Lukoil expands in Kazakhstan

By Newsbase April 12, 2024

Lukoil is expanding its oil and gas operations in Kazakhstan, the Moscow-based Kommersant newspaper reported on April 8, amid limited overseas opportunities for the company because of Russia’s increased international isolation.

According to Kommersant, Lukoil has paid $200mn to enter joint projects with Kazakhstan’s national oil company Kazmunaygas (KMG) to develop the Kalamkas-Sea, Khazar and Auezov fields in the Kazakh section of the Caspia Sea. The deal involves the payment of an additional $100mn after certain conditions are met. 

KMG sold a 50% stake in February last year in the Kalamkas-Khazar Operating company that owns licences for the fields in question, which are situated near to the only producing asset in Kazakh waters, the giant Kashagan project. They are 60 km from the shore, in waters between seven and nine metres deep.

The fields hold around 80mn tonnes (586mn barrels) of oil equivalent, according to Kazakh estimates. The cost of their development is estimated to come to $6bn, with production targeted to start in 2028. Output is expected to reach 3-4mn tpy (60,000-80,000 barrels per day). 

Explaining the rationale behind the Lukoil partnership, KMG’s deputy chairman Kuanysh Kudaibergenov cited the company’s experience at similar projects in the Russian section of the Caspian.

“It’s worth noting that the fact we have a strategic partner that possesses necessary technologies related to exploring offshore oilfields was a key factor that helped us re-launch the project,” he said in a statement. “Otherwise, it would lay on a shelf waiting for an investor.”

Kazakhstan has been trying to attract investment to develop its offshore oil and gas reserves for decades, but so far the only project in its section of the Caspian Sea to reach production has been the Kashagan field, operated by an international consortium.

Kashagan had a very problematic history. Development of the field, which was discovered in 2000, was plagued by delays, overwhelming cost overruns and disputes between the government and the investors. After a false start in 2013, when sulphur-containing gas was found to have caused extensive damage to its pipeline system, the field finally came on stream properly in 2016. Its cost ended up exceeding $55bn.

Besides the experience at Kashagan, companies were also deterred from investing in Kazakhstan’s offshore because of changing taxation and regulation. 

In the case of Kalamkas-Sea, Khazar and Auezov, Kazakhstan had reached out to Shell, a partner at Kashagan, to assist with development. But the UK major pulled out in 2019, citing the projects’ high costs.

Lukoil already has a large presence in Kazakhstan. It is partnered with KMG in a number of projects, including at the Karachaganak, Tengiz and Al-Farabi fields, the Caspian Pipeline Consortium (CPC) as well as in joint ventures for the development of the Khvalynskoye and Central fields. The Russian company also explored the Zhenis block in the Caspian Sea with KMG, but the joint venture disbanded last year after the pair drilled a dry well. 

Lukoil has been working for years to expand its international business, given a lack of growth potential in Russia, where many of its largest fields, mostly found in Western Siberia, are now mature with production declining. However, Western sanctions on Russia and the country’s increasing isolation on the global stage as a result of the conflict has made it harder for the company to secure opportunities. Meanwhile, sanctions have led to the company scaling back its downstream operations in Europe, including in fuel retail and refining.

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