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January 2015

Caspian Upstream: 2014 in review


The megaprojects were again at the centre of attention in the Caspian in 2014. At Kashagan, most of the year was spent
identifying the extent of the issues with the pipelines to shore. The decision has now been made to replace both pipelines. This
will be expensive and means production will not restart until 2017. At Tengiz, the Final Investment Decision (FID) on the Future
Growth Project (FGP) was postponed from end-2014 to H1 2015. The combination of a falling price and a higher capital cost
estimate is understood to be behind this delay.
In Azerbaijan, following FID for Shah Deniz Phase Two in December 2013, 2014 was a year of consolidation and partner
restructuring for the Southern Corridor. Total and Statoil farmed out of Shah Deniz and the South Caucasus Gas Pipeline (SCP)
to TPAO and PETRONAS respectively, selling an aggregate 25.5% stake for US$3.75 billion. TPAO will become the second
largest shareholder in Shah Deniz and the SCP.
Beyond the Southern Corridor, M&A activity has been dominated by Chinese companies. Sinopec is acquiring LUKOILs 50%
stake in four Kazakh oil projects for US$1.2 billion, while private Chinese firms also came to the fore. Other deals saw
Shanghai-listed Geo-Jade Petroleum and shipbuilder China Rongsheng Heavy Industries enter the region.
Regional exploration continues to disappoint, with limited activity both onshore and offshore and the absence of a previouslyproposed full-scale licensing round in Kazakhstan.
Fiscal revision, rising domestic oil obligations, collateral damage from sanctions on Russia and the falling oil price have all been
a concern to the industry. 2015 is set to be a year of even greater uncertainty.

Caspian Upstream: 2014 in review

52E

60E

68E

54N

54N

44E

RUSSIA
RUSSIAN volumes of crude
transit Kazakhstan to China

KAZAKHSTAN

TENGIZ expansion
FID delayed

Second well on ZHAMBYL


block, KAZAKHSTAN

46N

46N

Pipelines to be
replaced at KASHAGAN

Line C of Turkmenistan-China
pipeline commissioned
Caspian
Sea

UZBEKISTAN

KYRGYZSTAN

CHIRAG OIL
Project starts-up

AZERBAIJAN
TURKMENISTAN

Seismic acquisition commences on


BOKHTAR AREA, TAJIKISTAN

TAJIKISTAN
38N

38N

TURKEY

BP and SOCAR sign PSC


on near-shore exploration

SHAH DENIZ
- Total and Statoil exit
- TPAO increase interest
- PETRONAS farms-in

Construction of Line D
Turkmenistan-China
gas pipeline begins

IRAN
AFGHANISTAN

SAUDI
ARABIA

0
44E

52E

200

400

60E

km
800

PAKISTAN
30N

30N

IRAQ

68E Source: Wood Mackenzie

Southern Corridor post-FID: a year of farm-outs and contracts


In May 2014, Total signed an agreement with Turkey's TPAO for the sale of its 10% stake in Shah Deniz and the associated
SCP for US$1.5 billion. TPAO will now become the second largest shareholder in Shah Deniz and the SCP, reducing concerns
over misalignment between the upstream and the midstream. Later, in October, PETRONAS agreed to acquire Statoils
remaining 15.5% stake in Shah Deniz and the SCP for US$2.25 billion. This is a major shift in the ownership of the project,
where BP was seen as being supported by experienced partners Total and Statoil. The inclusion of PETRONAS is likely to be
welcome, given its significant offshore experience, including in the Caspian.
On the midstream, progress has been achieved with the completion of the FrontEnd Engineering and Design (FEED) study for
the Trans-Anatolian Pipeline (TANAP). WorleyParsons was subsequently awarded an Engineering, Procurement and

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Caspian Upstream: 2014 in review


Construction Management (EPCM) contract for the pipeline. This will help to ensure that TANAP is built on time and on
schedule.
Participation also changed at the Trans Adriatic Pipeline after E.ON and Total exited the project. Concerns over the landfall
point in Italy were alleviated after the Italian Ministry of the Environment issued a decree of positive environmental compatibility.

Waiting for Kashagan


Kashagan has now been shut-in for more than a year, following the gas leaks identified after start-up in September 2013. Initial
hopes of restart by end-2014 proved to be in vain. Both the oil and gas pipelines to shore will require full replacement, at an
estimated cost of US$4 billion. Wood Mackenzie does not expect production to resume before 2017. The additional Phase One
start-up costs will not be recoverable.
Delays in production start-up have raised further doubts over the profitability of the project and the future of additional
development phases. Nevertheless, an initial agreement on potential PSC extensions beyond 2041 has now been reached.
During the downtime, the complex Kashagan operating structure is to be revised once again. The existing operating agents are
currently being consolidated into an integrated structure, which will be finalised in 2015.

