Kazakhstan mulls new refinery as existing ones miss deadlines to modernise

Kazakhstan mulls new refinery as existing ones miss deadlines to modernise
Oil-rich Kazakhstan imports significant amounts of petrol to meet domestic demand
By Naubet Bisenov in Almaty February 25, 2016

Kazakhstan is still considering the idea of building a fourth refinery, while the completion of the overhaul of its three existing refineries has been pushed back for at least a year, according to government plans. The oil-rich Central Asian nation currently has to cover around 30% of demand with imports from Russia. 

On February 23 Deputy Energy Minister Asset Magauov said that a feasibility study for building a fourth refinery in Kazakhstan would be completed by the end of this year, as the national oil and gas company KazMunayGaz’s refining arm, KazMunayGas Refining and Marketing, “needs about eight months to complete the feasibility study” on the capacity, location and economics of the refinery. He also said that the western oil-rich Mangistau Region was also considering a project to build a refinery jointly with China’s CNPC.

The deputy energy minister’s announcement indicates that the Kazakh government is still undecided whether the country needs a fourth refinery or whether it needs to expand the existing capacities at Atyrau, Pavlodar or Shymkent refineries. Moreover, this is contrary to earlier pronouncements that Kazakhstan had opted to expand the capacity of the Shymkent refinery rather than build a new one.

In 2014 the government suggested that the capacity of a fourth refinery would have to be “at least 10m tonnes” to make its construction feasible. “The government has suggested the expansion of the Shymkent refinery instead of building a fourth one, and the head of state [President Nursultan Nazarbayev] has approved this proposal,” Uzakbay Karabalin, former first deputy energy minister, said. “This is the most favourable option.”

In 2014 the government also claimed that the country would be fully self-sufficient in petroleum products “in 2016”,  while another deputy energy minister, Magzum Mirzagaliyev, claimed the government expected to complete the modernisation of the country’s three Soviet-era refineries in 2016 to enable the country to be “able to satisfy its needs in petroleum products that we now have to import from the Russian Federation”.

The government seems to have resorted to revive talk of the construction of a fourth refinery after the realisation that its pledges to complete the modernisation of the existing refineries – in Atyrau, Pavlodar and Shymkent – in 2016 have failed to materialise. According to the Energy Ministry’s report on its performance in 2015, the completion of the task has now been pushed back to at least 2017. The government now expects the $700mn modernisation of the Pavlodar refinery to be completed by 2018, the $2.1bn overhaul of the Atyrau refinery in 2017 and the $2bn modernisation of the Shymkent refinery to be completed in 2017.

The country’s refineries processed 14.6mn tonnes of oil in 2015, 2.4% down on 2014, with petroleum output falling by 4.7% y/y to 2.84mn tonnes, jet fuel by 26% to 0.3mn tonnes and diesel fuel by 6.6% to 3.9mn tonnes. The reduction, the report explains, was due to “geopolitical and macroeconomic” reasons that resulted in a weaker Russian ruble, leading to a decrease in prices of Russian petroleum products and to a glut in Kazakh storages. “Measures to restrict imports of Russian fuel and lubricants helped refineries partly and prevent further decline in oil refining,” the report explained.

After the modernisation of the existing refineries is finally completed, capacity would increase from 14.3m tonnes in 2013 to 18.5m tonnes in 2017. This translates into 115.3% growth in high-octane petrol production to 5.73m tonnes, a 38.3% increase in diesel output to 5.63m tonnes, and a 138% jump in jet fuel production to 957,000 tonnes. The reconstruction programme will also mean the northern Pavlodar refinery will completely switch to refining domestic oil instead of Siberian oil.

The government doesn’t offer explanation for the delay but the low global price of oil has forced the Kazakh government and oil companies to cut spending on investment projects. The country is now expected to cut oil output to 74mn tonnes if the price of oil falls below $30 per barrel, Deputy Energy Minister Asset Magauov said.

“We plan to produce 77mn tonnes at a price of $40 per barrel this year. We can see a significant reduction by about 3mn tonnes. We expect the price to fall further resulting in a further reduction in drilling and well overhauling. Should the price fall below $30 per barrel output will be expected to be 74mn tonnes,” the deputy minister said. “Extractive companies themselves are adopting such a decision, taking into account their financial capabilities.”

The low price of oil makes production at some of Kazakhstan’s ageing fields unprofitable because of high production costs. The low price, as well as falling output, is also hurting the Kazakh economy and government finances. Astana is now revising its budget and has already slashed GDP growth forecasts to 0.5% at $30 per barrel from 2.1% at $40 per barrel.