Projects
TCO Launches the Largest Investment Project
On July 5, on the eve of the birthday of President of Kazakhstan Nursultan Nazarbayev and the day of Astana, the shareholders of the joint venture Tengizchevroil in a meeting with Minister of Energy Kanat Bozumbaev announced a final investment decision for the Future Growth Project and Wellhead Pressure Management Project (FGP-WPMP), which will be the next stage of expansion of the Tengiz oil field in western Kazakhstan. The project is supposed to involve $37 billion and is the world’s biggest investment project in petroleum production this year.
TCO Launches the Largest Investment ProjectUnder the President guarantee
There is a special history of relationship between Chevron and Kazakhstan. This American company was not afraid to be the first to invest in 1993 in Kazakhstan, a young country, which arose on the ruins of the Soviet Union. In those years it was a really risky affair. Kazakhstan's economy was in ruins, the country was still in the rouble zone, inflation galloped, legislation was raw and unpredictable. In such circumstances, Chevron decided to invest billions of dollars in exploration of Tengiz oil field in western Kazakhstan. Later, President Nursultan Nazarbayev recalled those days: “Twenty one years ago I negotiated with Chevron for the first time, inviting this company to Kazakhstan. I sat in front of the then President of the company, Mr. Derra, and argued with him about taxes: how much was payable by Kazakhstan, how much by him, what kind of territory. And he says to me: “Mr. President, you have no laws, you have no specialists, you have no technology. What will we hope for? What point are you trying to make?” I say: “My only argument is that you should believe me.” I believe that I have not disappointed them. They have been successfully working here in Kazakhstan...”
Chevron trusted us and they did not miscalculate. Now the company produces in Tengiz oil field one-fifth of all its worldwide oil production. Having a fairly small prime cost and high quality the Tengiz raw material is in great demand on the world market. Owing to this the oil field remains profitable even amid very low commodity prices, which were observed another couple of months ago.
The project is alco crucially important for Kazakhstan, which has about a half of the budget incomes depended on the oil industry. According to International Monetary Fund projects, the GDP country this year will grow by only 0.1%. For comparison, in 2013, the year prior to the fall in oil prices, the growth of GDP was 6%. In 2015, Kazakhstan produced 79.46 million tons of oil, which is just 98.3% of the previous year’s figure. The International Energy Agency estimates that in 2016 oil production in Kazakhstan will decrease for the third consecutive year.
More pressure - more extraction
The Future Growth Project (FGP) will allow for several years to increase output in the oil field by almost one and a half times: from the current 27.16 to 39 million tons of oil a year. FGP will use sour gas injection technology, successfully developed and proven during TCO’s previous capacity expansion in 2008. While FGP will expand production, WPMP will keep the existing Tengiz plants at full capacity by lowering the flowing pressure at the wellhead and subsequent boosting the pressure to the inlet requirements of the six existing processing trains.
The pressure at Tengiz field reservoirs steadily declines and it decreased twice since the beginning of exploration. Initially, the reservoir pressure was 880 MPa (atmospheres), currently it is only 450-550 MPa. The completed Sour Gas Injection project (SGI) aimed for injection of the sour gas into the reservoir somewhat stabilised and stopped the pressure decline rate, but these measures were not enough. WPMP will allow to maintaining reservoir pressure and increasing production volumes.
Drilling of 20-21 injection wells is planned in the course of WPMP implementation for reinjection of produced gas (after treatment at FGP facilities) to ensure sufficient injectivity of the reservoir by the time of start-up. Over the period of FGP implementation, at least 71 production wells will be drilled in the field to ensure sufficient reservoir productivity and keep FGP facilities full. After FGP commissioning, additional 114 production wells are expected to be drilled. For comparison, TCO currently operates 105 active production wells at Tengiz field and 16 production wells at Korolev field.
As a result, recoverable oil reserves of Tengiz field will be increased by more than 100 million tonnes with FGP implementation. (Recovered oil reserves in Tengiz field until April 2033 are estimated to be between 750 million and 1.1 billion tonnes, (6-9 billion barrels), total recovered oil reserves in Tengiz field and Korolev fields are estimated to be between 750 million and 1.1 billion tonnes (6-9 billion barrels), total proven reserves amount to 3 billion tonnes (26 billion barrels) at Tengiz field, and 190 million tonnes (1.5 billion barrels) at Korolev field.
TCO Launches the Largest Investment ProjectFGP facilities will be built in a contract site of the oil field to the south of the current second-generation plant. The FGP involves the construction and installation of new facilities including: the crude oil gathering system, new production wells, measurement facilities, oil tanks, a high pressure system (input separators, a pumping and compressor units), the second generation plant (SGP), the power generation system, sour gas re-injection (SGI) facilities. Facilities will be constructed using the so-called modular method. Production modules will be fabricated in Kazakhstan and many other countries. Some of them are very voluminous. The largest 88 modules will weigh from 300 to 1800 tons. Now the transportation routes are being developed, by which the modules will be delivered from Kazakhstani cities. Also, due to module sizes and inexpediency of land transportation the preference is made for the option of delivering the modules via the Black Sea to Russian Federation with further delivery via internal Russian waterways and the Caspian Sea to the port near Tengiz.
