The Kazakh oil and gas sector will be driven over the medium term by ongoing and planned mega projects in the upstream segment and by undergoing expansion and planned disposals in the downstream segment, Fitch Ratings said in a report published on August 25.
The country has been decreasing oil output as low global oil prices make production at some ageing fields unfeasible. On the other hand, production at the giant offshore Kashagan field has been postponed for at least three years after the discovery of a leakage on pipelines linking the field with offshore facilities weeks after its launch in September 2013. The country produced 80mn tonnes of oil in 2015, against 81mn tonnes in 2014. The government expects oil output to total 74mn tonnes this year if the oil price averages $30 per barrel and 77mn tonnes at $40 per barrel.
Kazakhstan's 2015 output of 1.7mn barrels of oil equivalent per day compared well with that of Qatar and Norway with production of 1.9mn barrels per day each, but lags behind Nigeria's (2.4mn), Brazil's (2.5mn) and Mexico's (2.6mn), Fitch said in its “Upstream Projects, Downstream Disposals Define the Kazakhstan Oil and Gas Sector” report. Since 2001 Kazakhstan's oil production has doubled, and in 2030 it may reach 2.7mn, up 60% on 2015, the ratings agency suggests.
“In 2025 the projected share of production from Kazakhstan's top-three mega oil projects - Tengizchevroil (TCO), Kashagan and Karachaganak - is likely to exceed 75% of the country's total, up from 50% in 2015,” Fitch said. “Kazakhstan's over-reliance on a few mega oil fields makes it more exposed to single-project geological and technical risks and oil price volatility, as illustrated by the ongoing multi-billion dollar efforts to restart Kashagan.” Since the suspension of production at Kashagan, NCOC, which is developing the project, has been replacing the underwater pipelines at an estimated price tag of $3bn.
The announced $37bn Tengiz expansion will reduce cash dividends to the national oil and gas company KazMunayGas (NC KMG) over the medium term. “Combined with lower upstream earnings due to high costs and poor netbacks at KMG EP, NC KMG's key upstream subsidiary, this will slow down NC KMG's deleveraging. The three-year Kashagan start-up delay is cash-neutral for the group, as we expect it to use cash dividends from Kashagan first to repay the $1.8bn deferred acquisition consideration,” Fitch suggested.
NC KMG's midstream assets - oil and gas pipelines operated by subsidiaries KazTransOil (KTO), KazTransGas (KTG) and Intergas Central Asia (ICA) - generate stable earnings for the group, or about $1bn in EBITDA on average in 2012-2015. “Most of the oil and pipeline capacity expansion will not bring cash earnings to the group, as it is being done through the joint ventures (JVs) that are unlikely to pay NC KMG large dividends over the medium term.”
KTG has been gradually losing gas transit revenues as China has replaced Russia as the main destination for Central Asian gas with transit volumes of 30.6bn cubic metres (bcm) in 2015. “KTG receives little benefit from the gas transit to China, as the Central Asia-China gas pipeline is operated by a JV that needs to repay large loans raised for the pipeline construction, before it can pay any dividends to KTG.”
NC KMG announced plans to sell its Kazakh refineries in Atyrau, Shymkent and Pavlodar, and KMG International (KMGI), a Romanian refiner, despite billion-dollar investments to date and more planned capex in 2016-2018 in refining and marketing (RM). “The disposals aim to deconsolidate the nearly $3bn debt associated with RM, although this may be hard to achieve.”
In 2016-2018 NC KMG is aiming to cut capex by 50% compared with 2013-2015, to $4.5bn, including $2bn in downstream - a drop on the October 2014 estimates of around $6bn in 2016-2018, Fitch noted. “The 60% Brent fall, shortage of funds used mainly for debt repayments and the 50% tenge depreciation since end-2014 are the reasons for the capex decline,” it explained. “We view NC KMG's downstream capex as mainly committed.”
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