No. 2, 2010
Vladimir Igorev
CASPIAN PROGRESS
The Caspian Pipeline Consortium is on the verge of important new changes
The CPC pipeline system is today the most direct and competitive export route for transporting hydrocarbon feedstock for oil companies from Kazakhstan to the Black Sea coast. In 2009, the Consortium set its own record of exporting over 34.5 million tons of oil through the Yuzhnaya Ozereyka-2 terminal. The maximum throughput capacity of the CPC system was thus virtually exceeded. At the same time, the market situation persistently calls for a substantial increase in the trunkline's capacity.
Two different CPC decades
CPC history dates back to June 1992, when the first framework Agreement on Setting up the Caspian Pipeline Consortium was signed between the Republic of Kazakhstan and the Sultanate of Oman. Soon, just a month later, the Russian Federation also joined the CPC.
The CPC was based on the 1,500 km Tengiz-Novorossiysk oil pipeline connecting the western Kazakhstan oil field with the Russian Black Sea coast.
In 1996, the founding members and a consortium consisting of Chevron Overseas Petroleum Inc., LUKOIL, Mobil Corporation, Rosneft, Agip SPA, British Gas Exploration and Production Ltd., the State Holding Company MunaiGaz (the forerunner of KazMunaiGaz) and Oryx Energy Company signed a protocol on restructure, under which the founding members were to provide the producing companies with 50% of the shares in the restructured CPC against an obligation to finance in full the construction and startup of the first stage of the oil pipeline system. As a result, two new companies were formed: one in the Republic of Kazakhstan - Caspian Pipeline Consortium-K (CPC -К), and the other in Russia - Caspian Pipeline Consortium-R (CPC-R).
CPC construction began in 1999 and the oil pipeline system was started up in 2001. In 2000, BP became a shareholder in LUKARCO by acquiring 100% of the shares in Arco, LUKOIL's partner on the project. In 2003, LUKOIL Group oil from the Kumkol field also began to be transported via the CPC system. In May 2004, the CPC system received the first batch of stable gas condensate produced by the LUKOIL Group on the Karachaganak field.
In November 2004, as part of the Russian CPC quota, oil began arriving from Surgutneftegaz, Sibneft, Yuganskneftegaz and TNK-ВР. At the same time, pumping began of Volga, Western Siberian and Grozny oil belonging to LUKOIL and Rosneft (shareholders in the consortium). The same year, transportation began along the pipeline system of oil from the Karachaganak field in Western Kazakhstan by the international consortium of Karachaganak Petroleum Operating B.V., uniting LUKOIL, Eni, Chevron and BG. It was precisely in 2005, when the Karachaganak field was connected to the CPC system, that the first stage of the oil pipeline system reached its rated throughput capacity.
Reconsolidation
The CPC has brought both Russia and Kazakhstan substantial geopolitical benefits. At the same time, the terms and conditions of the agreements signed on this project in 1996 precluded the Russian Federation, as a CPC shareholder, getting any profits from the transit of feedstock through this pipeline system. That is why, in 2007, the Russian leaders decided to transfer the country's 24% share in the CPC for trust management by the government monopoly company Transneft.
Initially, the construction work on the oil pipeline was financed by loans from the project participant companies at a high interest rate of 12.66% per annum, the result being that all revenues went to redeem the credit. The shareholders obviously received high profits from this, but Russia and Kazakhstan did not receive tax revenues. In 2007, largely thanks to the negotiating efforts of Transneft, the shareholders agreed to cut the interest rate to 6%, which soon allowed the participant countries to begin receiving direct tax revenues from the project.
In 2008, the Sultanate of Oman decided to withdraw from the CPC, as by that time its investment in consortium had been paid back many times over. Oman's 7% interest was acquired by Russia and soon also handed over for trust management to Transneft. In April 2009, British Petroleum sold Kazakhstan a 0.87% share in the CPC and then, in December of that year, LUKOIL acquired BP's 46% share in JV LUKARCO, this bringing its ownership interest in the Consortium up to 12.5%.
Today, the CPC shareholders are Russia - 31% (in Transneft trust management), Kazakhstan - 20.75% (KazMunaiGaz - 19% and Kazakhstan Pipeline Ventures LLC - 1.75%), Chevron Caspian Pipeline Consortium Company - 15%, LUKARCO B.V. (a wholly owned subsidiary of LUKOIL) - 12.5%, Mobil Caspian Pipeline Company - 7.5%, Rosneft-Shell Caspian Ventures Limited - 7.5%, BG Overseas Holding Limited - 2%, Eni International N.A. N.V. - 2%, and Oryx Caspian Pipeline LLC - 1.75%.
It is now nine years since the first tanker was loaded at the Black Sea terminal of the Caspian Pipeline Consortium and, since then, over 212 million tons of oil have been shipped via the CPC system. Officially, the throughput capacity of the oil pipeline system today is 28.2 million tons of oil a year. Yet, since 2005, the CPC has been moving over 30.5 million tons, this becoming possible thanks to application of special antifriction additives that have not, however, affected the safety of this technically advanced trunk pipeline. The Consortium reached its record in 2009, when 34.574 million tons of oil were shipped for export, this exceeding the 2008 figure by 9.9%.
