Kazakhstan vulnerable due to oil projects

By  Trend

Over the medium term, Kazakhstan’s oil and gas sector will be driven by ongoing and planned mega projects in upstream, oil and gas pipelines undergoing expansion, and planned disposals in downstream, Fitch Ratings said in a new report on August 26.

In 2025 the projected share of production from Kazakhstan's top-three mega oil projects - Tengizchevroil (TCO), Kashagan and Karachaganak - is likely to exceed 75 percent of the country's total, up from 50 percent in 2015, Fitch said.

Kazakhstan's over-reliance on a few mega oil fields makes it more exposed to single-project geological and technical risks and oil price volatility, as illustrated by the ongoing multi-billion dollar efforts to restart Kashagan, the report said.

According to Fitch, explicit state support and strong sovereign reserves drive the ratings of JSC National Company KazMunayGas (NC KMG or the group, BBB-/Stable), the holding company for state-owned assets in upstream, transportation and downstream.

“The announced $37bn TCO expansion will reduce cash dividends to NC KMG over the medium term, a scenario which we have included in our rating case,” Fitch said.

“Combined with lower upstream earnings due to high costs and poor netbacks at KMG EP, NC KMG's key upstream subsidiary, this will slow down NC KMG's deleveraging,” the report said. “The three-year Kashagan start-up delay is cash-neutral for the group, as we expect it to use cash dividends from Kashagan first to repay the $1.8bn deferred acquisition consideration.”

NC KMG's midstream assets - oil and gas pipelines operated by subsidiaries JSC KazTransOil (KTO, BBB-/Stable), KazTransGas JSC (KTG; BB+/Stable) and Intergas Central Asia JSC (ICA, BB+/Stable) - generate stable earnings for the group, or about $1bn in EBITDA on average in 2012-2015, the report said.

According to Fitch, most of the oil and pipeline capacity expansion will not bring cash earnings to the group, as it is being done through the joint ventures (JVs) that are unlikely to pay NC KMG large dividends over the medium term.