ANALYSIS: Kazakhstan's oil ambitions face challenge of OPEC+ quotas, Black Sea export risk

Kazakhstan's oil production growth plans are increasingly butting up against its commitments to the OPEC+ producer group, while threats to shipping in the Black Sea raise concerns about the security of exports, analysts say.

Kazakhstan was a founder signatory to the OPEC+ alliance formed in 2016 in an effort led by Russia and Saudi Arabia to exert greater control over oil markets. Kazakh officials have at various times played down the country's OPEC+ membership as "symbolic," and many observers have assumed any pledge to cut output would take a back seat to pre-existing agreements with foreign oil and gas majors, including expansion at Tengiz, the highest-producing Kazakh field, which accounts for over 40% of Kazakh crude output.

Nonetheless, with Kazakhstan bumping up against its quotas and Saudi Arabia seemingly determined to reassert control over markets, the potential for disagreement looks real. Kazakh crude output appears to have slightly exceeded quota levels for much of the first half of the year, averaging 1.64 million b/d, based on figures from the country's statistics agency. Power outages that affected legacy producers in July may still not have brought the country into compliance, judging from preliminary energy ministry data.

"We believe that the pledge by Kazakhstan, coordinated with other members of OPEC+, to cut output in the remainder of 2023 will not really act as much of a brake," John Webb, director for Russian and Caspian Energy at S&P Global Commodity Insights, said.

However, "the Tengiz Future Growth Project will test the hypothesis that the 'big 3' [oil and gas field] projects operate largely independently of OPEC+ policy," he said, referring to Kazakhstan's three highest-producing fields and expansion at Tengiz.

Production wiggle room

One reason for questioning whether Kazakhstan will adhere strictly to its OPEC+ commitments is its heavy reliance on international oil and gas companies, which have been central to the development of its highly complex, ultra-deep, ultra-sulfurous oil fields -- contrasting with some OPEC+ members.

Nonetheless, there is some wriggle room for Kazakhstan to broadly comply with quotas in the months ahead. Tengiz is due for a maintenance shutdown in the current quarter, and two more shutdowns are due at the field in 2024 as new facilities are brought on stream, with output expected to fluctuate. Kazakhstan's output quota is also set to ease slightly from the start of 2024 to 1.628 million b/d, when current additional 'voluntary' cuts by a number of countries expire.

Mike Wirth, CEO of Chevron, the lead partner at Tengiz, seemed unworried as he recently reiterated plans to increase Tengiz production to more than 1 million b/d of oil equivalent in 2025 under the $45 billion expansion plan known as the Future Growth Project-Wellhead Pressure Management Project.

That compares with 657,000 b/d of crude output in the first half of 2023, although the 1 million boe/d figure also includes gas and associated liquids -- not subject to OPEC+ cuts. Wirth said the first part of the expansion, the Future Growth Project, should be mechanically complete in the current quarter and start up by mid-2024.

"What you're going to see in 2023 and 2024 is the normal turnaround activity interlaced with project start-up activity," he said. "This is not as simple as bringing on a new portion of the field. We're really reworking the entire gathering and producing capacity of the field. It's quite a complex series of activities to execute all of that and the production reflects that."

Asked about any clash with Kazakhstan's OPEC+ commitments, Tengizchevroil, the Chevron-led consortium, said it complied with applicable laws and contracts, was focused on safe and reliable operations, and strived to "meet the expectations of ... Kazakhstan and our shareholders."

"We do not expect Tengiz oil production to be impacted by any current OPEC + agreement," a TCO spokesperson said.

'Hostage' threat

As things stand, OPEC+ cut arrangements look set to remain a headache for Kazakhstan. Equally pressing is how Kazakhstan ensures the continuity of its exports in the light of a recent escalation of military strikes in the Black Sea, including an Aug. 4 attack that seriously damaged a Russian naval ship near the loading facilities of the Caspian Pipeline Consortium at Novorossiisk on the Black Sea.

The CPC terminal -- owned separately from Russia's main pipeline system by a consortium of Russian, Kazakh and foreign partners -- handles most of Kazakhstan's oil exports, with CPC Blend usually attracting prices well above those of Russia's Urals. Even before the latest attack, Kazakhstan was voicing concerns about its reliance on the route, and had been seeking to increase the use of alternative routes, but routes such as Azerbaijan entail significant infrastructure bottlenecks.

Traders have speculated that any escalation could cause buyers to look elsewhere and diversify away from CPC Blend, which is light and relatively low in sulfur thanks to major sulfur removal facilities in Kazakhstan. The crude grade has recovered in price since the aftermath of the 2022 invasion: Platts, part of S&P Global Commodity Insights, assessed CPC Blend at a $1.30/b discount to Dated Brent on Aug. 11.

Some observers play down the chances of Ukraine attacking major oil infrastructure and particularly the CPC facilities, highlighting international consensus on the need to keep oil exports flowing, the potential damage to Kazakhstan, which is not a party to the conflict and is supported by countries such as the US, and the risks associated with an oil spill in the environmentally sensitive Black Sea.

But not everyone is so sanguine. Sergei Vakulenko, former head of strategy at Russia's Gazprom Neft and now a scholar at the Carnegie Russia Eurasia Center, has written of the possibility of escalation, including disruptions at Novorossiisk and in a worse case scenario, Russia taking over the CPC facilities and using them to export its own Urals crude.

In a recent article published by the Carnegie Russia Eurasia Center, Vakulenko drew parallels with the 1980s "tanker wars" between Iran and Iraq and said joint use of the CPC terminal for Russian and Kazakh exports "would serve to protect Russian cargoes, with departures interspersed with Kazakh ones, just as a civilian hostage is used as a human shield by terrorists."

The CPC consortium dismissed Vakulenko's comments saying they showed an "absence of knowledge about CPC oil delivery principles and [the] composition of Consortium shareholders."

Attempts to reach Kazakhstan's energy ministry for comment were unsuccessful.