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European involvement in the energy complex of Kazakhstan: general direction, prospects, risks and recommendations

Tuesday, September 27, 2011 - 16:07

The European interest in the fuel and energy complex of the Republic of Kazakhstan focused primarily on oil and gas industry, clearly delineated by the mid 90s of last century. Other branches of Kazakhstan's energy sector have not become objects of any significant attention from the EU member states and European companies, with the exception of some attention of the European Union, France in particular, at the end of 2006 to the nuclear industry in Kazakhstan.
Oil and gas sector
It should be noted that during the Soviet era oil and gas industry in Kazakhstan was rather poorly developed. In 1990 Kazakhstan produced only about 14 million tons of oil, accounting for slightly more than 2% of the total oil production in the USSR (more than 620 million tons). And almost all Kazakhstan's oil was processed at Russian refineries, as it contained large amounts of sulfur and paraffin, and for this reason could not be processed at the Kazakh oil refineries. In Kazakhstan, in its turn, was processed mainly Russian (West Siberian) oil. Thus Kazakhstan's oil and gas industry was essentially an appendage of a similar industry in Russia (the RSFSR produced about 560 million tons) and by itself could not play a significant role in the economy of the former Soviet Union.
Starting from in the second half of the 70s of last century, the Soviet leadership began to pay more attention to finding new oil fields as an alternative to Western Siberia (which played at that time a key role in the economy of the former USSR), considering Kazakhstan as the most promising Federal Republic in this respect. It was a time of rather large investments in exploration of Western Kazakhstan, including the Kazakh section of the Caspian shelf. As the result a number of oil and gas fields (the largest, "Tengiz", "Karachaganak", "Kashagan") have been found. In Soviet times the decision to develop the vast majority of these reserves was not adopted due to a number of reasons, including high cost and technical complexity of their development.
Shortly after the Soviet collapse in the global media has become widely publicized and exaggerated the issue of "giant oil reserves" of the Caspian shelf and in particular its Kazakh section. This, in turn, led to increased European interest in Kazakhstan and gave a powerful impetus to the beginning of the project and investment activities of a number of oil companies to develop the EU's largest oil fields in Kazakhstan.
Thus in the second half of 90s British BG Group Plc. and Italian Eni SpA have started development of Karachaganak oil and gas condensate field. At the same time a number of other European companies of the international Caspian Pipeline Consortium (CPC) took part in the construction of the pipeline, "Tengiz - Novorossiysk", intended to transport oil from western Kazakhstan to world markets. A little later, with the advent of the XXI century, the Italian Eni, Total of France and the Anglo-Dutch Royal Dutch Shell in the international consortium Agip KKO began implementing the North-Caspian project: development of a number of offshore fields in the northern Caspian Sea, including the "Kashagan" one of largest in the world.
In turn, in the first decade of XXI century, facing rising energy prices the EU interest in Kazakhstan and the scale of presence of European companies in the oil and gas industry of Kazakhstan dynamically increased. As a result, the European project and investment activity was focused on three major projects:
- Karachaganak (development of the field "Karachaganak" as a part of the international consortium Karachaganak Petroleum Operating BV);
- Northern Caspian (development of the field "Kashagan" as a part of the international consortium Agip KCO, which was later converted into an operating company North Caspian Operating Company);
- Construction and operation of the pipeline, "Tengiz - Novorossiysk" (part of the international Caspian Pipeline Consortium).
Karachaganak project. This project actually started only in 1998, although the tender was held in 1992. Apart from other companies (American Chevron, Texaco and Russian "Lukoil") the British BG Group Plc. and Italian Eni SpA also take part in the project. During the period of 1998-2010 in the project have been invested supposedly about 6.2 billion dollars (including about $ 4 billion of European funding). According to others, the amount of foreign investments in the "Karachaganak" field is considerably higher: as of the beginning of 2009 the amount of investment in the project could reach up to 10.7 billion dollars.
North-Caspian project. The project started in 2001. Apart from other companies (American Conoco Phillips and Exxon Mobil, as well as subsidiary KMG Kashagan BV and the Japanese Inpex) Italian Eni, French Total, Anglo-Dutch Royal Dutch Shell participate in the project. During the period of 2001-2010 it was invested over 17 billion dollars in the project including 9.45 billion of European investment. However oil production for a variety of technological and other complications has been repeatedly postponed, with the advent of the global crisis the project's prospects have become even more uncertain. At the moment it is assumed that production should begin in 2016, but it may not be the final date.
