Central Asian FSU republics set to expand oil export pipeline network

David I. Hutchison
Wood Mackenzie Consultants Ltd.
Edinburgh

The oil industry in the central Asian/Caspian Sea region of the former Soviet Union is entering an exciting new phase as governments look to exploit massive reserves.

This phase is characterized by increased foreign investment, exploration activity, early production projects, construction of new pipelines, and expansion and diversification of the transportation network.

The central Asian republics hold some of the largest oil reserves in the world, comparable in size with those of western Europe. However, for many years, these countries' resources were developed for the principal benefit of the Soviet Union.

A massive injection of foreign investment, major structural reorganization, modern technology, improved management techniques, and increased productivity are now required to transform the economies of the region and realize their full potential.

A major obstacle to oil exports is the fact that this vast region-covering 3.9 million sq km, compared with western Europe's area of 3.5 million sq km-is landlocked.

Oil exports are seen as a priority to help pay off long-term debts and revitalize the economies. However, without several major new oil export pipelines, it will not be possible to secure the hard currency income needed to realize the full growth potential of the region.

Many new central Asian oil export pipeline routes have been proposed in recent years. However, because of tough competition, unrealistically high production forecasts for individual countries and optimistic pipeline construction schedules are too often featured in the debate.

Wood Mackenzie Consultants Ltd. recently reviewed production and export potential and pipeline capacities for the main central Asian oil countries-Kazakhstan, Turkmenistan, Uz- bekistan, and Kyrgyzstan-to understand more fully the dynamics and competitive nature of pipeline politics in this emerging region.

Of the four central Asian republics considered, Kazakhstan has by far the most extensive oil pipeline network, with 80% of the central Asian grid.

Despite the size of the network in Kazakhstan, there is a fundamental problem in that it was designed to bring Russian crude into the refineries in the eastern, populated parts of the country and to export Kazakh crude from the western part of the country to Russian refineries.

The less-developed oil pipeline systems in both Turkmenistan and Uzbekistan were primarily constructed to supply Russian crude to local refineries. The short pipeline in Kyrgyzstan allowed production from the small Izbaskent field to be exported to Uzbekistan for refining.

Kazakhstan

Kazakhstan's main oil pipelines are believed to be in satisfactory condition, as there have been no major oil leaks and resulting environmental damage.

Of six main oil pipelines in Kazakhstan, the two primary export/import lines (Uzen-Atyrau-Samara and Omsk-Pavlodar-Chimkent-Chard-zhev), were built in the 1970s, and the remainder were brought into operation during the 1980s.

A program is under way to evaluate the state of repair of the pipelines and assess the extent of internal corrosion. System throughput is low due to a combination of declining state-controlled production, low Russian import quotas, small volumes of oil transported across the country, payment difficulties, and reduced supply to the two eastern refineries.

The Uzen-Atyrau portion of the Uzen-Atyrau-Samara pipeline has a maximum capacity of 500,000 b/d, while the Atyrau-Samara section is rated at 210,000 b/d.

The Uzen-Atyrau segment of the pipeline was operating at 30% capacity during January-September 1997, when throughput on the Atyrau-Samara section was 154,000 b/d (73% of capacity). The Kenkiyak-Orsk pipeline, with a capacity of 130,000 b/d, was operating at only 26% capacity during the first 9 months of 1997.

KazTransOil is the wholly state-owned oil pipeline operator in Kazakhstan. It is a closed joint stock company formed in May 1997 to replace two firms: Yuzhnefteprovod (western oil pipelines) and the Main Oil Pipeline Board of central Asia (eastern oil pipelines).

Bearing in mind that operation of the gas pipeline network has already been handed over, under contract, to Tractebel of Belgium, there is some uncertainty regarding how Kazakhstan's oil pipelines might be managed in the future.

While the initial emphasis is likely to be on reassessing pipeline tariffs in the short term, some restructuring of KazTransOil to allow foreign participation is expected.

To date, there is no pipeline linking the main centers of production in the west with the two main refineries in the east. This critical link could be achieved by the proposed Chinese National Petroleum Corp. (CNPC) pipeline to China, which supercedes an earlier Kazakh proposal to construct a west-east pipeline.

Turkmenistan

In Turkmenistan, there is only a small local oil pipeline network, operated by 100% state-owned Turkmenneft, linking oil fields in the west with the Turkmenbashi refinery.

In the east, the main import pipeline from Russia, through Kazakhstan (Omsk-Pavlodar-Chimkent-Chard-zhev), terminates at the Chardzhev refinery.

