Kazakhstan sits near the northeast portion of the Caspian Sea and claims most of the Sea's biggest known oil fields. Kazakhstan's combined onshore and offshore proven hydrocarbon reserves have been estimated between 9 and 40 billion barrels (comparable to OPEC members Algeria on the low end and Libya on the high end). Please see the reports by the US Geological Survey (USGS) for an extensive account of the country’s North Caspian and North Ustyurt basins’ oil reserves.

Kazakhstan produced approximately 1.45 million barrels per day (bbl/d) of oil in 2007 and consumed 250,000 bbl/d, resulting in petroleum net exports of around 1.2 million bbl/d. EIA expects oil production in Kazakhstan to average 1.54 and 1.71 million bbl/d in 2008 and 2009, respectively (See Table 3b of EIA’s Short Term Energy Outlook for updated estimates). Major producers include Karachaganak (250,000 bbl/d), Tengiz (280,000 bbl/d), CNPC-Aktobemunaigas (120,000 bbl/d), Uzenmunaigas (135,000 bbl/d), Mangistaumunaigas (115,000 bbl/d), and Kumkol (70,000 bbl/d). These producers account for 1 million bbl/d (or around 70 percent) of liquids production in the country. Other production is centered in smaller fields.

Increased oil production in recent years (see Figure 1) has been the result of an influx of foreign investment into Kazakhstan's oil sector. International projects have taken the form of joint ventures with Kazmunaigaz (formerly Kazakhoil), the national oil company, as well as production-sharing agreements (PSAs), and exploration/field concessions. See EIA’s table of PSAs in Kazakhstan for more information. The country expects the majority of the growth will come from four enormous fields: Tengiz, Karachaganak, Kurmangazy, and Kashagan. See the IMF’s November 2004 report for an expanded discussion of oil production in Kazakhstan.

Slower growth rates from 2005 to 2007 can be attributed to government restrictions on associated gas flaring, field maintenance at Karachaganak and Tengiz, cold weather, and a lack of progress on expanding the Caspian Pipeline Consortium (CPC) pipeline. Further restrictions due to environmental non-compliance, especially at the Tengiz field, may cause the revocation of the operator’s PSA and would therefore impede production growth.

The Tengiz field is located in the swamplands along the northeast shores of the Caspian Sea (see Map 2) and is the largest source of oil production in the country. The field has been developed since 1993 by the Tengizchevroil (TCO) joint venture. Production averaged almost 280,000 bbl/d during 2007, and recoverable crude oil reserves have been estimated at 6-9 billion barrels by consortium member Chevron. According to Chevron, Tengiz could potentially produce 700,000 bbl/d by the end of the decade with the sour gas injection program fully implemented . Most of the oil from the field is being sent through the Caspian Pipeline Consortium (CPC) pipeline to the Russian Black Sea port of Novorossiysk (see Map 2).

Due to current government regulations against the flaring of associated sour natural gas (see Natural Gas section), restrictions on flaring hurt production performance from the Tengiz field during 2005 and 2006. Repeated mechanical problems have also hurt output during the first half of 2006. In 2007 the consortium was fined around $609 million by the Kazakh authorities for environmental violations relating to the storage of over 9 million tonnes of sulfur, a waste product of oil production at the field.

A $1-billion plan to reinject the sour gas (SGI) is currently being tested and is one factor in the field’s increased production during late 2007. Full-scale implementation of SGI, along with newly-drilled wells (called the second generation project) should allow for an increase in oil production to more than 460,000 bbl/d during 2008.

The Kashagan field, the largest oil field outside the Middle East and the fifth largest in the world (in terms of reserves), is located off the northern shore of the Caspian Sea, near the city of Atyrau (see Map 1). The consortium operating the field, the Agip Kazakhstan North Caspian Operating Company--Agip KCO has estimated the field's recoverable reserves at 13 billion barrels of oil equivalent, with total reserves-in-place around 38 billion barrels. In late 2007, an Eni spokesman estimated that the field would initially produce around 300,000 bbl/d from the field as early as late 2011. According to Kazmunaigaz, full-scale commercial production is not expected to commence until 2013. The consortium originally estimated peak production at around 1.3 million bbl/d, but this figure may be adjusted under a new ownership structure agreed to in early 2008.

The Kashagan field has presented particular challenges for its developers. ENI, the operator of the consortium, has pushed back the projected startup date from 2005, then to 2008, and then to the end of 2011. Kashagan contains a high proportion of natural gas under very high pressure, the oil contains large quantities of sulfur, and the offshore platforms require construction that can withstand the extreme weather fluctuations in the northern Caspian Sea area. During negotiations over the redistribution of British Gas’s (BG’s) share, and in light of new government policies introduced at the same time, the project was delayed further.