Construction and operation of the pipeline "Tengiz - Novorossiysk". This project began in 1999 and involved Russia, Kazakhstan, Oman and a number of companies, including European ones. Start-up of the pipeline took place in 2001. Apart from other companies (US Chevron Caspian Pipeline Consortium Co., Mobil Caspian Pipeline Co. and Oryx Caspian Pipeline LLC, Russian LUKARCO BVi Rosneft - Shell Caspian Ventures Ltd., Kazakhstan Kazakhstan Pipeline Ventures LLC) Italian Agip International, British BG Overseas Holdings Ltd. and BP also participate in the project. European investment in the project was nearly 267 million dollars.
Along with the three largest projects, the European Union and European companies have participated in a number of smaller projects, as well as continue exploring opportunities to expand Kazakh and Russian oil pipeline infrastructure in order to increase oil supplies to Europe bypassing the Turkish straits.
Nuclear industry
From the middle of the first decade of this century European Union has shown some interest in cooperation with Kazakhstan in the nuclear industry, given that Kazakhstan has approximately 20% of world reserves of natural uranium, and with the amount of its production the republic along with Australia and Canada is among the first three exporters.
Thus in late 2006 in Brussels an agreement on cooperation in peaceful use of nuclear energy was initialed between the Government of Kazakhstan and the European Atomic Energy Community (Euroatom). In accordance with this agreement, deliveries of Kazakh natural uranium to the EU are expected to increase. Currently Kazakhstan's share of uranium in the European market is 3%, in the future European Union is planning to increase this share to 20%. Many European countries are interested in the supply of Kazakh uranium, in principle, particularly those with significant amounts of nuclear generation in the overall energy mix. These countries include France, in particular, which intends to establish a full nuclear fuel cycle production in Kazakhstan, including production of fuel assemblies. Especially since Kazakhstan in addition to being among the world’s largest producers of uranium ore is capable of producing fuel pellets for nuclear power plants (metallurgical plant in Ust-Kamenogorsk property "Kazatomprom") including Russian nuclear power plants in particular.
Among the projects with the most detailed studies French company "Areva" is the most prominent with its plans of the construction of a technological line for production of fuel assemblies at the Ulba Metallurgical Plant (Ust-Kamenogorsk, East Kazakhstan). Back in 2008 a French-Kazakh joint venture "Katko" was established to mine uranium for the period until 2039. The share of "Kazatomprom" was 49%, and the company "Areva" - 51%. Enterprise power is 4 tons of uranium annually. In October 2010 during the official visit of President of Kazakhstan Nursultan Nazarbayev to France "Kazatomprom" signed another agreement with the French company "Areva" to establish within the said joint venture the production of fuel assemblies. In this case "Areva" pledged to ensure the production of fuel assemblies of capacity of 1,200 tons per year at the Ulba Metallurgical Plant, including 400 tons a year for reactors of French design. It is assumed that the remaining 800 tons will be used as fuel for reactors of other designs. Pellets for these assemblies will be supplied by "Kazatomprom". This line (the technological project, "Areva") is scheduled to be commissioned in 2014.
Prospects and risks
European presence in the energy sector of Kazakhstan seems to be significant although it is mainly concentrated in oil and gas industry. In addition cooperation in the nuclear power industry of Kazakhstan's fuel and energy complex looks promising while other sectors are unlikely to be of any significant interest to the EU, at least because of the irrelevance of their capacity to Europe. However it is difficult to predict due to certain contradictory factors how fast the European cooperation with Kazakhstan in the energy industry will be developing in the future. The main factors that determine the fragility of the EU-Kazakhstan energy cooperation are currently delusive hopes of foreign investors for a "big oil" of the Caspian shelf (which the European business mainly relay on while in Kazakhstan), the negative impact and unpredictability of the global crisis, fierce competition brewing for Kazakh uranium from Russia and China, as well as the so-called Fukushima syndrome.
First, at the beginning of 2011 the total European investment in the energy sector of Kazakhstan is estimated at about $ 14 billion, including $ 9.450 billion invested in the North-Caspian project, $ 4.2 billion in field development of "Karachaganak", $0.267 billion in the pipeline "Tengiz - Novorossiysk". However these investments are concentrated only in the oil industry. Moreover further significant increase in European investment in oil and gas sector of Kazakhstan is not likely to happen any time soon. The main reason is the lack of guarantees finding "big oil" in the Caspian Sea and predominantly skeptical prospects of its production which have been surfacing lately. Despite the fact that oil production in Kazakhstan has increased by almost 5 times compared with 1990, it is now clear that information about the "tremendous reserves of Caspian hydrocarbons" (supposedly second Persian Gulf) have been greatly exaggerated. Moreover the implementation of the North-Caspian project have been faced with extraordinary and largely unanticipated technological difficulties which still remain unsolved and it is not known what would be the financial cost of overcoming them.
