Russia, Kazakhstan Agree to Double CPC Oil Pipeline Capacity by 2012

This Time, They Mean It

In a statement announced by the Russian Industry and Energy Ministry, Viktor Khristenko said that he and his Kazakh counterpart, Sauat Mynbayev, had reached an agreement on an expansion of capacity on the Tengiz-Novorossiisk oil pipeline. "A joint position has been agreed on the issue of the CPC [Caspian Pipeline Consortium] expansion, which should take place before 2012 in two stages", the statement said. The agreement paves the way for the privately owned CPC pipeline to expand to its design peak capacity of 67 million tonnes per year (1.34 million b/d), up from its current capacity of around 32 million tonnes/year.

That is, however, in theory. In practice, Russia and Kazakhstan—the two largest stakeholders in CPC (see table) and the two countries through whose territories the pipeline runs—have previously "agreed" to expand capacity on the pipeline several times, only for these deals to fall through, for various reasons. The CPC launched the 1,510-km pipeline from the Tengiz oilfield in western Kazakhstan to Russia's Black Sea port of Novorossiisk in October 2001, opening up the first direct oil export route to world markets for Kazakh oil. At the time, capacity on the pipeline was 28 million t/y (565,000 b/d), but throughput volumes quickly reached initial capacity, triggering discussions on an early expansion on capacity for the route.

However, until now, Russia has repeatedly blocked an early expansion of the pipeline, standing alone among CPC shareholders in arguing for higher transit tariffs, a restructuring of the consortium's debt from construction of the multi-billion-dollar pipeline, and, later, pushing for Kazakhstan to commit to supporting Russia's own preferred "Bosphorus bypass" pipeline, the Burgas-Alexandroupolis pipeline from Bulgaria to Greece, as the exit route for Kazakh oil exports heading west to the Mediterranean market (see "Related Articles"). Several times in recent years, Kazakhstan believed it had met Russia's conditions for an expansion of the pipeline, and the other CPC shareholders consented to higher transit tariffs, only for Russia to renege on an agreement. Kazakh President Nursultan Nazarbayev, having agreed to support the Russian-sponsored Burgas-Alexandroupolis route, even came away from a meeting with Russia's then-president Vladimir Putin announcing that a deal had been reached to expand the CPC's capacity, only for Russia to drag its feet again.

In the meantime, however, Kazakhstan has been moving slowly towards further diversification of its oil export options, with the launch of exports via the Kazakhstan-China oil pipeline in 2005, and progress (albeit slow) towards starting trans-Caspian oil exports for re-export via the Baku-Tbilisi-Ceyhan (BTC) pipeline. The CPC itself has pushed the Tengiz-Novorossiisk pipeline to its limits, expanding capacity through the use of drag agents and pumping an average of 655,000 b/d in 2007, up 4.8% year-on-year.

Nevertheless, with Tengizchevroil (the Chevron-led consortium developing the Tengiz field) having launched an expansion at the field earlier this year that is expected to double output to 540,000 b/d by the end of the year, Kazakhstan is in need of additional oil export options to handle the anticipated rise in volumes.

Outlook and Implications

With initial oil production from Kazakhstan's Kashagan oilfield now slated to come onstream in 2011, the Central Asian state is keen to move forward with ensuring that the infrastructure is in place to handle its anticipated increase in oil exports. China has already begun work on the third and final phase of the Kazakhstan-China pipeline, which will link two existing pipelines in central Kazakhstan, thereby allowing Kazakh oil from the Caspian region (including from Tengiz) to flow across Kazakhstan to China. The expected completion of this leg, perhaps by next year, will provide an additional export option for Tengiz volumes, as will the start of a Kazakhstan-Azerbaijan oil supply agreement that would see oil from western Kazakhstan shipped by barge across the Caspian for reloading via the BTC.

The progress on these alternative oil export options for Kazakhstan, together with the fact that CPC shareholders have already agreed to all of Russia's demands, seems to have finally convinced Russia to stop stalling and permit CPC to begin the long-awaited capacity expansion. The pipeline's shareholders had agreed to restructure the consortium's debt and go along with an increase in the transit tariff in September of last year, and in December Russia said it had dropped its opposition to an expansion of the pipeline, yet it has still taken until now to finally secure an agreement on a plan to double the pipeline's capacity. Considering the slow progress in reaching an agreement—and the numerous times in which an "agreement" has proven only a false promise—Chevron and the other CPC shareholders will be hoping that this time Russia lives up to its end of the deal.

Related Articles

CIS: 19 March 2008: Start of Kazakh Oil Exports Via Baku-Tbilisi-Ceyhan Pipeline Remains On Hold

Kazakhstan: 30 January 2008: Tengizchevroil Launches Oil Production from Tengiz Field Expansion in Kazakhstan

CIS: 20 September 2007: CPC Shareholders Agree to Restructure Debt, Hike Transit Tariffs for Key Kazakh Export Pipeline

Russia: 23 July 2007: Russia Says CPC Can Be Expanded, but Debt Issue Must Be Settled First

Russia: 13 July 2007: Russian Authorities Hit CPC Group with US$290-mil. Back-Tax Claim

Russia: 5 July 2007: Transneft Fails to Persuade CPC Partners on Proposed Changes

Kazakhstan: 12 June 2007: Kazakhstan Confirms Interest in Stake in Planned Bulgaria-Greece Oil Pipeline

CIS: 11 May 2007: Kazakhstan Agrees to Russian Bosphorus Bypass Plan in Deal to Expand CPC Pipeline

CIS: 25 January 2007: IOCs, Kazmunaigaz Sign Deal on Kazakhstan Caspian Transport System