Although the central Asia Oil Pipeline Project (Caopp) is intended to originate at Chardzhev in Turkmenistan, a 1,000 km pipeline linking oil fields in the west with Chardzhev in the east would be required if Turkmenistan is to export crude through this line.

The primary long-term options for export of Turkmen oil by pipeline are likely to be via the proposed line south to Iran or the Trans-Caspian pipeline, both longer-term prospects. However, in the short term, it is likely that most oil exports from Turkmenistan will continue by tanker across the Caspian Sea.

Uzbekistan

Uzbekistan has no dedicated oil export pipelines and a poorly developed internal oil pipeline network, comprising two main lines, which link the main fields with the Fergana and Altiarik refineries, and several inter-field lines.

However, the Omsk-Pavlodar-Shymkent-Chardzhev import pipeline crosses the country. The country's 725 km of pipelines are operated by six organizations under the jurisdiction of Uzbekneftegaz. They are Karshineft, Mubarekgaz, Dzharkurganneft, Asaka Pipeline Board, Fergananeft, and Mingbulakneft.

The transportation of oil internally is severely restricted by lack of pipeline infrastructure, and the country is thus highly dependent on transportation by rail. In addition, several of the pipelines were commissioned almost 50 years ago and are now in desperate need of upgrading.

Oil exports from Uzbekistan will be relatively small and could not support an export pipeline in their own right. Therefore, the most likely export option for Uzbekistan in the longer term is the proposed Caopp pipeline to Pakistan.

Kyrgyzstan

Kyrgyzstan has no major export oil pipeline and virtually no internal oil pipelines.

The only pipeline links Izbaskent oil field, in the Kyrgyz sector of the Fergana basin, with Asaka in Uzbekistan. Oil is pumped to the Fergana refinery for processing, because Kyrgyzstan had no refineries until recently.

central Asia currently has an export pipeline capacity of 640,000 b/d through three pipelines that run through Kazakhstan to Russia.

However, it is believed that no oil is being exported to Astrakhan, Russia, so the total effective pipeline export capacity from central Asia is 340,000 b/d.

For a region with the potential to increase production significantly, current export pipeline capacity is less than satisfactory. Due to payment difficulties and export restrictions through Russia, alternative export routes to international markets are desperately needed.

Production potential

Central Asia has the potential to increase oil and condensate production fourfold, from a combined 800,000 b/d now to 3.1 million b/d by 2020.

The region's production capacity could increase to around 1 million b/d by yearend 1998. The regional supply picture will be dominated by Kazakh- stan, which could provide 80.5% of total production and 87% of potential exports in 2020.

Turkmenistan would produce 13% of the regional total, with Uzbekistan contributing 6.4% and Kyrgyzstan 0.1%. This forecast assumes that the equivalent of three Tengiz-sized oil fields are discovered offshore during 2000-10.

While there is undoubtedly some upside in this forecast, it should be stressed that there is also a significant downside, if substantial gas rather than oil reserves are discovered offshore.

For Turkmenistan, one large offshore discovery and production from undeveloped onshore fields have been assumed. The country's current offshore production amounts only to 8,000 b/d from one small venture.

If the region's ambitious target of a total 3.1 million b/d of production in 2020 is to be achieved, almost 1.4 million b/d, or 45% of the total, will come from major exploration successes in Kazakhstan and Turkmenistan.

Total offshore production from central Asia could reach 1.56 million b/d, or 51% of total production, in 2020. Due to the significant contribution required from exploration offshore, there is considerable uncertainty regarding the production potential estimate, especially bearing in mind the strong possibility that some gas could be found instead of oil.

Based on regional trends, any gas is likely to be high-pressure and sour, which will add significantly to the cost of any possible development.

Consumption/exports

Oil consumption in central Asia next century is expected to rise by about 3%/year, to reach the pre-independence level of 800,000 b/d in 2020.

A very optimistic 5%/year growth assumption would allow the pre-independence consumption to be reached as early as 2010.

Central Asia could export 2.3 million b/d of oil in 2020, but only if all the main projects and offshore exploration program go ahead as forecast.

Based on successful offshore exploration programs and adequate foreign investment, Kazakhstan and Turkmenistan could meet 99% of export requirements from central Asia in 2020. There are unlikely to be any significant net exports of oil from Uzbekistan and Kyrgyzstan.

In the unlikely event of a 5%/year growth in demand, only 1.8 million b/d would be available for export from the region in 2020. However, in a worst-case scenario based on only half the anticipated offshore exploration success in Kazakhstan and Turkmenistan, exports from the region would fall by 700,000 b/d to just 1.6 million b/d in 2020.