“FGP-WPMP is now ready to be implemented for the benefit of the Republic of Kazakhstan and TCO shareholders,” said Ted Etchison, TCO General Director. “TCO is confident that these world-class projects will build on our long partnership with Kazakhstan to deliver sustainable, reliable Tengiz production to benefit the future generations of Kazakhstan.”
Kazakhstan enters the list of priorities
The project was designed back in 2013, and a work on the project was scheduled to start a year later. However, because of the fall in oil prices the project was suspended. Virtually all the world's oil companies began to cut their investment programs. Costs were cut by more than $1 trillion in total, which in turn led to large reductions in service companies and related industries.
In December last year, Chevron announced steep cuts in its spending on exploration, drilling and new projects globally by 24% to $26.6 billions. “The company will focus on short term investments, is said in a company report to the press. More ambitious projects that could begin to show profits in several years will be postponed.” Nevertheless, the Board of Directors of Chevron decided to set the Tengiz project as priority and proceed with its implementation.
The project would be financed by a combination of funds from the company and borrowing, Ted Etchison, TCO General Director said. “Like many other on-going TCO projects, this project will be implemented through the effort of partners, and we will also use our operational cash flow to finance the project. A part of the funding will come from the international credit market. We established a special task force on financing, which is studying and working on this issue. Initially, our plan was to use our internal instruments, media partners and partially borrowing.
“Given that TCO is a reliable partner and has a high credit rating, a good TCO contract, I think that money will not be expensive to affect the prime cost," said Minister of Energy Kanat Bozumbaev. “TCO, I think, will reveal all these figures.
As the agency S&P Global Ratings later reported, a subsidiary of TCO- Tengizchevroil Finance International Ltd. plans to issue $1 billion of senior secured bonds. “Bond credit ratings ' BBB ' of bonds to be issued shows the fact that the issue will be placed under the full and unconditional TCO guarantee,” S&P said in a statement. “Our ratings of TCO as satisfactory primarily reflects our view of the company's low-cost production, which allows it to generate meaningful positive free cash flow, even with low oil prices (before the expansion project). At the same time, it incorporates the agency’s view of the company's exposure to high country risk in Kazakhstan, where all of its assets are located, together with limited diversity in terms of products and geography. TCO's business risk is also constrained by its reliance on the Caspian Pipeline Consortium (CPC) as a low-cost means of transportation, which currently supports above-average profitability. However, this dependence could meaningfully increase costs in case of any disruptions,” the rating agency noted.
TCO Launches the Largest Investment ProjectS&P assesses TCO's financial risk profile as significant, reflecting its expectation that the expansion project will materially increase debt/EBITDA ratio, which will peak in 2020-2021 at about 4.0x, with a gradual reduction thereafter. S&P Global Ratings agency has assigned its BBB long-term corporate credit rating to Tengizchevroil LLP (TCO), the forecast is negative, the agency said in a message. The negative forecast on TCO mirrors the similar forecast on the Kazakhstan sovereign credit rating. “We expect that TCO could attract borrowing by the end of 2016 and commence its investment project and that its shareholders will provide their share of the funding, as currently envisaged by the financing structure,” the rating agency said in a statement.
Implementation of the project will result in the production of an additional 250 million tons of oil by 2033, when the contract ends. “But the oil field will live and after 2033 quite actively,” said Minister of Energy Kanat Bozumbaev. “In general, the expansion will continue after the contract ends, and the additional production will be exactly 420 million tons. If oil prices will behave normally, Kazakhstan will get about 120 billion dollars in taxes by the end of the contract period.
Billions to local contractors
Today Tengizchevroil is the largest taxpayer in the country. The increase in output will bring Kazakhstan more budget revenue. Anuarbek Jakiyev, TCO Deputy General Director, said: “The creation of jobs, the purchase of products and services and the ‘multiplier effect’ throughout Kazakhstan’s economy are significant. FGP-WPMP will leave a legacy of new capabilities for our country’s future – in engineering, high-tech equipment servicing, project management, construction and fabrication.”
FGP-WPMP has completed the front-end engineering and design (FEED) phase and about 52 percent of detailed engineering. The project team is currently engaged in long-lead procurement and early construction works for key project infrastructure at site in Tengiz.
TCO Launches the Largest Investment ProjectFGP will generate approximately 20,000 jobs during peak construction. 30% of the total project cost in $37 billion will be placed on Kazakhstani suppliers and contractors. TCO has already invested more than $20.8 billion on Kazakhstani goods and services since 1993. TCO attracts Kazakhstani enterprises to perform works on designing, purchasing and module manufacturing for FGP. To date, over 1,600 Kazakhstani companies have undergone a pre-selection procedure.
In the year 2022, when FGP really works, and Kashagan, as expected, reaches the volume of commercial production, Kazakhstan will have all chances to bypass by volumes of extracted oil the countries like Norway and Qatar. According to Matthew Sagers, Managing Director of the Washington Office of consulting firm IHS Inc. on Caspian oil and gas exploratory region, “it will be tantamount to one more minor national oil player in the oil market.”
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