What’s at stake for oil and gas markets in the Kazakhstan protests?

This article was written in collaboration with Laura Page.

Violent clashes between protesters, police and the army broke out in Kazakhstan after the government lifted its price cap on LPG, which is widely used as a motor fuel in the country. With Kazakhstan being a major oil and gas producer and exporter, we take a look at what could be at stake if disruption hits the energy sector.

Kazakhstan produces around 1.5% of global oil supply and exports 3.2% of seaborne oil

Although internal tensions in Kazakhstan have not impacted physical export flows yet, markets should keep an eye on events in the country as the situation could be quickly turning around. Kazakhstan produces around 1.5 mbd – roughly 1.5% of global oil supply – and has a production capacity of 1.7 mbd. As a member of the OPEC+ alliance, it has agreed to undertake production cuts. As a result, it is entitled to boost production by another 137 kbd between now and September, when the OPEC+ agreement is supposed to terminate.

Kazakhstan’s oil exports reached 1.18 mbd in 2021, up from 1.12 mbd in 2020. Production is increasing in line with the OPEC+ agreement, although we believe that the country overproduced in Q4 as exports reached 1.29 mbd in Q4, lifted by an extremely elevated level of 1.4 mbd last month, a monthly record for the country. Kazakhstan’s low level of compliance was notably discussed at the latest OPEC+ meeting earlier this month. Over Q4, the country had a 3.2% share in global seaborne oil exports.

Protests, which were initially centered on the country’s largest city and previous capital, Almaty, have now spilled over to other cities including Atyrau, Kazakhstan’s main city on the Caspian Sea and considered the country’s oil capital. While Almaty is located some 1,850km away from the northern Caspian region where the country’s largest oil and gas fields are located, Tengiz, Kashagan and Karachaganak, the country’s largest oil fields, are within a 200km radius from Atyrau. Oil workers have joined the protests as of 5th January. As a result, Chevron which operates the 700-kbd Tengiz field, indicated that disruptions at train lines had started to impact oil production.

The CPC pipeline provides a vital line to Kazakhstan via Russia

Oil production is mostly exported via the Caspian Pipeline Consortium (CPC) pipeline, which runs across west Kazakhstan and Russia to reach Novorossiysk on the Black Sea. Throughput at the CPC was 1.3 mbd last year. Usually, around 90% of the throughput is Kazakh liquids while the remaining comes from Russia’s Caspian fields.

The 40-inch pipeline was commissioned in 2001 and was expanded in 2018. It is the country’s main oil export route. It runs for around 1,500km from the Tengiz field – operated by Chevron – to Novorossiysk in Russia. The route runs via Atyrau in Kazakhstan – where the country’s refinery is located – and Astrakhan, Komsomolsk, and Kropotkin in Russia.

The pipeline is also an illustration of Kazakhstan’s over-dependence on Russia. The oil and gas sector is the country’s leading economic contributor, representing around a fifth of GDP and close to 60% of exports.  All oil that is not consumed domestically is exported via the pipeline, at an attractive tariff level: around $4.8 per barrel paid to the CPC shareholders, which include the Russian government (24%) and Kazakh state-owned KazMunaiGas (19%) as well as Chevron (15%) and Lukoil (12.5%) and others.

China probably won't be affected but could resort to increased seaborne volumes in the short term, probably from Kozmino

Russia's intervention in support of the Kazakh government is also explained by its stake in the Kazakhstan-China oil pipeline. In addition to the CPC pipeline, Kazakhstan's other main oil pipeline links the northern Caspian region to Alashankou in Xinjiang. The 2,800km long pipeline has a 400 kbd capacity and is operated by CNPC. In the future, the Kashagan field will provide most of the liquid flows for the pipeline.

For now, it is also mostly used to transport Russian oil under a swap agreement: around 200 kbd of Russian oil flows eastwards to China. Some of these volumes reach Kazakhstan's Atyrau refinery, but they are replaced by Kazakh oil - from CNPC's Aktobe fields and from the Kumkol field - under a swap agreement. This pipeline further highlights the importance of maintaining stability in the country for Moscow.

With the Kazakhstan-China pipeline mostly exporting Russian oil, we do not expect a significant reduction in throughput because of the ongoing crisis. However, were this to happen, it won't impact China significantly as the bulk of Chinese consumption is in the east. More generally, such a disruption would impact Russia more than it would affect China.

Nevertheless, China could be tempted to increase seaborne oil imports from the east and could turn to more imports of Russian oil from Kozmino. Russian oil exports out of Kozmino reached a monthly all-time high with 780 kbd exported last month, primarily to China. Technically, Russia could divert Western Siberia crude to the ESPO pipeline via the Omsk-Irkutsk pipeline, potentially boosting shipments out of Kozmino to 1 mbd but doing so would mean higher transportation costs compared to the Kazakh route.

