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Oil Kazakhstan in the New Reality: Risks and Opportunities

The geopolitical situation in the world that changed after February of this year has created new risks for Kazakhstan's oil and gas industry, which has just begun to recover after the Covid crisis of 2020-21.
Currently, four groups of significant risks are visible:
- problems with the export of Kazakhstani oil;
- slowing down or suspending the implementation of investment projects;
- strengthening Kazakhstan's dependence on Russia in political and economic terms;
- possible introduction of secondary sanctions against Kazakhstan if helping Russia to circumvent Western sanctions.
Where will Kazakhstan's oil flow
To date, about 97% of all Kazakhstani oil exports are pumped through the territory of Russia. According to the Ministry of Energy, last year, 80% of all volumes were exported through the Tengiz-Novorossiysk oil pipeline of the Caspian Pipeline Consortium (CPC), about 17% more through the Atyrau-Samara pipeline.
Oil from Kazakhstan's fields, which goes through Atyrau-Samara, is mixed with West Siberian oil and sold as the Russian Urals grade, which is now traded at a discount compared to Brent. In September, the discount rate almost reached 20%.
On June 3, 2022, the European Union approved the 6th package of sanctions against Russia, including a ban on imports of Russian oil starting in December of this year. At the same time, the UK and the EU agreed on a ban on the insurance of tankers that transport Russian hydrocarbons. What does this mean in reality? "The refusal to insure sea transportation cannot unequivocally prohibit the trade of Russian oil, for example, with India or China, but such a tanker will not be able to come to the port and unload so easily, as the owner of the port will not risk his business because of one particular tanker. In this case, the rules of sea trade are unambiguous – if there is no insurance, then there is no access to the port," comments Russian expert Anatoly Nesmian.
To dissociate itself from the "toxic" Urals, Kazakhstan decided to label oil from its fields shipped in the ports of Russia with its brand – KEBCO (Kazakhstan Export Blend Crude Oil). In particular, a representative of CNPC-Aktobemunaigas told Reuters that since June 6, the oil they export had been labeled in the accompanying documents precisely like this.

Through CPC, oil enters world markets under the CPC Blend brand, which is not subject to embargo. Although at the beginning of March, the Indian Oil and Natural Gas Corporation notified traders that it would purchase CPC Blend grade oil for processing at its plants only on the condition that the seller bears the cost of insurance and delivery to the plant.
The problem is that it is currently impossible to guarantee the stability of supplies via the CPC pipeline. On March 22, the Consortium's press service reported that due to a hurricane and a strong storm in the area of the port of Novorossiysk, the single point mooring (SPU) was seriously damaged. This is the first serious damage in more than 20 years of CPC marine terminal operation in South Ozereevka, although storms in the autumn-winter period are recorded annually.
"According to the results of the extraordinary inspection, damage in the form of reinforcement carcass displacement of one of the SPM-3 floating hoses was revealed. In this regard, it was decided to decommission SPM for flushing and repair temporarily. According to the results of the diving survey, damage to the 9th and 13th sections of the SPM-2 internal hose was revealed. These damages are critical and do not allow the safe operation of the device. In this regard, CPC is forced to suspend the operation of the specified SPM," the Consortium said in a statement. Thus, of the three pumping devices, only one remains in working condition.
Due to restrictions on the shipment of Kazakhstani oil at the CPC terminal, daily production in April at the Tengiz, Kashagan, and Karachaganak fields fell by 14%. The repair work lasted exactly a month, during which Kazakhstan suffered financial losses from export restrictions.
And at the end of April, there was talk in the Russian public field about the possibility of nationalizing the Russian section of the oil pipeline. Accusations have appeared in the media and social networks that oil is shipped through the CPC terminal to the KazMunayGas plant in Romania, and the oil products produced there are supplied to the armed forces of Ukraine. As the close to the Kremlin Nezygar telegram channel wrote, the Kazakhstan authorities secretly provide fuel to the armed forces of Ukraine using CPC, and for the good of Russia, it would be better to nationalize the oil pipeline owned jointly by Russia, Kazakhstan, and the alliance of transnational corporations. "This situation actualizes the need, following the latest decisions of the Russian authorities, to nationalize CPC and consider the possibility of blocking Kazakhstan's oil exports," the pro-Kremlin telegram channel wrote. It is worth noting that the nationalization of the CPC, if it happens, will punish not only Kazakhstan but, first of all, the United States because the export of Chevron and ExxonMobil from Tengiz will be under the control of the Kremlin.

As known, telegram channels in the post-Soviet space, and especially in Russia, have turned into a communication channel through which official authorities or individual intra-elite groups "tip off" various information, and the reaction of society to which needs to be observed. Keep in mind that since April 8, the Russian State Duma has had a bill providing for the possibility of nationalizing assets of states, companies, and individuals from "unfriendly countries" located on the territory of the Russian Federation without reimbursement of their value. So there should be no problems with the legislative framework for the nationalization of CPC if a political decision is made in the Kremlin.
In June, CPC again announced that it could not fulfill its obligations to pump oil fully. This time, the reason was unexploded mines and shells from the Second World War found in the port's water area. The port is being closed to carry out mine clearance work, and oil will be shipped again only through one SPM, the Consortium said in a statement.
And finally, in August, Kazakhstan's CPC exports were again restricted. This time, the work of two of the three single point moorings has been stopped due to cracks in subsea hose attachments. According to the Russian newspaper Kommersant, "considering the necessary procedures for choosing a contractor and the imminent start of the storm season, the restoration work may take until spring. In this case, the supply of Kazakhstani oil to the world market via CPC may fall by 15 mln tons."
Kazakhstan has not yet experienced serious problems with exports solely because, since the beginning of August, oil production at the Kashagan offshore field has already been reduced due to the accident. In September, a volume decrease is expected after major repairs start at Karachaganak. This will allow maintain production at the current level in Tengiz.
On September 4, the risks of dependence on the only Russian oil export route were unequivocally pointed out by S&P Global Ratings, which revised the outlook on the sovereign credit ratings of the Republic of Kazakhstan from Stable to Negative. "In our opinion, Kazakhstan remains vulnerable to possible disruptions in the work of the Caspian Pipeline Consortium (CPC), which exports about 80% of the oil produced in Kazakhstan. In case of a decrease in the CPC capacity for a long time, this may negatively affect the country's foreign economic and fiscal indicators. The growing dependence on domestic financing and the increase in the cost of borrowing can lead to an increase in debt servicing and repayment costs and a deterioration in budget indicators. As a result, we have revised the forecast on the ratings of the Republic of Kazakhstan from Stable to Negative and confirmed the sovereign ratings at the BBB-/A-3 level," S&P said in a statement.
Under these conditions, the Government of Kazakhstan is stepping up efforts to diversify export flows. The Special Representative of the President of Kazakhstan for International Cooperation, Yerzhan Kazykhanov, discussed oil supplies to world markets through the Caucasus in Tbilisi in May. "The Kazakh side expressed interest in increasing cargo turnover via the Georgian corridor. It was noted that already in 2022, Kazakhstan plans to transport from 2 to 3 million tons of oil along the Georgian corridor. In the coming years, it is planned to increase this indicator further," the final message posted on the Ministry of Economy of Georgia website says. The Georgian ministers noted that the country's transport infrastructure is ready to transport goods from Kazakhstan and Central Asia.