Kazakh energy sector caught on geopolitical faultline as leader eyes fresh term

Kazakh President Kassym-Zhomart Tokayev is expected to be handed a new term in office in a snap presidential poll on Nov. 20 as he seeks to reassure the world on his country's role as a reliable, long-term, destination for investment and a growing oil producer.

Kazakh crude export volumes have fluctuated significantly in the wake of Russia's invasion of Ukraine, and prices for oil shipped via its key export route, the Caspian Pipeline Consortium, have traded at sizeable discounts.

Kazakhstan has close energy links with Russia, the EU, US and China, and is struggling to adapt to Western efforts to isolate Moscow, while relying on Russian infrastructure, particularly the CPC route to the Black Sea, to access international markets.

S&P Global Commodity Insights sees the country's ties with Russia as the most crucial issue for oil markets in a second Tokayev term.

"Russia will likely prioritize maintaining an ally, but sporadic shutdown threats could be an appealing way to raise risk premiums and target supply to Europe once Russian import bans take effect," Commodity Insights said in a Nov. 17 note.

So far, Kazakhstan has managed to sidestep US sanctions against Russia and an impending EU ban on Russian crude imports, having rebranded some of the heavier crude it sends through Russia under the new 'Kebco' (Kazakh Export Blend Crude Oil) brand.

The US has provided an exemption for Kazakhstan's flagship CPC Blend loaded at the Russian port of Novorossiisk, with the proviso it carries a Kazakh certificate of origin, and the EU is expected to take a similar line when its Russian crude ban enters into force Dec. 5.

Investor fears

Meanwhile, an array of international investors are warily monitoring the fall-out from the Russia-Ukraine war, including Russian pressure on Tokayev to side with Moscow, as they seek to ensure both current supply and investment in projects aimed at growing production and developing low-carbon energy.

London-based consultancy PRISM said Sunday's poll, featuring little genuine opposition, was a way for Tokayev to shore up his legitimacy at home and internationally, noting domestic opponents have been marginalized since unrest that rocked the country in January 2022. However, Kazakhstan faces a challenge maintaining the ties with Moscow needed to ensure full access to infrastructure such as the CPC route on which it relies.

"A further decline in relations could result in greater Russian disruption to the Caspian Pipeline Consortium pipeline... or attempts by Russia to destabilize the Tokayev administration," PRISM said in a research note.

Kazakhstan is seeking alternative supply routes, with the Baku-Tbilisi-Ceyhan pipeline from the Caspian Sea to Turkey's Mediterranean coast so far the most promising. Commodity Insights sees these diversification efforts as having only a slight impact in the short term, however.

Export volumes have been volatile since Russia invaded Ukraine partly due to disruptions at the Novorossiisk loading facilities.

This has mostly been attributed to storm damage, with no evidence of a political motive behind the disruption. CPC announced it had completed repairs to one loading facility on Nov. 15, likely enabling a return to normal loading levels. A preliminary loading program suggests CPC Blend loadings could reach 1.5 million b/d in December.

In October Kazakhstan produced 1.4 million b/d, according to the Platts OPEC+ survey by S&P Global Commodity Insights. This is significantly below its OPEC+ crude production quota of 1.706 million b/d. In February it produced 1.65 million b/d, compared to its quota of 1.572 million b/d.

Kazakhstan is the second largest non-OPEC producer in the group, and one of the few OPEC+ members expected to increase output in the near term, as the Chevron-led Tengizchevroil consortium works to increase capacity.

Alongside risks related to the Ukraine conflict, Kazakhstan's energy sector faces a risk of domestic instability. In January 2022 civil unrest broke out across the country in response to fuel price increases, including protests in major oil producing regions and some disruption at the Tengiz field.

To help stabilize the situation Tokayev reversed the price hikes, and called in Russian forces under the auspices of the Moscow-led Collective Security Treaty Organization.

Oil prices

Since the Ukraine invasion, Russian and Kazakh crudes have traded at significant discounts to Dated Brent, reflecting a variety of uncertainties, including over the security of Black Sea shipping. Although Russia's key crude grade Urals has seen the biggest impact, prices are also significantly lower for crude shipped via the CPC route from Kazakhstan.

Prior to the invasion, CPC was trading at a discount of around $5/b, and Urals at a discount of around $10/b compared with Dated Brent, according to Platts price assessments by S&P Global Commodity Insights. These discounts are now significantly bigger. Platts assessed CPC Blend at $83.8/b and Urals at $64.67/b on Nov. 17, compared to Dated Brent at $91.365.