Two thirds of Kazakh oil typically heads to Europe, primarily Italy and Central Europe

Lower CPC supplies would add to Europe’s woes after two other major suppliers have seen production outages lately. Three quarters of Libya’s oil exports are usually headed to Europe, while Libya's production has fallen from 1.2 mbd to 700 kbd lately. Likewise, 44% of Nigeria’s exports headed to Europe last year, making the Old Continent the first destination for Nigerian oil.

Kazakh oil is mostly shipped to Europe, although Asia represents a non-negligible share. In 2021, two-thirds of oil shipped out of the CPC terminal, or 887 kbd (including Russia’s CPC oil) went to Europe. Italy (and Central Europe via the Trieste terminal) would be the most impacted places by far. Italy traditionally is the main importer of CPC oil, taking close to a third of shipments bound to Europe, or 280 kbd on average in 2021. In fact, 40% of Italy’s oil imports come from the CPC terminal, Libya and Nigeria combined. The Netherlands, Turkey and France are also major importers of CPC oil with volumes averaging between 100 kbd and 150 kbd for each. In total, Kazakh oil represented 8% of Europe’s oil imports last year.

Are we heading towards a shortage of light sweet oil supply in Europe, widening the WTI-Brent spread?

Coincidentally, not only have production outages worldwide mostly hit some of Europe’s main oil suppliers at the same time, but most of these disruptions have also hit light sweet oil supply. The CPC blend is light and sweet (44 °API, 0.6% sulphur). Any potential disruptions would further impact the supply of light sweet oil in the market following Libya and Nigeria, Libya’s Sharara blend and Nigeria’s Akpo and Agbami blends share similar characteristics with CPC. Nigeria’s exports were down 273 kbd or 17% in December m/m to 1.37 mbd, while Libya’s oil exports more than halved in the last week of December to 486 kbd.

This comes at a time where we see US oil production and exports boost at the fastest pace since the beginning of the pandemic, and as we expect US shale oil production to increase by 100 kbd every month in H1 2022. Oil exports out of the US have reached 3.23 mbd in December, up 86 kbd m/m and 162 kbd y/y, and their highest level since February 2020.

Equities: OMV with the highest downside risk?

On the corporate side, OMV’s oil supply is at risk as the company transports all its crude oil imports through the Transalpine oil pipeline, which begins in Trieste, where 95% of CPC oil destined for Italy is discharged. Companies involved in the country’s upstream and midstream operations such as Chevron, Eni, Total, Lukoil, CNPC and ExxonMobil are also at risk.

China and Russia could face gas shortfalls if production or infrastructure is impacted

Kazakhstan’s natural gas output reached 55.2 bcm in 2020 and was expected to come in at 54.4 bcm in 2021.  Most of the country’s gas is produced in association with oil at the country’s three major projects - Tengiz, Karachaganak and Kashagan.

As well as supplying the domestic market with gas, Kazakhstan exports surplus gas via pipeline to Russia and China. It is understood that around 12 bcm/year of gas is supplied from the Karachaganak field to the Orenburg processing plant in Russia. Over the past 12 months, 6.1 bcm/year has been exported to China, according to Chinese customs data. Any disruption to domestic gas production could hinder exports to these countries, as well as supply to the domestic market.

However, China’s security of supply could be at greatest risk if there are any attacks on the Central Asia-China pipeline which passes through Shymkent and Almaty (where recent unrest is centred) in southern Kazakhstan. The three-line Central Asia-China pipeline has a capacity of 55 bcm/year and passes from Turkmenistan, through Uzbekistan and Kazakhstan into Horgos in Xinjiang province. The gas is then transported through the West-East pipeline system for onward delivery to demand centres in eastern China.

Together, Turkmenistan, Uzbekistan and Kazakhstan account for 75% of China’s pipeline supply or on average 3.6 bcm of gas each month between January and November last year. The remaining 25% of China’s pipeline supply originates from Russia and Myanmar.

Turkmenistan is by far the largest supplier through the pipeline, shipping on average 2.7 bcm per month or 57% of China’s total pipeline gas supplies between January and November last year. Kazakhstan supplied on average 0.5 bcm of gas each month to China over the period, accounting for approximately 10% of China’s total pipeline imports. The gas originates from fields in the far west of Kazakhstan and runs through a pipeline that begins in Beynu and ends in Shymkent where it discharges gas for the population centres in the southeast and connects to the Central Asia-China pipeline for export. Uzbekistan typically supplies on average 0.4 bcm each month or 8% of pipeline supplies.

Chinese pipeline imports account for roughly 18-20% of the country’s total gas supply in the peak winter months of January and February. If pipeline imports face disruption, China would likely pivot towards the LNG market to make up for lost volumes.

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