The excellent prospects for oil production in the Caspian region, both in Kazakhstan and in Russia, together with the current enormous demand for the services of the CPC, persistently dictates the need for the Consortium to expand the throughput capacity of the pipeline.
Negotiating zigzags
The plans for launching construction of the second stage of the oil pipeline, capable of bringing crude transport up to 67 million tons a year, have been under discussion by the Consortium member-companies and the leadership of Russia and Kazakhstan since 2004. Even so, partly because of the position taken by British Petroleum, the shareholders had not, until recently, been able to reach a common understanding on this issue. In 2008, ВР announced its intention to withdraw from the Consortium, since it is the only CPC shareholder without any substantial volumes of oil to transport via the system, so expansion of the pipeline was not economically beneficial for the British company.
Late 2009 and early 2010 saw positive shifts for the CPC. On December 15-16, 2009, the CPC shareholders approved the plan for implementing the expansion project, including a set of organizational, technical, commercial and financial matters. Shortly before that, on December 11, LUKOIL concluded a transaction to purchase British Petroleum's 46% stake in the LUKARCO B.V. joint venture, which had a 12.5% ownership interest in the CPC. Thus, no differences regarding aspects of the strategic development of the Consortium arose when the plan for expanding the pipeline was adopted.
In February 2010, a meeting was held in Moscow of the Board of Directors of JSC CPC-R, as well as an Extraordinary General Meeting of Shareholders of JSC CPC-К, devoted to implementation of the project for expansion of the Caspian Pipeline Consortium. At the meetings, the shareholders adopted the resolutions needed for further development of the project on the basis of a plan approved in December 2009 to more than double future pumping capacity compared with the current one.
In addition, agreements were approved on management of the CPC expansion project. Under the agreements, Transneft, KazMunaiGaz and Chevron will act as management companies organizing implementation of the project in their specific zones of responsibility. Conclusion of the agreements on management of the CPC's expansion will enable expansion project continuation and completion on schedule.
The expansion will be carried out in three stages to providing for a step-by-step increase in the system's capacity. The first stage, to be completed by approximately mid-2012, will involve modernization of the existing oil-pumping stations to ensure a 7-8 million tons increase in crude transport per annum. The second stage envisages construction of five new oil pumping stations and three reservoirs of 100,000 m3 each at the sea terminal, as well as replacement of 88 km of pipes, bringing capacity up to 48 million tons without the use of additives by mid-2013. And finally, during implementation of the third stage, another five oil-pumping stations, three reservoirs and an additional single point mooring will be built, bringing the pipeline up to a planned capacity of 67 million tons of oil per annum by 2014. With the use of antifriction additives and given a favorable market situation, 76 million tons of oil a year may be transported.
Moreover, the shareholders approved a scheme for external energy supply for the expanded CPC system: 90% of the electric power will be provided by the main grids in the regions through which the pipeline passes and 10% will be produced by autonomous generators, including gas-fuelled ones.
The core profile
In the near future, immediate financing of the project will begin. The current CPC oil transportation tariff ($38 per ton) and the beneficial credit rate of 6% will remain in place. Until construction is completed, payments on the loans will be suspended, meaning that the expansion project can be financed mainly by the CPC's own funds. The pump or pay principle will remain in effect for pipeline shareholders. Debt payments will be resumed only once construction is finished. The candidate for the post of CPC General Director will be put forward by the Russian government shareholder.
Expansion of the system will raise the CPC to a new level of economic efficiency, bring practical benefits not only for shareholders in the project, including the two founding states, but also the regions along the pipeline's route, since these will receive new jobs, new contracts for local companies and materials suppliers.
Aggregate investment in the CPC expansion by the participating companies are estimated at $4.5 billion. The anticipated revenues, after construction is completed, will amount to about $2.5 billion per annum. For comparison, the Consortium's revenues in 2009 stood at $1.131 billion.
According to the resolution adopted by the CPC shareholders, in the event of restricted passage by tankers through the Bosphorus and the Dardanelles, the shareholders will use any pipelines allowing the CPC oil to be transported bypassing the Black Sea straits. In any case, expansion of the CPC will inevitably result in greater volumes of oil reaching the Black Sea, thus increasing the burden on the straits . This will greatly raise the chances for construction of new oil pipelines, in particular that from Burgas to Alexandropoulos.
The territorial proximity of such countries as Russia, China and Azerbaijan opens up broad prospects for export of Kazakhstan's hydrocarbons in several directions at once: the CPC, Baku-Tbilisi-Ceyhan, Uzen-Atyrau-Samara, and the Kazakhstan-China oil pipeline. The CPC is today one of the main export routes for oil companies operating in Kazakhstan. Its advantage over the other pipelines lies in the fact that it provides the most direct and competitive route for Kazakhstan oil and gas producing companies to international markets. Timely expansion of the CPC will allow this advantage to be maintained, so the oil producers will have no need to make use of other export routes.