Pipeline capacity

The Uzen-Atyrau-Samara oil pipeline is Kazakhstan's principal export line, used to transport heavy oil from fields on the Buzachi Peninsula and oil from Uzen field to the Samara refinery.

The 210,000 b/d capacity of the Atyrau-Samara section is the main technical constraint to Kazakh oil exports. However, throughput during the first 9 months of 1997 was only about 154,000 b/d. There are plans to increase capacity of this line to 300,000 b/d during 1998.

Oil from Zhanazhol field is supplied to Kenkiyak through a single pipeline. The twin oil pipelines running between Kenkiyak and Orsk have combined capacity of 130,000 b/d.

Oil is pumped from Kenkiyak to the Orsk, Salavat, and Ufa refineries in Russia in exchange for light western Siberian oil supplied to the Pavlodar and Chim- kent refineries.

However, in recent years, the supply of Russian crude has been reduced considerably, due to price and payment-related difficulties. As a result, Zhanazhol crude has been sent by rail to Kazakh refineries in the east.

Rail exports

Although the Kazakh rail network connects to other FSU countries that in turn link up Europe, Asia, and China, rail transport is difficult due to the gauge differences of the railway lines.

There are also severe restrictions on the volumes of crude that can be transported by rail, due to the fact that most of the lines are single-track.

In the past, Chevron Corp. has sent quantities of Tengiz crude by rail to Finland. Trial shipments of Tengiz oil have been sent by rail to China to assess the route and to see if the Chinese refineries could obtain satisfactory yields from the high-mercaptan-content crude.

CNPC has begun exporting its 24,000 b/d share of oil from Aktyubinsk area fields to China by rail. Due to different railway line gauges, capacity is limited to 50,000 b/d, but a project to double rail transit capacity to 100,000 b/d is under way.

If Chevron and CNPC both attempt to increase rail exports significantly in the short term, then there could be a shortage of rolling stock in Kazakhstan. It is believed that export of oil by rail from the region is unlikely to exceed 60,000 b/d in the short term, or be much over 100,000 b/d beyond 2000.

Seaborne exports

During the Soviet era, Kazakh crude was shipped from the port of Aktau to Azerbaijan.

Kazakhstan's main port, Aktau, is navigable year round, but the shallow waters of the northern part of the Caspian Sea are covered by ice for about 5 months of the year.

Aktau has facilities to load 60,000 b/d of oil into 5,000-metric-ton capacity tankers. This could be expanded to 400,000 b/d of oil into 10,000-ton tankers.

The port requires modernization, and a breakwater needs to be built to counter the rising waters of the Caspian.

After protracted negotiations, an outline agreement on the exchange of Kazakh crude with Iran was signed in 1996. Kazakh blend crude was to be transported by rail to Aktau and then shipped across the Caspian Sea to northern Iran.

The agreement provided for the supply of 40,000 b/d in the initial stages, increasing to 120,000 b/d later, although Iran's northern pipeline system is capable of handling 500,000 b/d. The swap was scheduled to begin in mid-1996, but there have been disagreements over pricing and the quality of the crude.

The main sea route from the Caspian Sea to the Black Sea is via the shallow draft (3.7 m) Volga-Don Canal. Vessels of up to 5,000 dwt can use this route to access the Black Sea and the Mediterranean.

Until the Caspian Pipeline Consortium (CPC) export pipeline becomes operational in 2000, there is likely to be a growth in Trans-Caspian exports from Kazakhstan.

It is believed that current export capacity of 60,000 b/d will be boosted to the Soviet-era level of 140,000 b/d by 1999. It has been assumed that half the maximum port capacity of 200,000 b/d could be reached by 2010.

Turkmenbashi, the largest port on the eastern Caspian, is in a poor state of repair. Reconstruction of the port, which began in 1995, is one of the country's priority projects.

There are also oil tanker-loading facilities at Cheleken and Ekerem (1.8 km offshore). Trans-Caspian oil exports from Turkmenistan are likely to flourish until there is competition from the CPC pipeline in 2000.

Oil exports from Turkmenistan are running at a very low level of about 6,000 b/d. However, production is set to rise as the Nebitdag and other projects come on stream, and exports could build up to around 100,000 b/d by the turn of the century. The first shipment of oil from the Nebitdag venture was delivered to Baku in November 1997.

Black Sea route

Construction work on the CPC pipeline to the Black Sea was intended to begin in January 1998, which would have allowed start-up in November 1999.