Chinese investment remains strong in the Caspian


Chinese companies have continued to dominate investment in the region. This follows the limited success of the small Western
firms active in the region in recent years.
In April, Sinopec announced the US$1.2 billion acquisition of LUKOILs 50% stake in Caspian Investment Resources, operator
of four projects in Kazakhstan. Upon completion, this deal will double the value of Sinopecs Kazakh portfolio. The regions most
active purchaser in 2014 has been Shanghai-listed Geo-Jade Petroleum, which acquired two assets in Kazakhstan: 95% of
Maten Petroleum for US$526 million and 100% of the Marsel exploration block for US$107 million. The latter was majorityowned by Condor Petroleum.
In September, a leading Chinese shipbuilder China Rongsheng Heavy Industries acquired a 60% stake in four blocks in
Kyrgyzstan for US$282 million. This deal could help revive the stagnant Kyrgyz upstream industry.

Regional production remains reliant on a handful of mega-projects


Unlike 2013, 2014 was a disappointing year for production at the Caspians mega-projects. At Azeri Chirag Guneshli, production
fell slightly despite the start-up of the West Chirag platform. This will be the last new development under the existing PSC.
Maintenance outages also caused production to decline at Tengizchevroil. Karachaganak liquids and gas production has and
will continue to remain relatively flat at around 250,000 b/d and 790 mmcfd respectively, although ongoing debottlenecking of
facilities might allow some minor increases.
In Turkmenistan, the super-giant Galkynysh field continues to ramp up production, following Phase One commissioning in
September 2013. The Engineering, Procurement and Construction (EPC) project for Phase Two was launched in May. This will
provide another 30 bcm per annum of production capacity by the end of the decade.
CNPC also commissioned the second Gas Processing Plant on the Bagtiyarlyk Area, which will increase production capacity by
870 mmcfd. These will help increase Turkmen gas supply to China.

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Caspian Upstream: 2014 in review


In November, Eni announced a ten-year extension to its Nebit Dag contract. Turkmenneft has taken a 10% interest in the PSC
as part of the extension. The asset currently produces around 20,000 b/d.

Caspian region liquids production,2010-2020 ('000 b/d)


2012-2014

YoY production change (%) at key regional fields

3500

Production '000 b/d

3000
2500
2000

Others
Uzbekistan

1500

Turkmenistan
Azerbaijan

1000

Kazakhstan

500
0

Source: Wood Mackenzie

15%

10%

5%

Azeri Chirag
Guneshli
Tengizchevoil
Area

0%

Karachaganak

-5%

-10%
2012

2013

2014

Source: Wood Mackenzie

*Oil and condensate production only.

Exploration remains disappointing

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Caspian Upstream: 2014 in review


2014 was another disappointing year for regional exploration.
In Kazakhstan, NC KazMunaiGas (NC KMG) and KNOC drilled their second well on the Zhetys structure at the offshore
Zhambyl block. Testing is underway.
Following the Kazakh governments decision to lift the licensing moratorium for onshore acreage in April 2013, three exploration
blocks were made available for tender in December 2013. In April 2014, it was announced that two blocks Kosbulak and
Adaiski Contract Area had been awarded. The third block Mangistau block was not awarded and has since been retendered. This fell well short of the previously-proposed full licensing round.
In June, Eni and NC KMG inked an agreement on the Isatai block, offshore Kazakhstan. The agreement also includes the
development and management of a shipyard in Kuryk. Further increasing its footprint in the region, ENI also signed a MoU for
potential offshore cooperation in Turkmenistan.
In Azerbaijan, the exploration focus is moving away from high-cost offshore deepwater to low-cost onshore and near-shore.
ConocoPhillips processed a 2D seismic survey undertaken onshore Azerbaijan in late 2013 and data interpretation is currently
underway. In December 2014, SOCAR and BP signed a PSC for the shallow water area surrounding the Absheron Peninsula in
the Caspian Sea. Work is expected to start in mid-2015.