In September 2007, Kazakhstan requested over $10 billion in compensation from the multinational consortium that was developing the Kashagan field in Kazakhstan, and the government prohibited further work on the field (in part, because of environmental violations) until the parties come to an agreement. After months of negotiations during 2007 and 2008, the shareholders finally agreed to allow Kazakhstan’s Kazmunaigaz (KMG) to raise its stake from 8.33 to 16 percent, paying $1.87 billion or roughly half their book value . The other shareholders will reduce their respective 18.52 percent stakes and will compensate the Kazakh government for delays. The companies will pay an additional $2.5-$4.5 billion to the country, depending on the price of oil. According to the Economist Intelligence Unit, government receipts from the field’s production are expected to total $20 billion through 2041. Large scale production will require completion of the Kazakh pipeline as well as an oil and gas treatment plant with an initial capacity of 300,000 bbl/d.

Although details of the new 2008 agreement have not been made public, reports indicate ENI will remain responsible for exploration and development of the field but will lose official “operator” status after the field comes online in 2011. Total and Shell, along with Kazmunaigaz, will form a new operating company after the field comes online. Kazakh sources estimate the total cost of the project has increased from $57 billion to $136 billion.

The Kashagan area also holds other hydrocarbon prospects. Other discoveries in the Kashagan area include Kashagan SW, Aktote, Kairan and Kalamkas. These offshore fields are large by international standards, but still considerably smaller than the giant Kashagan field. Appraisal programs for these fields are currently underway.

The Karachaganak oil and gas/condensate field is located onshore, in northern Kazakhstan, near the border with Russia's Orenburg field (see map 2). In 2007, the field produced over 250,000 bbl/d of natural gas condensate. Karachaganak is being operated by Karachaganak Petroleum (KPO) consortium (see above for shareholders). According to KPO, the field holds reserves of around 8-9 billion barrels of oil and gas condensate and 47 Tcf of natural gas. The consortium members aim to triple output with up to $10 billion in investment within 6-8 years.

In previous years, almost all of Karachaganak's crude oil production was processed at Russian facilities associated with the Orenburg field located just across the border. In April 2003, a pipeline spur southward to Atyrau was completed that connects the Karachaganak field to Kazakhstan's primary export pipeline, the Caspian Pipeline Consortium (CPC) project. The new connection has enabled increased exports from Karachaganak, and has reduced the consortium members' dependence on Russian buyers.

Located on the maritime border between Russia and Kazakhstan, the Kurmangazy field is the least developed of Kazakhstan's upcoming oil field developments. Russia and Kazakhstan signed a new $23 billion PSA agreement for the 7.33 billion barrel Kurmangazy oil field in July 2005. After some delay on the terms of the agreement, Russian and Kazakh state oil firms Rosneft and Kazmunaigaz signed the deal in the hopes that this would hasten the field's development. The first well was drilled in early 2006 but came up dry. Further drilling could occur in 2008.

In October 2007, Shell discovered hydrocarbons in its Pearls Block (called Zhemchuzina in Kazakh). The Pearls PSA was signed in 2005 by Shell, with a 55% stake, and KazmunaitEniz, an offshoot of state oil and gas concern Kazmunaigas (KMG), with 25%, and Oman Pearls, a subsidiary of Oman Oil, with 20%. The Pearls block lies just south of the Kalamkas field discovered in 2001 by the Agip KCO consortium. According to a Nefte Compass report, Kalamkas, which is in the same contract area as the Kashagan field, contains recoverable reserves of about 500-600 million barrels of sweet, 34° API oil and roughly 3.5 trillion cubic feet (Tcf) of natural gas. The Kalamkas reservoir, which is almost 6,000 feet underground, would be much easier to bring on stream than Kashagan, which is deeper and prone to extreme high pressure. Kalamkas could be producing 100,000-120,000 bbl/d of oil within about four years of starting development.

For a detailed map of the Caspian Region's oil and gas infrastructure please see the Maps section of the brief.

Kazakh oil exports are growing rapidly, with current infrastructure delivering it to world markets via the Black Sea (via Russia), the Persian Gulf (via swaps with Iran), to the north pipeline and rail (through Russia), and now to the East to China.