However, because of access difficulties via Russia, construction has been delayed, and the official start-up has slipped to September 2000. Initial capacity of the pipeline will be 560,000 b/d, expandable in four stages to 1.35 million b/d in 2010.

The government of Turkey has indicated that current traffic through the Bosporous Straits has reached its limit of 750,000 b/d. However, with additional navigational aids, capacity could perhaps be doubled.

It should be kept in mind that, due to volume restriction through the Bosporous Straits, it is likely that a Bosporous bypass or an additional line through Turkey will be required during capacity buildup in the CPC pipeline.

In the event that a new Turkish pipeline is not built, then one of the other proposed central Asia oil pipelines might become a more attractive proposition.

CNPC line to Iran

If lasting political stability is to be secured in the region, it is inevitable that a greater degree of cooperation will be required between all the players.

The proposed CNPC pipeline to Iran provides an excellent opportunity for four of the major countries in the region-China, Kazakhstan, Iran, and Turkmenistan-to cooperate and share in the benefits. In addition, it would provide an important counterbalance to potential U.S./Turkey/Russia dominance in the region.

As CNPC appears to be undeterred by financing and U.S. sanctions that apply to foreign investment in Iran-rather than to oil transit through Iran-this pipeline could provide some competition to CPC in the short term.

For the purpose of this study, a nominal capacity of 250,000 b/d has been used. As this pipeline is one third of the length of the proposed 500,000 b/d CNPC pipeline to China, it has been assumed to be constructed first and put on stream in 2002.

In addition, as only 200 km is actually within Kazakhstan, this route would be considerably cheaper for CNPC. However, an extra 300 km section might also be required to link up CNPC's Aktyubinsk fields to the main export pipeline at Kulsari.

CNPC line to China

Despite the obvious need for China to import oil to replace declining production, many oil companies in central Asia have expressed doubts about the commercial viability of this long pipeline to China, especially as CNPC production is unlikely to occupy more than 40% of the 500,000 b/d capacity of the line.

Press reports suggest that the pipeline should be completed by 2005. However, it is difficult to see how it could compete with the CPC pipeline, which is scheduled to start operation by September 2000.

Continued speculation about the Chinese pipeline will at least ensure that the Russians and CPC partners do everything possible to meet the ambitious start-up target of the CPC pipeline.

Trans-Caspian pipeline

In June 1997, the presidents of Azerbaijan and Kazakhstan signed a memorandum of understanding for cooperation in transportation of oil to foreign markets.

The agreement envisioned construction of a pipeline across the Caspian Sea, calling for a construction start in 2000 and its completion as early as 2003.

However, to meet this ambitious timetable, resolution of the territorial status of the Caspian Sea, agreed on by Azerbaijan, Turkmenistan, and Kazakhstan, would be required.

Despite the statements on timing, it is difficult to see this pipeline materializing until production from the offshore sectors in Kazakhstan and Turkmenistan begins to accelerate, beyond 2010.

Although a capacity of up to 2 million b/d has been proposed for this pipeline, this probably relates to the overall requirement for a main oil export route from Baku to Ceyhan.

However, a more modest initial capacity of 500,000 b/d has been assumed for the subsea section, based broadly on an extra 200,000 b/d from onshore ventures in Turkmenistan and 300,000 b/d from new offshore developments in Kazakhstan.

As the offshore developments gather pace, a 1 million b/d pipeline could probably be supported sometime beyond 2020.

The final decision on the main export pipeline route for Azerbaijan International Operating Co. (AIOC), a consortium developing Chirag, Azeri, and Guneshli fields in the Caspian Sea, will be made by the Azeri government before October 1998.

This will mean the main oil export route from Baku might become operational around 2003. The Trans-Caspian pipeline would probably only be viable after the main AIOC pipeline is in operation.

Caopp to Pakistan

There is no large source of oil close to Chardzhev, where the central Asia Oil Pipeline Project (Caopp) originates, which could be used to fill this pipeline.

However, production from Kazakhstan, Azerbaijan, Turkmenistan, and Russia could be fed into the pipeline at Chardzhev for delivery to the ports of Gwadar, Pasni, or Ormara.

Unless there are significant volumes of Russian oil exported through this line, it is difficult to see how it could compete with the CPC pipeline in the short term.

As a result, it has been assumed that this pipeline will only be viable beyond 2010. This 1 million b/d pipeline is perhaps best considered as a possible replacement for CPC, if that did not go ahead, rather than a direct competitor.

