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Kazakhstan Oil Field Investing

Brian Hicks

Written By Brian Hicks

Posted September 12, 2013

Kazakhstan is a rich land of awe-inspiring scenery and unique history. For travelers, it’s a beautiful country to spend time in.

But investors might be feeling a little jaded toward the Central Asian country. I’m specifically talking about the Kashagan oil field.

kazakhstanLocated in the North Caspian Sea, the Kashagan holds roughly 9 to 13 billion barrels of recoverable oil.

And the oil field has seemed like a financial black hole for investors. The region has been frayed with financial, infrastructural, and political disputes. But a light appeared at the end of the tunnel when the offshore Kashagan oil field finally struck oil.

Production is set to begin at 350,000 bpd, but the second phase of 1.5 million bpd has been postponed due to technical problems and government issues related to revenue. There is no solid reading on when production will be commercially viable enough to place Kazakhstan on the map as a major oil producer.

And there is more bad news. The Kazakhstan government plans to cut government spending after lacking the proper revenue, which forestalls ambitions of turning the nation into an oil center of Central Asia.

The oil field was originally discovered in 2000. Production was set to begin in 2005, and costs were estimated at $10 billion. But the deal evolved into a massively bloated headache with cost overruns that turned the Kashagan into a $48 billion venture.

The Kashagan is run by a joint venture involving state-run company KazMunaiGaz, Royal Dutch Shell (NYSE: RDS-A), ExxonMobil (NYSE: XOM), Japan’s Inpex (TYO: 1605), France’s Total (NYSE: TOT), and Italy’s Eni (NYSE: E). China National Petroleum Corp. also recently bought into the venture with an 8.33% stake.

It is a good thing that the venture partners were finally able to begin production, since they would have been slapped with hefty government fines if they missed the October 1 deadline.

With so many major players involved, it would seem as if operations should flow with ease. But there are many outside factors to blame.

Core Problems

There has been a fair share of partner in-fighting, but the primary problem is government interference. Foreign investors have had to undergo frequent renegotiations with the government.

Kazakhstan may be a headache for outside investors, but it is actually a major oil hub, holding roughly 30 billion barrels of oil in place, making that country one of the top reserve holders in the world.

Kazakhstan has potential, and the country has already proven it can be a major contender in the world energy economy, with a 3 million barrel production rate just a decade ago.

But the government still has tight control over resources, and its dealings with foreign investors have not exactly gone smoothly.

Companies like Chevron (NYSE: CVX) and Eni are looking to expand Kazakhstan oil production in the Karachaganak and Tengiz oil fields, two of Kazakhstan’s major sources of oil production. But the companies have been prevented from doing so due to tax and land rights disputes with the government.

One gripe investors have is with a 2009 tax system that makes the investment atmosphere very uncomfortable, as well as with a 2010 export duties imposition.

But there is one area that has really placed a sour taste in the mouths of investors.

Investors have been seeking a $136 billion recoup effort due to the presence of sour gas and an unwanted chemical called mercaptans that led to high oil viscosity. This has made it even more difficult to begin the second phase of the project – not expected to begin until sometime after 2020.

According to analyst projections, it would take a long-term oil price of $150 a barrel for investors to make a 15 percent internal rate of return on the expansion of the project, Reuters reports.

Oil prices have risen as a result of tensions in the Middle East, but it’s very unlikely prices will go that high anytime soon.

On top of that, an oil pipeline under construction in the region has seen numerous delays.

And then there is the violence.

Since 2010, the country has been plagued with violence in the form of extremist attacks on government buildings. There was an energy strike in December of 2011 that left 16 people dead.

Kazakhstan is a safe country compared to places like Iraq and Colombia, but these recent bouts of violence are something to keep an eye on.

Investor Options

If you’re interested in investing in Central Asian oil, the good news is that Kazakhstan is not your only option.

Uzbekistan is looking to begin shale oil production this year in order to break away from oil imports from Kazakhstan. And the Uzbek government is looking attract $850 million worth of foreign investment by 2015.

Uzbekistan is undergoing dwindling oil production, but its efforts in revitalizing its energy economy are certainly worth keeping on your radar.

But if you’re looking for a solid bet in Central Asian oil, look to Azerbaijan.

Foreign investment in this country’s oil sector jumped to 33 percent from January to July of this year

Azerbaijan did cut oil production by 4.4 percent in the first quarter and 4.3 percent for natural gas, but the country exports commodities like natural gas to high demand havens like Turkey, Georgia, and Russia. Major companies interested in developing shale oil in Azerbaijan are Chevron, Exxon Mobil, and Total.

If you’re looking for the safest oil investment, stick with domestic shale oil in the U.S. If you’re concerned about the oil quality in the Kashagan, investing in America’s light, sweet crude is always a good option. We’re also getting close to 1 million barrels a day in production from North Dakota, and Texas production reached over 2 million barrels a day. On top of that, new plays like the Niobrara Shale and the Avalon Shale could gain plenty of traction in the future.

Despite the problems, Central Asian oil looks promising depending on where you look. But you can never go wrong with North American oil production.

It is just a matter of deciding where you want to park your investment dollars.

Good luck investing.


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