During 2007, Kazakhstan exported around 1.2 million bbl/d of petroleum on average in all directions:

-408,000 bbl/d northward (via the Russian pipeline system and rail network);

-620,000 bbl/d westward (via the Caspian Pipeline Consortium Project), which does not include an additional 72,000 bbl/d of Russian production.

-70-80,000 bbl/d is sent southward via a swap agreement with Iran.

-85,000 bbl/d eastward to China on the Atasu-Alashankou pipeline route during 2007.

Connections to ports on the Black Sea and the Persian Gulf have allowed some Kazakh oil (or proxy oil from Iran) to be traded on the world market. Efforts are underway to expand the country's export infrastructure (especially to the east) over the next decade as Kazakhstan's oil production increases.

Trans-Caspian Barge Shipments

In order to facilitate exports of oil from Kashagan during the next decade, Kazakhstan is developing an internal “Kazakhstan Caspian Transportation System” (KCTS), which will include the construction of a 500,000 bbl/d pipeline from Eskene in western Kazakhstan to the port of Kuryk. From Kuryk and the current nearby working port of Aktau, oil will be shipped via barge across the Caspian to the BTC pipeline. Current trans-Caspian shipments are expected to double at Aktau to around 400,000 bbl/d, and will augment a new 760,000-bbl/d oil terminal at Kuryk, just south of the Aktau port. Kazmunaigaz has not yet decided on the exact site for the port. Expansions of the oil terminals in Baku and Kuryk and the pipeline’s construction could cost at least $1.5 billion. Kazakhstan has also taken an interest in sending oil via rail (and the port of Batumi) to the Black Sea and then onwards to the reversed Odessa-Brody pipeline.

The 980-mile long CPC pipeline connects Kazakhstan's Caspian Sea area oil deposits with Russia's Black Sea port of Novorossiysk. The governments of Russia, Kazakhstan, and Oman developed the CPC project in conjunction with a consortium of international oil companies. See the table above for the consortium members.

The pipeline is an extension of the existing oil transit infrastructure surrounding the Caspian Sea. Newly constructed components of the line run from the Russian town of Komsomolskaya straight westward to Novorossiysk. The pipeline is supplied with Kazakh oil through the Soviet-era links surrounding the Sea, which the consortium members have refurbished.

The CPC pipeline exported around 690,000 bbl/d of crude oil in 2007, and the consortium has plans for a $1.5 billion expansion project to increase the pipeline's peak capacity to 1.34 million bbl/d. With the completion of the two pipeline spurs from Kenkiyak and Karachaganak to the CPC at Atyrau (see Map 1) and the usage of additives, CPC transport levels have increased from around 600,000 bbl/d in 2005 to a monthly peak of 800,000 bbl/d in February 2007.

In September 2007 consortium members reached a major milestone in agreeing to raise the transport tariff to $38/thousand tonnes (mt) from $30.24/mt, effective in October 2007. The shareholders also agreed to cut the interest rate on CPC loans to 6 percent/year from the previous rate of 12.66 percent. The decisions followed several meetings among the project partners this year as they attempted to resolve financing issues, which have held back expansion of the link. Consortium members are also awaiting the formulation of the Bourgas-Alexandropoulis pipeline route, which would keep incremental CPC volumes from further crowding the Turkish Straits.

The 613-mile-long, 813 mm, and 200,000-bbl/d capacity pipeline from Atasu, in northwestern Kazakhstan, to Alashankou in China's northwestern Xinjiang region is exporting Caspian oil to serve China's growing energy needs. PetroChina’s ChinaOil is the exclusive buyer of the crude oil on the Chinese side and the commercial operator of the pipeline is a joint venture of CNPC and Kaztransoil. In addition to around 85,000 bbl/d of Kazakh crude that flowed through the pipeline during 2007, Gazpromneft and TNK-BP have received around 12,000 bbl/d each in allocations for their crude oil exports during the first quarter of 2008.

The source of Kazakh oil for the pipeline comes from CNPC’s Aktobe field and from CNPC and Kazmunaigaz’s Kumkol fields. Securing long term crude oil supply for the pipeline’s capacity is the current priority so plans to expand the pipeline to 400,000 bbl/d are now of lower concern. The quantity of crude oil supplied to China through this route will still represent only a small percentage (i.e. less than 5%) of China's expected oil demand by the time the project reaches completion.