Russian crude can be pumped along the Russia-Omsk-Pavlodar-Chimkent import pipeline to Kazakhstan's Pavlodar and Chimkent refineries and Turkmenistan's Chardzhev refinery.

The Omsk-Pavlodar section has a capacity of 800,000 b/d, while the Pavlodar-Chimkent section has a capacity of 460,000 b/d. This pipeline is working at much-reduced capacity in Kazakhstan (4% and 9% for each section, respectively, during the first 9 months of 1997) because of the decline in deliveries of western Siberian crude and because the Turkmen section is idle.

This pipeline could be used to feed West Siberian oil to Chardzhev for the proposed Caopp line to Pakistan, or, by reversing the direction of flow in the pipeline, central Asian oil could be exported to Russia.

As all the region's oil is likely to be needed in the three refineries along the pipeline route in the foreseeable future, this export option is considered extremely unlikely. Consequently, this pipeline capacity has only been considered an export route after 2015.

Surplus capacity risk

Five grassroots oil export pipelines from the central Asian region, with a combined capacity of 4.6 million b/d, have been proposed.

It should be noted that, if all five pipelines were put into operation as indicated, there would be a massive surplus of export capacity in central Asia.

Central Asia is set to become a major global player, having the potential to increase oil production by 2.2 million b/d to reach 3.1 million b/d in 2020, 80% of which will come from Kazakhstan.

However, only 2.3 million would be available for export based on a projected regional consumption of 800,000 b/d.

If the planned CPC pipeline capacity of 1.35 million b/d is reached in 2010, central Asian oil exports will be dominated by this one pipeline, and it will be extremely difficult for the competition to make any inroads before 2010.

It appears that the CPC pipeline capacity has been carefully engineered potentially to control early oil exports from central Asia. In addition, once the pipeline is operational, the CPC group would have the option to adjust the pipeline tariff for third parties to discourage new grassroots pipelines.

However, the scope for Russia to delay the schedule or complicate matters by increasing imports from central Asia should not be overlooked. Furthermore, throughput through this line will be controlled to some degree by Turkey because of shipping restrictions through the Bosporous.

The estimated export potential is based on an average annual production rate. An additional 15% has been incorporated to account for the upside exploration potential in Kazakhstan and pipeline downtime. Based only on the projected export potential of Central Asia (+15%) and total pipeline capacity, it is difficult to see the need for more than two export pipelines before the year 2015 and three in the year 2020.

However, due to the need for competition to keep transportation tariffs down and the complex politics of the region, additional pipelines will certainly be required.

Uncertainty

As production capacity up to the year 2005 comes from existing onshore developments, it can be considered relatively secure.

However, as an increasing percentage of total production capacity will have to come from offshore exploration in the Caspian, a much higher degree of uncertainty must be presumed beyond 2005.

Nearly 45% of total production, or 1.4 million b/d, will need to come from new offshore exploration programs and major oil discoveries in Kazakhstan.

Optimum timing for export pipelines will unfortunately be subject to the same degree of uncertainty as offshore exploration. Progress in the forthcoming Kazakh and Turkmen offshore licensing rounds and early exploratory drilling results will need to be monitored and reviewed very closely so that pipeline capacity requirements can be reassessed over the next few years.

Increased offshore exploration activity is likely to encourage more interest in a Trans-Caspian subsea pipeline. However, resolution of the territorial status of the Caspian Sea is likely to have a significant effect on the timing and viability of any such route.

The complex geopolitics of the region will also have a major impact on pipeline routes, as the U.S., Turkey, Russia, China, and Iran battle for power and influence in central Asia.

The countries of central Asia desperately need to avoid dependence on Russia, so a number of secure export pipelines to international markets will have to be constructed.

While the CPC pipeline through Russia to Novorossiisk on the Black Sea is essential in the short term, it would not be commercially or politically prudent to rely on it alone for too long.

The proposed CNPC pipeline to Iran will provide a counterbalance to the potential dominance in the region by the U.S., Turkey, and Russia.

The Author

David Hutchison is head of F.S.U. Energy at Wood Mackenzie Consultants Ltd., Edinburgh. Since joining the company in 1994, he has been responsible for developing a new range of business analysis products and consultancy in Central Asia, the Caucasus, and Russia. Before that, Hutchison was with BP Exploration Operating Co. Ltd. in a variety of petroleum engineering, reservoir engineering, and planning assignments in South America, Middle East, and U.K. He holds a BSc degree in electronic engineering from the University of Strathclyde, Scotland.