KMG Move Defines Market Future
BMI View: Ka z MunaiGa z (KMG) approved ONGC's acquisition of ConocoPhillips' stake in the Kashagan field in late January. At the same time, KMG acquired an additional 24.5% stake in the promising Nursultan block from ConocoPhillips. However, w e believe that growing state ownership in the upstream segment could create a serious downside risk to our forecast .
In late January 2013, KazMunaiGaz (KMG) announced two developments that will impact the Kazak hydrocarbon s market. Firstly, the company opened the way for ONGC to acquire ConocoPhillips ' 8.4% stake in the offshore Kashagan oilfield after it relinquished its pre-emptive right to acquisition. Secondly, KMG bought ConocoPhillips' 24.5% stake in the Nursultan offshore block , located near the city of Kuryk.
The Nursultan block and the Kashagan field are two examples of areas with significant hydrocarbons potential. The former holds an estimated 2bn barrels (bbl) of recoverable oil and first production is targeted in 2016. From now on, it will be shared between KMG and Abu Dhabi's state-owned investment company, Mubadala.
The latter was the world's biggest oil discovery in 40 years when it was found in 2000, with total recoverable oil reserves estimated at 8bn barrels (bbl). This Caspian field alone is expected to add 450,000 barrels per day (b/d) to Kazakhstan's total liquids output by 2015/2016, according to oil and gas minister Sauat Mynbayev, and will eventually peak at 1.5mn b/d once second-phase development is completed. These recent developments will allow ConocoPhillips to pursue divestment of its Kazakh assets.
|Kazakhstan Oil Production, Consumption & Net Exports ('000b/d)|
Disputes between the government and the companies that are partnering to develop Kashagan ( ExxonMobil, Royal Dutch Shell and Eni) have caused many delays to the development of the field. We have already highlighted the regulatory risks in Kazakhstan; with growing nationalist sentiment influencing government policy (see our online service, October 2 2012, 'Kashagan Exit Highlights Country Risks'). Commercial start-up of Kashagan has been pushed back repeatedly; originally expected online in 2005, first oil is now only expected to flow from 2013 following a US$1bn payment from Kashagan's partners to the government in May 2012 that paved the way for development to proceed.
Two main developments continue to threaten investment in the country:
Producers could face increased regulatory risk due to the government's proposal to establish 'the priority right of the state to take part in any new trunk pipeline being built'. This would effectively give the government a 51% stake in such projects, according to Minister Mynbayev. If turned into law, the new bill points to a worrying trend of resource nationalism and could cause Kashagan's Phase II, which was originally timed for 2018-2019 completion, to be further delayed or postponed indefinitely.
Protests among oil workers have already disrupted the Kazak hydrocarbons sector in late 2011 and early 2012 ( s ee ' Unrest Escalates To A Worrying Level For Foreign Operators' , December 20 2011 ). We could see further disruption coming along in the next years, and investors will most likely be forced to consider this risk when taking decisions.
KMG's involvement in the promising Nursultan block is in line with our view that - in spite of its tremendous potential - Kazakh oil production is at risk over the long term because of a shortage of foreign investment. Increased state ownership on the Nursultan block could ultimately pose a downside risk to our forecast. We highlight the potential downside stemming from technical challenges associated with the high rates of carbon dioxide and complicated conditions that characterises fields in the Caspian Sea. Therefore successful development requires operators experienced with bringing such projects into production. Increased state ownership in the Kazak hydrocarbon industry raises questions about the capacity of such firms to develop future projects and is thus a trend we will closely monitor.