disruption, followed by Russia's invasion of Ukraine and fears of a knock-on hit to exports via the 1,500 km (932 mile) CPC pipeline from Kazakhstan, through Russia's Black Sea port of Novorossiisk.

Storm damage to the Novorossiisk loading facilities that cut exports in March fueled speculation that Moscow might deliberately sever the link, perhaps to squeeze the oil market in the face of sanctions or inflict pain on Kazakhstan for rebuffing pressure to support the invasion and recognize Russian gains. A Russian court ruling in July that briefly threatened to shut down the facilities in an environmental case added to such worries, though the threat was averted.

However, fears of foul play interfering with loadings look less pressing as Kazakh exports end 2022 near record highs. Expansion work at the highest producing Kazakh oil field, Tengiz, promises further increases up to 2024, supported by recent upgrades to the CPC pipeline itself.

Loadings of CPC Blend at Novorossiisk were set to average around 1.5 million b/d in December and January, according to loading programs. And ship tracking data suggests monthly average loadings stayed above 1 million b/d throughout the year, despite the loading problems.

The outages at Novorossiisk, including for lengthy repair work, have mostly been offset by the facilities' spare capacity, according to sources close to the situation; the facilities comprise three single-point mooring systems each able to load nearly 900,000 b/d, providing significant redundancy.

Kazakhstan may even benefit from an EU and US ban on Russian crude imports. In November, shipments of CPC Blend and KEBCO -- a Kazakh crude brand shipped via Russian ports -- amounted to the EU's single largest source of crude imports, at 1.2 million b/d, according to Commodities at Sea data from S&P Global Commodity Insights.

CPC Blend prices have weakened amid an oversupply of light sweet crude in the Mediterranean region but have largely normalized compared with immediately after the invasion.

CPC Blend was assessed at $6.90/b below Dated Brent Dec. 20 by Platts, part of S&P Global Commodity Insights. KEBCO, launched by Kazakhstan to differentiate its crude from Russia's own shipments from Russian ports, was assessed at a $6/b discount on a CIF (cost, insurance, freight) basis in recent days.

Political landscape

Observers then are cautiously optimistic. At home, President Kassym-Jomart Tokayev has emerged stronger after putting down an apparent coup in January. His political opponents, among them supporters of former president Nursultan Nazarbayev, have been "scattered," said Benjamin Godwin, associate director and head of analysis at London-based consultancy Prism.

As for Russia, predictions are difficult, with Novorossiisk and Russia's control over the export route still a question mark, said Paul Sheldon, chief political adviser at S&P Global Commodity Insights.

"Sporadic shutdown threats could be an appealing way to raise risk premiums and target supply to Europe once Russian import bans take effect," he said.

However, he is among analysts who reference Moscow's increasing isolation and need for allies such as Kazakhstan, particularly if they offer potential advantages as a trade route.

Godwin sees Russia as now "less tolerant of allies sitting on the fence" but noted Tokayev's cultivation of ties with Russia and with President Vladimir Putin, evident when the Kazakh leader was received at Putin's summer residence in Sochi in August.

Investor confidence

Maintaining investor confidence will, however, be challenging. As environmental, social and governance pressures rise, Kazakhstan will need to play its part in the energy transition plans of the European majors to be sure of winning investment in giant fields such as Kashagan, which is still relatively early in its productive life.

And sanctions against Russia may not help; bringing in heavy equipment such as wind turbines via Russia's river system -- the traditional supply route for rigs and other large items -- has become more complex, Godwin said.