Foreign Operators Feel the Heat and Pressure in Kazakhstan's Oilfields

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). High pressures and temperatures are the order of the day both geologically and politically on Kazakhstan's oilfields.

The head of the oil and gas institute in Aytrau, Kazakhstan reports that the hydrocarbons in the Kashagan field are under a very high pressure of about one thousand atmospheres with a petroleum temperature of between 100-120 degrees Celsius. The release of hydrocarbons in these conditions will result in fluctuations in the earth's crust. An incident under similar conditions was recorded in a petroleum development area close to Aktau in 2000. Work is in hand on developing alternative methods to recover Kashagan's oil to avoid the possibility of catastrophic consequences.

In the heat and pressure of oil business politics the ChevronTexaco led (NYSE:CVX) (San Francisco, California) consortium, TengizChevroil, has reached an agreement with the Kazakhstan government on how to finance the expansion of the country's largest oilfield. The onshore Tengiz field is the country's largest producer.

TengizChevroil suspended a $3 billion expansion plan last month when the government said, to protect its budget income, that the company should borrow abroad and continue to pay tax on profits. The oil company had proposed that it would reinvest profits from the local operation in expansion which would mean fast amortization. The Kazakhstan government claimed that this would lose them budget income of $600 million over the next three years.

The minister of energy, industry and trade announced in the first week of December, that a solution to the confrontation had been found and that the budget would receive $200 million per annum. Just how the oil consortium would now raise expansion funds was not revealed. " That's not a matter for the public, that's the business of our partners' the minister was reported to have said.

The minister's partners, TengizChevroil, have had another bruising experience with a $70 million fine imposed by a Kazakhstan court for ecological damage caused by the storage of six million tons of sulfur at the Tengiz field. The natural resources and environmental protection ministry states that sulfur has a negative effect, and that the company lacked permission to store sulfur at the site. The company is considering an appeal as it views the sulfur as a product and not a waste, temporarily stored, under state and international standards, awaiting export for use in road building and fertilizers.

TengizChevroil production averages over 250,000 barrels per day. The planned expansion program will increase production to around 440,000 barrels per day. ChevronTexaco holds 50% of TengizChevriol, KazMunaiGaz 20%, ExxonMobil 25%, and LUKArco 5%.

The political will and pressure of the Kazakhstan government has also put a squeeze on Hurricane Hydrocarbons (TSX,NYSE:HHL) (Calgary, Alberta) who had intended to acquire a stake in the Caspian Pipeline Consortium (CPC) to provide an export outlet. The company and the government have disagreed over export quotes and so now Hurricane is looking to diversify its routes out of the country where it is the second largest foreign producer. Hurricane's production and refining operations are totally based in Kazakhstan. The company plans to continue to grow production, from the current 135,000 barrels per day, and to increase exploration efforts.

Transport costs and pipeline access are crucial for Hurricane in decreasing its reliance on rail for oil transport. They are still hopeful to be able to ship part of their production through CPC pipeline, as they are currently using seven different routes and striving for better transportation tariffs.

Hurricane has signed a deal with KazMunaiGas indicating that it would take a minority stake in the 700 kilometer Kumkol-Aralsk-Kenkiyak (KAK) pipeline, depending on feasibility study results. The possible commissioning of the project is three years down the road so the pressure for Hurricane's oil to find low tariff routes out of the country is still on with the government continuing to put pressure on margins.