More pipeline capacity to the Chinese market


In May 2014, Line C of the Turkmenistan-China Pipeline became operational. The pipeline runs parallel to Lines A and B and is
expected to reach its design capacity of 25 bcm by end-2015. Construction of Line D, which follows a different route to the
previous lines, began in September. Upon completion, Line D will increase capacity of the Turkmenistan-China pipeline by 30
bcm per annum.
Following the five-year deal between Rosneft and CNPC in 2013, Russian oil deliveries to China via Kazakhstan started in
January 2014. 140,000 b/d were delivered via Kazakhstans Atasu-Alashankou route. These volumes will bolster throughput
along the Kazakhstan-China Oil Pipeline.
Expansion of the Caspian Pipeline Consortium (CPC) line is underway with capacity increasing at the marine terminal to 1.4
million b/d in three stages from 2014 to 2016. In 2014, commissioning of initial facilities in Russia, including a third single point
mooring at South Ozereika, enabled throughput to reach close to 1 million b/d by year-end.

Another year of fiscal changes in Kazakhstan


For the second year in a row, and the third time in four years, Kazakhstan raised its export customs duty (ECD) rate. The tax
increased by 33% to US$80/tonne. This primarily affects operators with mature assets and a high cost base, as export duty
payments are not offset by a decrease in income tax and excess profit tax payments.
In June, the Kazakh government formally approved a Mineral Extraction Tax (MET) break for the Karazhanbas field. This is the
first asset to be approved on a list of low-margin, high-viscosity, depleted fields. MET has been reduced to a flat rate of 0.5%.
In February, the Kazakh Central Bank devalued the Tenge by 19% to combat currency volatility and sustain the competitiveness
of Kazakh exports, as the Russian Rouble started to depreciate. This devaluation had little impact on operators: most of them
soon increased wages while oil transportation tariffs were revised upwards to compensate.

A challenging geopolitical context

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Caspian Upstream: 2014 in review


The depreciation of the Rouble, primarily caused by the falling oil price and EU and US sanctions against Russia, have
implications for Central Asia. Operators benefit from lower transportation costs Transneft's tariffs decreased by 17% in US
dollars terms in 2014, compared to 2013. Pressure is also increasing on the Kazakh Central Bank for a second devaluation to
protect Kazakh exports' competitiveness. Smaller Central Asian economies primarily Kyrgyzstan and Tajikistan are suffering
from a fall in remittances from Russia, which are vital for their economies.
With a low oil price and a Russian economy in crisis, 2015 promises to be an even more challenging year for the Caspian
region.

Appendix

Licence awards in 2014


Block Name

Basin

Licence Type Licence


Status

Block Acreage Partners


(km)

Azerbaijan
South Absheron

South Caspian

Geophysical Exploration

850.0 RWE Dea (50.00%), SOCAR (50.00%)

Shallow water Absheron South Caspian

PSC Exploration

2,015.0

BP (50.00%), SOCAR (50.00%)

Peninsula
Kazakhstan
Kosbulak

South Turgai

Concession Exploration

Block A (Kristall Mngmnt) South Turgai

Concession Exploration

Nursat-Bauir (100.00%)

Almeks Plus Area

Precaspian

Concession Exploration

Adaiski Contract Area

Precaspian

Concession Exploration

3,465.0

Ocean Petroleum (100.00%)

West Tien Shan

Concession Exploration

264.2

Tunguch Gold (100.00%)

Concession Exploration

176.0

Euro House Buildings (100.00%)


KyrgyzMunaiGers (100.00%)

Kristall Management (100.00%)


Almeks Plus (100.00%)

Kyrgyzstan
Tuz-Shamshin

Intermontane
West Tien Shan

Serafim

Intermontane

Pishkarin

Fergana

Concession Exploration

192.0

Fergana

Concession Exploration

550.0 Hausch Natural Resources (100.00%)

Gavian-Say

Fergana

Concession Exploration

Dekabrskaya

Fergana

Concession Exploration

7.9

AS Group (100.00%)

Borki

Fergana

Concession Exploration

132.0

PetroIks Beta (100.00%)

Nooshkent
21.4

AS Group (100.00%)

*Unknown
Source Wood Mackenzie

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Caspian Upstream: 2014 in review


Completed and pending asset deals in 2013
Asset name

Buyer

Seller

Shore

Consideration

Interest (*denotes

status

(US$m)

operator)

Azerbaijan
Shah Deniz*

TPAO

Shah Deniz*

PETRONAS

Total

Offshore

1,500.0

10%

Statoil

Offshore

2,250.0

16%

Kazakhstan
CIR Assets*

Sinopec Group

LUKOIL

Onshore

1,200.0

50%

Borneo Energy Oil and

Sumatec Resources

Borneo Energy Oil &

Onshore

250.0

100%

Caspian Energy Inc

Asia Sixth Energy

Onshore

47.1

60%

Max Petroleum

Onshore

114.5

100%

TPAO

Onshore

205.0

49%

Kyrgyzgaz

Onshore

40.0

100%

Kyrgyzneftegaz

Onshore

281.8

60%

Gas assets*

Gas

Zhagabulak fields*

Resources

Max Petroleum assets*

AGR Energy Limited

KTM Contract Area*

KazMunaiGas

Kyrgyzstan
KyrgyzGaz

Gazprom
China Rongsheng Heavy Ind.

