Kazakhstan eyes new oil export route via Caspian Sea

Development plans center on the Mangystau Region in western Kazakshtan, bordering the Caspian Sea. In the dusty streets of Kuryk, a town of about 12,000 residents, few seem to realize that the deep-water bay, with its turquoise waters, could soon become a major energy link for Western markets.

If all unfolds according to plan, in about four years the future port at Kuryk, located about 70 kilometers south of the regional capital of Aktau, will be able to handle shipments of up to 500,000 barrels of crude oil per day, pumped in from Atyrau Region to the north. From there, the oil will be shipped across the Caspian to Azerbaijan, where it will be funneled into the existing Baku-Tibilisi-Ceyhan (BTC) pipeline.

Though in recent months there has been increased talk about building undersea pipelines that forge direct links among Azerbaijan, Kazakhstan and Turkmenistan, Kazakhstani officials are not yet counting on such export routes becoming a reality. At the same time, they are eager to find new methods to export a large volume of oil from the Kashagan field. When it reaches peak production around 2019, Kashagan will produce up to 1.5 million barrels per day, enabling Kazakhstan to roughly double oil export volume to 120 million tons annually.

For now, Kazakhstani political leaders and oil executives are basing their export strategy on the so-called Kazakhstan Caspian Transport System (KCTS), of which the construction of the terminal at Kuryk is the centerpiece. To make the Kuryk export strategy viable, however, Kazakhstan also must: build a 600-kilometer pipeline linking the terminal to supplies in Atyrau; assemble a fleet of barges to transport the oil across the sea; and create a connection on the Azerbaijani side that can allow Kazakhstani energy to flow into the BTC pipeline.

Jaksybek Kulekeev, the first vice president of KazMunaiGas (KMG), the Kazakh national oil company, readily admitted that the construction of an undersea pipeline would, in theory, offer a far simpler solution to the present export dilemma. But, he added, existing conditions are precluding the creation of an undersea route in the near-term.

"From the economic point of view, when you have to convey between 20 and 56 millions tons of oil per year, it becomes interesting to build a pipeline," Kulekeev said. "But the Caspian Sea hasn't had its legal status defined, and it is … very ecologically sensitive."

"That's why today I can't tell whether this KCTS system will be a temporary one, all the more since we'll have to spend a lot to create it," he continued.

The project, which could cost more than $3 billion, officially came into being on January 23, with the signing of a memorandum of understanding creating a KCTS consortium. Among the oil companies with an interest in the project are Chevron, ExxonMobil, LUKarco, KMG, Agip and Total. Two consortia involved in the development of the Kashagan and Tengiz oil fields are fully backing the KCTS plan.

"This is a very important document for us because we needed to create a group to deal with the Kazakh and Azeri authorities," said Philippe Rochoux, General Director of the Kazakhstan E & P Total, a French company that handled the feasibility study for KCTS.

The establishment of a direct export link between Kazakhstan and Azerbaijan, one that enables Kazakhstani exports to circumvent Russian export routes, remains a sensitive topic in Moscow. Accordingly, Kazakhstani officials proceeded cautiously with the plan. However, Western oil executives report, the KCTS plan now enjoys the full support of President Nursultan Nazarbayev's administration.

"We felt approximately one year ago that, at the highest level, a decision was taken to support KCTS," a senior oil executive said, speaking on condition of anonymity. "Now, Kazakhstan, through KMG, is really the mainspring of the project."

Kazakhstani and Azerbaijani authorities still have to settle a wide range of issues before the KCTS plans becomes a reality. Some of those with detailed knowledge of the plans believe it can't become operational before late 2011 or early 2012.

Even so, there is evident eagerness on the part of many Western oil executives to get started with the project. On the Azerbaijani side, officials and experts say that BTC's capacity can easily be expanded to accommodate Kashagan oil. "BTC's design capacity is 1 million barrels per day, [but] this can be increased up to 1.8 million barrels per day if there is more volume committed to the BTC in the future," confirms Tamam Bayatli, Communications Manager from British Petroleum, in Baku.

For Kazakhstani officials, promoting the KCTS option not only will enhance the country's energy export capability, it also stands to raise living standards in the Mangystau Region. Local officials hope that the influx of oil investment will spark growth in other economic spheres.

"Our main goal is to diversify our economy. Our President [Nazarbayev] has, for example, created, as part of this goal, a new Special Economical Zone in our region. In it, our mission is to decrease the share of the oil and gas exports from 94 percent, as they are today, to 75 percent," said Krymbek Kusherbayev, the governor of Mangystau.

By James Delly

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