Caspian Upstream: 2014 in Review
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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 LUKOIL’s 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 previously- proposed 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 44°E 52°E 60°E 68°E N N ° ° 4 4 5 5 RUSSIA RUSSIAN volumes of crude transit Kazakhstan to China Pipelines to be replaced at KASHAGAN KAZAKHSTAN TENGIZ expansion Second well on ZHAMBYL N N ° ° FID delayed block, KAZAKHSTAN 6 6 4 4 Line C of Turkmenistan-China pipeline commissioned Caspian Sea UZBEKISTAN CHIRAG OIL KYRGYZ- Project starts-up STAN AZERBAIJAN BP and SOCAR sign PSC Seismic acquisition commences on BOKHTAR AREA, TAJIKISTAN TURKEY on near-shore exploration TURKMENISTAN TAJIKISTAN N N ° SHAH DENIZ ° 8 8 3 - Total and Statoil exit 3 - TPAO increase interest Construction of Line D - PETRONAS farms-in Turkmenistan-China gas pipeline begins IRAN AFGHANISTAN IRAQ PAKISTAN km SAUDI 0 200 400 800 N N ° ° 0 0 ARABIA 3 3 44°E 52°E 60°E 6 8 ° E 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 Statoil’s 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 Front–End Engineering and Design (FEED) study for the Trans-Anatolian Pipeline (TANAP). WorleyParsons was subsequently awarded an Engineering, Procurement and Insight - 07 Jan 2015 Page 2 of 9 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 LUKOIL’s 50% stake in Caspian Investment Resources, operator of four projects in Kazakhstan. Upon completion, this deal will double the value of Sinopec’s Kazakh portfolio. The region’s 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 majority- owned 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 Caspian’s 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. Insight - 07 Jan 2015 Page 3 of 9 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) YoY production change (%) at key regional fields 2012-2014 3500 3000 d / 2500 b 0 0 0 ' 2000 Others n o Uzbekistan i t c 1500 Turkmenistan u d o Azerbaijan r 1000 P Kazakhstan 500 0 Source: Wood Mackenzie 15% 10% 5% Azeri Chirag Guneshli Tengizchevoil 0% Area Karachaganak -5% -10% 2012 2013 2014 Source: Wood Mackenzie *Oil and condensate production only. Exploration remains disappointing Insight - 07 Jan 2015 Page 4 of 9 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 government’s 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 re- tendered. 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 Kazakhstan’s Atasu-Alashankou route.