In the middle of the first decade of XXI century these factors led to some decrease in the size and intensity of the European involvement in the oil and gas sector of Kazakhstan: after 2003 some European companies have started selling their assets. The onset of the global financial crisis, the declining oil prices and the economic slowdown in the world especially in Europe have only intensified this tendency.
Second, the activity of the EU and European Companies in Kazakhstan will depend on how effectively the EU itself can overcome the financial crisis. That is what will determine the financial capacity of European companies and the scale of demand for the same oil and uranium in the euro zone, which, in turn, will affect or, on contrary, increase interest in the energy sector of Kazakhstan.
Third, despite existing favorable conditions for development of Kazakh-European cooperation in the nuclear industry, given the large reserves of uranium ore in Kazakhstan and the EU need for a "nuclear fuel", there are certain difficulties. In particular, the EU may well be facing opposition from Russia and China. As a matter of fact, Russia and China do make plans to develop nuclear energy: for example, China plans to increase the share of nuclear power plants in its electric power from the current 1.9% to 7% by 2030 while Russia is planning to do the same from current 16% to 25% by 2020.
In particular, the annual production of uranium ore in China is about 900 tons, which provides only 50% of current domestic demand. Approximately the same amount of uranium China imports from Kazakhstan. By 2020 according to Chinese experts, China's demand for uranium will reach about 8 thousand tons. Meanwhile Russia currently produces about 3 tons of uranium which is about 20% of its current demand. The deficit is covered by stocks accumulated during the Soviet era which according to experts will be exhausted by 2020. It looks like by that time Russia will have an urgent need for Kazakh uranium. At the same time the demand for uranium in Russia by 2020 will be approximately 20.5 thousand tons per year.
Considering the above, it is very likely that Russia and China will make active efforts to force out the European companies from Kazakh uranium market. Especially that Moscow and Beijing have a much stronger position in Kazakhstan (in Central Asia as a whole), rather than Brussels or any European capital. Moreover "Fukushima syndrome might play a certain role in weakening of EU position in the uranium market of Kazakhstan (and Central Asia in general) as it, no doubt, has dramatically increased the influence, of yet to be surmounted after a quarter of century, "Chernobyl syndrome" in Europe.
Recommendations
It seems that in order to improve the quality and intensity of energy cooperation between the EU and Kazakhstan it is advisable to diversify the project and investment activities of European companies, especially in oil and gas industry. Along with the production projects an important part of the European strategy in the region should be a profound processing of Kazakh hydrocarbons with subsequent sales of finished products in the European market.
It is proposed to establish a network of joint ventures aimed at the profound processing of hydrocarbon raw materials in Kazakhstan or other Central Asian countries, with further distribution of finished products in the EU markets. And along with the use of existing production capacity, the joint construction of new plants near oil fields should be considered as well in order to avoid high transportation costs. For example, the same Kazakh oil containing a high proportion of heavy fractions is economically more expedient to process in place using cracking processes rather then export it. In particular, it is more efficient to obtain high-octane gasoline, jet fuel and other fuels through the cracking process of oil.
At the same time, energy cooperation between the EU and Kazakhstan should focus on profound processing of gas through creating a network of gas and chemical production facilities in Kazakhstan and other countries of Central Asia located near the gas fields. It is necessary to encourage European investors to develop a profound processing of hydrocarbons (lower taxes, lease payments, deferring some types of tax payments, etc.).
Apart from the above, increasing cooperation between the EU and Kazakhstan in the nuclear industry may be another strategic direction, given the huge reserves of uranium in Kazakhstan and well-developed nuclear power industry in the European Union, as well as the urgent demand of some large EU countries in this material. For example, it is worth of consideration the idea of building on the territory of the Kazakhstan a powerful nuclear power plant by European companies as part of international consortium which would be operated on Kazakh uranium. Especially that the institutional and legal framework for organization of such multilateral interstate project is already there, and there are more than enough of uranium ore reserves in the country.
On the one hand, shifting the priorities of European companies involved in Kazakhstan's energy sector from "export of the commodity" to "processing" area will lead to a dramatic strengthening of EU positions in Kazakhstan. On the other hand, it can turn more than probable competition of Russia and China with the EU into cooperation between these countries. In overall it may give impetus to wider international energy cooperation in the center of Eurasia which will guarantee stability and sustainable development of Europe, Russia, China and Central Asian countries.
Note: The article is prepared to order Internet-project "Easttime", implemented by the Institute of Strategic Analysis and Prognosis KRSU, http://www.easttime.ru



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