Eric Watkins
Senior Correspondent
LOS ANGELES, Aug. 24 -- Kazakhstan's oil and gas pipeline operators, according to Fitch Ratings, are set to embark on intensive investment programs over the next 5 years to capitalize on favorable oil and gas industry fundamentals, as well as increased demand from a rapidly growing Kazakh economy.
"Whilst the credit impact of these programs will be more pronounced in the short-term, it could be limited in the long-run based on the nature of projects funding," the ratings agency said.
KazTransGas (KTG), a national operator of gas pipelines in Kazakhstan, has increased capital expenditure plans with a view to investing more than $8 billion in the construction of three gas pipelines, including the West-South gas pipeline, the China gas pipeline and the By-Caspian gas pipeline.
In turn, Kazakhstan's state-run oil pipeline operator KazTransOil (KTO) intends to invest more than $2 billion in the construction of two new oil pipelines.
The two new lines include the Kenkiyak-Kumkol route, which will connect western Kazakhstan to China, and a link between the Kashagan oil field and a new export terminal on the Caspian Sea.
Moreover, according to Fitch, the consortium operating the Caspian Pipeline Consortium (CPC) pipeline is considering the possibility of pipeline capacity expansion, with the costs estimated at some $2.5 billion.
Angelina Valavina, Director of Fitch's Energy, Utilities & Regulation team, said that while implementation of the construction and expansion projects unveiled by Kazakh pipeline operators will put pressure on the companies' credit metrics in the short-term, "the impact of escalating capex is likely to be subdued in the medium to long-term due to the flexibility of financing options available to operators."
Fitch noted that non-recourse financing is emerging as an important financing tool in the region, as demonstrated by KTO's financing of the Kenkiyak-Kumkol route construction. KTG is also currently negotiating for financing of the China gas pipeline to be arranged by its JV counterparty—CNPC—without recourse to KTG.
Fitch also noted that some projects are expected to be partly or fully state-funded given their social and political importance such as the construction of the West-South gas pipeline by KTG.
"This project will connect the western gas-producing region of Kazakhstan with the main consuming region in the south and thus will ensure the country's energy independence," Fitch said.
Additionally, it said, construction of some pipelines is pre-conditioned on obtaining secured transportation contracts.
This approach is being considered by CPC for its pipeline expansion, where it intends to render transportation services on a ship-or-pay basis.
As another example, Fitch cited KTG which plans to increase gas transit tariffs and secure gas transportation contracts with OAO Gazprom as part of the By-Caspian gas pipeline construction.
"In combination," Fitch concluded, "these factors could mitigate the negative impact of large investments on Kazakhstani oil and gas pipeline operators' financial profiles, albeit with a time lag."
Nevertheless, it said, "given the smaller scale of these companies (including KTG and KTO), management should exercise a prudent and disciplined approach to managing their capex."
Contact Eric Watkins at [email protected].