UPDATED 1 Sept: The EI library in London is temporarily closed to the public, as a precautionary measure in light of the ongoing COVID-19 situation. The Knowledge Service will still be answering email queries via email , or via live chats during working hours (09:15-17:00 GMT). Our e-library is always open for members here: eLibrary , for full-text access to over 200 e-books and millions of articles. Thank you for your patience.
Can Kazakhstan’s gas sector meet its commitments to China?
Kazakhstan’s gas sector is coming of age. Last year, state-owned KazTransGas (KTG) signed a five-year export deal to deliver up to 1bn cf/d – roughly 10bn cm/y – to China.
The Caspian country began oil exports to its eastern neighbour in 2006 and has exported gas to China via the Turkmenistan-China gas pipeline since 2017.
According to Ashley Sherman, Principal Analyst, Caspian and Europe Upstream ,Wood Mackenzie: ‘The scale of the new export commitment cannot be overstated. The volumes committed represent nearly one-third of Kazakhstan’s marketed gas output and are almost on par with current domestic demand of 1.5bn cf/d.’
But can Kazakhstan deliver on its commitments? At present, Central Asia meets about 15% of China’s growing gas demand, according to Wood Mackenzie. By signing the Kazakhstan contract, China is looking to hedge its bets against future under-performance from its anchor Central Asian gas suppliers, Turkmenistan and Uzbekistan. The five-year deal will also allow China to test out Kazakhstan’s supply capacity before it commits to a longer-term agreement.
Sherman continues: ‘Seasonal domestic demand will challenge Kazakhstan’s ability to respond in full to China’s peak winter needs. And high delivered costs will persist because of the vast distances that need to be covered to reach China’s coastal regions. While China’s gas demand grew in 2018, it now faces downward pressure from economic slowdown. In our base case, we anticipate that Kazakhstan’s core gas exports to China will not exceed 0.8bn cf/d. To reach the agreed 1bn cf/d would require stronger Chinese gas demand growth and much clearer commercial incentives for gas in Kazakhstan’s own upstream sector.’
He adds: ‘Unfortunately, commercial incentives are no clearer than they were five years ago. On the positive side, a meteoric rise in gas production has boosted Kazakhstan’s volume growth. Since 2010, gas production has increased by almost 50% from 3.6bn cf/d to 5.3bn cf/d. And gas sales to domestic and export markets grew by 75%. But the country’s gas sector is behind the curve in terms of development maturity and diversity. Few new sources of supply are ripe for commissioning before 2023. And for the largest upstream projects – the playground of the majors – sour gas re-injection is the future priority.’
Sherman says: ‘A range of commercial obstacles means that Kazakh domestic gas prices are generally on the low side, with some exceptions. And under the current commercial framework, neither upstream producers nor the national operator can be confident of near-term profits. By our analysis, a standalone non-associated gas development in west Kazakhstan will struggle to break even.’
He concludes: ‘For Kazakhstan to realise its potential, much clearer commercial incentives are needed. This will require collaboration. Operators and state entities must work together to trial new approaches and maximise the utilisation of existing gas processing capacity. Without change, Kazakhstan risks not being the reliable long-term gas partner that China hopes and needs.’
Figure 1: Central Asian gas flows to China – base case
Source: Wood Mackenzie