The first stage of the project was completed in 2003 and runs westward across Western Kazakhstan from the oil fields of the Aktobe region to the oil hub of Atyrau near the Caspian Sea. This line will be reversed when all stages are complete. Construction began on the second section of the Kazakhstan-China pipeline in late September 2004 and was completed during 2006. Crude oil reached the Chinese side on July 29, 2006, around two months behind schedule, and was then pumped to the Dushanzi refinery. Pricing issues were the main reason behind the delay, but China and Kazakhstan eventually came to a compromise. The final stage of the project, scheduled to be complete around 2009, will connect Kenkiyak and Kumkol at a cost of around $1 billion, will connect the first two sections, and will theoretically double the pipeline capacity to 400,000 bbl/d. The speed of this final leg will in part also be dependent on the availability of Kashagan crude oil.

Map 3: Kazakhstan – China Pipeline Route

Source: US government, DI Cartography Center

Kazakhstan's other major oil export pipeline, from Atyrau to Samara, is a northbound link to the Russian distribution system. The line was recently upgraded through pumping and heating stations additions and has a capacity of approximately 600,000 bbl/d. Before the completion of the CPC pipeline at the end of 2001, Kazakhstan exported almost all of its oil through this system. But, since Kazakhstan desired more independence from the Russian transit systems, it favored the development of transport alternatives. In June 2002, Kazakhstan and Russia signed a 15-year oil transit agreement under which Kazakhstan will export 340,000 bbl/d of oil annually via the Russian pipeline system. Russia's trade ministry also pledged to increase the capacity of the line to around 500,000 bbl/d.

During 2007, Kazakh authorities announced they would review all energy and mineral resources contracts in a bid to generate more revenue and diversify the sources of investment. President Nursultan Nazarbayev signed an amendment into law in October 2007 that allows the government to unilaterally break contracts with oil companies, possibly motivated in part by frustration over delays with the Kashagan project. The new law, effective in November 2007, gives Kazakhstan two paths to terminate contracts with energy companies. One option forces the company into negotiations with the government, and the other option allows for the repudiation of the contract with a notice period of only two months.

In response to concern about Kazakhstan's investment climate, the Tax Ministry proposed reforming the foreign investment structure. Within one month, however, the government decided to drop a proposal that would have turned the PSA regimes into a concession-type system, allowing the country to change tax rates and contract terms more easily. According to the director of the Ministry’s Tax Department the PSAs should be replaced because of a lack of transparency, the inability to monitor and adjust subsoil users' expenditures, and the lack of a clause to redistribute interests in the agreement. Oftentimes, the PSA terms are generally undisclosed, and the taxation structure is fixed for the entirety of the project, even in the event of a change in ownership.

The government has successfully implemented other reforms in the past. The introduction of a new tax structure in January 2004 included a so-called "rent tax" on exports, a progressive tax that increases as oil prices grow. The amendment raised the government's share of oil income to a range of 65 to 85 percent, and it removed a clause guaranteeing investors a static tax rate throughout the duration of the contract. The new structure includes an excess profit tax, and limits foreign participation to 50 percent in each offshore project with no guarantees of operatorship. The remaining share will belong to KazMunaiGaz.

In 2005, Kazakhstan amended the subsoil law to preempt the sale of oil assets in the country. These changes helped the state’s case to buy part of British Gas (BG’s) share of the Kashagan project. Another amendment to the country’s subsoil law in 2005 extended the government’s power to buy back energy assets by limiting the transfer of property rights to strategic assets in Kazakhstan. This helped legitimize the government’s bid to acquire a 33 percent share in Canadian-based PetroKazakhstan after it agreed to a takeover deal with CNPC. For more information on the subsoil law changes please see the fact sheet from the American Chamber of Commerce and from the Central Asia Caucasus Institute.

In contrast to the upstream sector, the refining sector has remained largely in the state's possession. The refining sector in Kazakhstan has not received high levels of FDI like other parts of the oil and gas production sector. Since domestic prices for refined products have remained low, oil producers have more incentive to export crude oil to international markets instead of refining it locally.

The refining sector in Kazakhstan has three major oil refineries supplying the northern region (at Pavlodar), western region (at Atyrau), and southern region (at Shymkent), with total crude oil refining capacity of 345,093 bbl/d. Refinery runs increased by around 2 percent during 2007, showing that the facilities are still improving their profitability. Around 193,000 bbl/d of refined products were produced during 2007, up from around 191,000 bbl/d in 2006.

The refinery at Pavlodar is supplied mainly by a crude oil pipeline from western Siberia (since Russian reserves are well placed geographically to serve that refinery); the Atyrau refinery runs solely on domestic crude from northwest Kazakhstan; and the Shymkent refinery currently uses oil from Kazakh fields at Kumkol, Aktyubinsk, and Makatinsk, although it is linked by pipeline to Russia.