Analysis: Oil companies face slump in production, big losses if Russia shuts down Kazakh pipeline


  • This includes content produced in Russia, where the law limits coverage of Russian military operations in Ukraine.
  • Russia threatened to suspend CPC over leaks
  • Oil markets could lose more than 1% of supply
  • Few options to divert oil
  • Oil majors could be exposed to billions of losses

LONDON, July 11 (Reuters) – Western energy companies will cut production and lose billions of dollars if Russia, feared, suspends a pipeline that is nearly the only export route for oil from landlocked Kazakhstan, company sources, traders and analysts say.

The closure of the CPC pipeline carrying oil from Kazakhstan to Russia’s Black Sea export terminal at the port of Novorossiisk would cut off more than 1% of the global oil supply, exacerbating the already worst energy crisis since the Arab oil embargo in the seventies.

The pipeline, which runs through Russian territory and is owned by a consortium of Western, Asian, Russian and Kazakh companies, has been in the spotlight since Russia invaded Ukraine on February 24 in what Moscow calls a “special military operation.”

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Last Wednesday, a court in Novorossiisk ordered CPC to suspend operations for 30 days amid concerns over oil spill management. read more

A Russian court on Monday overturned the ruling against CPC and imposed a fine of 200,000 rubles ($3,300) instead. read more

However, the sources said they still considered major disruptions likely. Co-owner of the pipeline Russia has said all the interruptions are caused by technical problems.

Storm damage in March has already interrupted flows through the 1.3 million barrels per day (bpd) oil artery operated by the Caspian Pipeline Consortium.

Major oil companies, including Chevron, Exxon Mobil, Shell and Italy’s Eni, have interests in the CPC in addition to several Russian and Kazakh companies. Western companies also have interests in Kazakh oil fields.

The CPC pipeline is the route for almost all Kazakh oil exports.

Three sources at Western oil companies operating in Kazakhstan, asking not to be named due to the sensitivity of the issue, said they expected a lengthy suspension of the CPC pipeline.

A Western major trader said such a disruption would result in a 50 million tons of oil per year (1 million bpd) drop as landlocked Kazakhstan has limited alternative export routes.

Many Western companies have shut down operations in Russia, with oil majors among the first to leave in the days after the conflict began. Western sanctions have disrupted Russian exports and pushed up energy prices.

In response, Russia has taken steps to seize oil and gas projects Sakhalin 1 and 2, where Shell and Exxon have interests.

A Western director familiar with CPC operations said Sakhalin was “a clear sign of things to come for CPC”.

Shortly after the Russian invasion of Ukraine, international oil prices soared to their highest level since 2008 records.

They have since eased to just over $100 a barrel as the market expects economic weakness to dampen demand, although sales have been curtailed by worries about tight supplies that would be exacerbated by a cut in CPC output.

“Losing a million barrels a day in an already tight environment could create an unsolvable problem for the oil market,” said Amrita Sen of Energy Aspects in London.

Analysts at JP Morgan last week predicted that the price of oil could soar to an all-time high of $190 a barrel if combined production of 3 million barrels a day from Russia and Kazakhstan were hit by sanctions and related issues.

LACK OF ALTERNATIVES

Kazakhstan produces about 1.6 million barrels of oil per day and exports about 80% of that volume, mainly through the CPC.

Of the rest, 15% also leave the country via Russia, and about 5% go to China and various destinations via rail and the Caspian Sea, data from the Ministry of Energy of Kazakhstan shows.

Last week, Kazakh President Kassym-Jomart Tokayev told his government to diversify oil supply routes.

But that would take time, said Camille Chautard, an analyst at Moody’s ratings.

Oil companies have been studying the viability of alternative routes in recent months, the three sources said, including to China and trans-Caspian shipments to Azerbaijan and Georgia. All those options are challenging.

The pipeline to China can get oil from East and Central Kazakhstan, but most of the major fields are in the West.

In the Caspian Sea, exporters face tanker shortages and have limited capacity to absorb more oil.

“To be honest, I don’t think we can divert anything,” said a Western trader familiar with CPC operations.

CHEVRON MOST EXPOSED

Chevron would be particularly exposed to any pipeline shutdown as it has the largest western stake in Kazakh production at about 380,000 bpd, or more than 12%, of its total output.

Recent temporary outages shouldn’t have a material impact on the company’s credit, but any “prolonged outages would be very material to Chevron’s production volumes,” said Moody’s Elena Nadtotchi.

If Chevron’s investments in Kazakhstan are compromised or lost, it could lead to a downgrade, she said.

A prolonged shutdown would also threaten Chevron’s future growth plans. The US major planned to increase production of Tengiz, Kazakhstan’s largest field, by 40% to about 1 million barrels per day.

Credit Suisse analysts estimate that Chevron, which owns 50% of Tengiz, would have seen free cash flow rise to $3.0-$3.5 billion by 2024 after the expansion and to $4.0-$4. 5 billion in 2026 based on oil prices of $60 a barrel.

In May, Chevron pointed to the risk of sanctions on its output, but said the measures had not yet had a material impact.

The Chevron-led Tengiz consortium TCO, which also includes Exxon, declined to comment on specific details if the CPC pipeline would shut down.

“As global oil markets continue to face challenges arising from geopolitics, TCO’s primary focus is on maintaining secure operations, and we are exploring potential crude oil export options,” it said in a statement to Reuters.

Exxon is the second largest foreign producer in Kazakhstan with production of 213,000 bpd of oil and 234 million cubic feet of gas. It will be followed by Eni with about 145,000 boe per day, Shell with about 100,000 boed and TotalEnergies with about 80,000 boed in 2021.

Shell, Eni and Total declined to comment, as did Exxon, saying TCO was best placed to respond.

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Editing by Barbara Lewis

Our Standards: The Thomson Reuters Trust Principles.

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