No. 2, 2008

The question of further enhancing the through capacity of the Caspian Pipeline Consortium needs to be decided

The Caspian Pipeline Consortium (CPC) is currently holding on to its position as the key export pipeline for Kazakhstan oil, pumping over 30 million tons of hydrocarbon raw materials a year. Yet the increase in the volume of this valuable raw material produced in Kazakhstan, as well as the growing competition on the part of alternative export routes for oil from this republic, will, in the near future, require the participants in the project to enhance the through capacity of the pipeline system to its maximum design capacity of 67 million tons a year.

The different stages in the project

In the early 1990s, there was only one export pipeline in Kazakhstan, the Atyrau-Samara pipeline, with a through capacity of no more than 10 million tons a year. At the same time, the annual production of oil in the republic amounted to over 20 million tons. It is not surprising that the significant amount of the hydrocarbon raw material acted as a catalyst to seeking effective new ways for supplying the world market with hydrocarbons.

When the independent Republic of Kazakhstan was formed, the first step in developing new oil arteries for the country was the creation, in July 1992, of the Caspian Pipeline Consortium (CPC), when the first framework agreement was signed on setting up the Caspian Pipeline Consortium between the Republic of Kazakhstan and the Sultanate of Oman. A month later, it was joined by the Russian Federation.

In 1996, the CPC was reorganized: in addition to the three founding countries, the project was joined by eight new participants: producing companies representing international, Russian and Kazakh organizations, including Chevron, LUKOIL, ExxonMobil, BP, Rosneft, Shell, ENI, BG and Kazmunaygaz.

Construction of the CPC pipeline system was launched in 1999. This system, 1,510 km in length, was started up in October 2001.

Today, the CPC is the main export pipeline for Kazakhstan oil. Moreover, since the end of 2004, 500 thousand metric tons of Russian oil has been transported along this system every month.

The system as a whole is designed to transport 1.8 million tons a month, while in practice, with the help of antifriction additives, the throughput has now reached a volume of over 30 million tons a year. In spite of such a loading, according to oil industry experts, the CPC system is one of the most technically advanced and safe pipelines in the world.

To retain the competitive advantage

In 2007, the Caspian Pipeline Consortium exported 32.6 million tons of oil through its marine terminal near Novorossiysk. The quantity of oil shipped exceeded the equivalent indicator for 2006 by 4.8%. In 2007, 315 tankers were loaded at the consortium’s typical single point moorings. In all, since the pipeline came into operation in October 2001, 143 million tons of oil have been shipped.

At the present time, the pipeline capacity of the CPC system linking the oil fields in Western Kazakhstan with the sea terminal on the shore of the Black Sea is thus loaded to the maximum with oil coming from the Caspian region and Russia. An expansion of the pipeline system would be in the national interests of both Russia and Kazakhstan and would meet the demands of the growing economies of both countries. The oil-shipping companies’ optimistic

production forecasts for the coming years face the Consortium with the task of speeding up implementation of the enhancement plan.

The agreement reached in 1996 presupposed that the CPC pipeline system would eventually be enhanced to reach its full capacity of 67 million tons a year. Moreover, permits obtained from the Governments of Russia and Kazakhstan by the CPC in 1998 also approved full enhancement of the system to its finite capacity.

It was initially intended to reach the maximum through capacity of the CPC by 2014, but the current market situation dictates new “rules of the game.” Construction of the Baku-Ceyhan pipeline and the pipeline to China faces the Caspian oil producers with a problematical choice. The task of the Consortium’s shareholders consists in making it possible for regional producing companies to avoid having to seek alternative ways of transporting their raw material. Timely enhancement of the system will allow the CPC to retain its competitive advantage.

At the same time, development of the system is being slowed down by the fact that the positions with respect to future tariffs for pumping the oil through the CPC system have not yet been agreed with one of the main shareholders in the Consortium – the Russian Federation, whose interests have been represented since 2007 by the state monopoly Transneft.

Development potential

In September 2007, an Extraordinary General Meeting of Shareholders of the CPC was held in Almaty. The meeting adopted the following resolution: the shareholders came to an agreement to raise the oil pumping tariff from $30.24 to $38 per ton from October 2007.

At the next meeting of the Consortium Board of Directors, held in February 2008, after protracted discussions a new proposal was rejected to raise the CPC tariff by $2.5 to finance development of a detailed construction project to a value of $50 million. Transneft, which manages the Russian Federation block of shares in the amount of 24% of the voting shares in the CPC, proposed raising the CPC tariff from $38 to $40.5. Yet, an increase in capacity of the pipeline in conjunction with a rise in the tariff would mean a fall in returns for the companies participating in the project.

Representatives of the Consortium’s western shareholders came up with a new idea: to suggest that the Russian Government sign a new memorandum on enhancement of the CPC fixing the CPC tariff at its current level. The question of enhancing of CPC capacity thus currently remains open and the parties are in search of a compromise.

“In order for the CPC project to be successful and profitable, we need to bring the throughput along it up to 67 million tons of oil a year as soon as possible,” President of the Republic of Kazakhstan Nursultan Nazarbayev has opined.

The project for enhancing the CPC system, envisaging an increasing in throughput volume at least to 67 million tons of oil a year, includes designing and construction of 10 new pumping stations, an increase in existing reservoirs for storing an additional 480,000 tons of oil, as well as construction of a third typical single point mooring on the Black Sea. The new capacities are to be put into operation in three stages. Installation of additional pumping units at existing booster stations in about two years’ time will allow the through capacity of the pipeline to be increased by approximately 10 million tons.

Another six months will be needed to complete construction of half the new booster stations, allowing an increase of another 10 million tons in the volume of oil transported and a through capacity of the system equal to 50 million tons a year to be reached. Enhancement to the full design capacity of 67 million tons might be completed a year later. The project will cost about $1.8 billion.

The optimistic forecasts of the growth of production in Kazakhstan over the next five years will require the CPC to reach full capacity as soon as possible. Implementation of these plans will allow the CPC, over the coming years, to play a vital role in the economic development of the Caspian region. The benefits for Russia and Kazakhstan will increase substantially after enhancement of the system, since this will provide both the founding states with an additional, reliable source of income.