Various assets
* Deals Pending
Source Wood Mackenzie

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Caspian Upstream: 2014 in review


Key drilling activity in 2014
Well Name

Block Name Basin

Shore

Well Type

Well Result

Partners

Status

Kazakhstan
KN-E-205

West

Precaspian Onshore

Appraisal

Oil

Condor Petroleum* (100.00%)

Precaspian Onshore

Exploration

Dry Hole

Condor Petroleum* (100.00%)

Precaspian Offshore

Exploration

Zharkamys I
KNC-3

West
Zharkamys I

Zhetysu-1

Zhambyl

Tight Hole Zhambyl Petroleum* (0.00%), KazMunaiGas

(ZT-1)

(73.00%), KNOC (9.45%), SK Innovation


(6.75%), Hyundai (2.70%), LG (2.70%), Aju
(1.35%), Daesung (1.35%), Daewoo
International (1.35%), Samsung (1.35%)

KZIE-3

Block E

Precaspian Onshore

Appraisal

Dry Hole

Max Petroleum* (100.00%)

KZIE-4

Block E

Precaspian Onshore

Appraisal

Oil

Max Petroleum* (100.00%)

KZIE-5

Block E

Precaspian Onshore

Appraisal

Oil

Max Petroleum* (100.00%)

SAGW-7

Block E

Precaspian Onshore

Appraisal

Oil & Gas

Max Petroleum* (100.00%)

SAGW-13

Block E

Precaspian Onshore

Appraisal

Oil

Max Petroleum* (100.00%)

SAGW-10

Block E

Precaspian Onshore

Appraisal

Oil

Max Petroleum* (100.00%)

AKK20

Akkulkov

North Ustyurt Onshore

Appraisal

Gas Shows

Tethys Petroleum* (100.00%)

AKK19

Akkulkov

North Ustyurt Onshore

Appraisal

Gas

Tethys Petroleum* (100.00%)

AKK18

Akkulkov

North Ustyurt Onshore

Appraisal

Gas

Tethys Petroleum* (100.00%)

NK-14

Northwest

South Turgai Onshore

Appraisal Oil Shows & Gas

Galas & Co* (0.00%), LG (40.00%), Roxi

Shows

Petroleum (34.22%), Private Investors

Konis

(25.78%)
BNG-801

BNG Block

Precaspian Onshore

Exploration

Drilling Roxi Petroleum* (58.41%), Private Investors


(41.59%)

NK-31

Northwest

South Turgai Onshore

Appraisal

Gas Shows

Konis

Galas & Co* (0.00%), LG (40.00%), Roxi


Petroleum (34.22%), Private Investors
(25.78%)

West Aksai

Aksai Area

Precaspian Onshore

Exploration

Drilling

(Zapadnaya)-

Sequa Petroleum* (75.00%), BOLZ LLP


(25.00%)

1
Southwest

Arisskoye

South Turgai Onshore

Exploration

Oil

Sarybulak-1

CNPC Ai-Dan Munai* (0.00%), CNPC


(100.00%)

Turkmenista
n
South Umytly- Kamishldzha South Caspian Onshore

Exploration Gas/Condensate

Turkmenneft* (100.00%)

1
South

South

South Caspian Onshore

Appraisal

Oil

Turkmenneft* (100.00%)

Kamishldzha- Kamishldzha
27

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Caspian Upstream: 2014 in review


North Kotur

Barsa

Tepe-208

Gelmes-

South Caspian Onshore

Appraisal

Oil

Turkmenneft* (100.00%)

South Caspian Offshore

Appraisal

Oil

Dragon Oil* (100.00%)

South Caspian Offshore

Exploration

Tight Hole

SOCAR* (100.00%)

Kotur Tepe
Zhdanov

Cheleken

21/101

Contract
Area

Azerbaijan
Agburun-

Agburun-

Deniz-1

Deniz

Source Wood
Mackenzie

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