Analysis: Oil majors face output slump, deep losses if Russia stops Kazakh pipeline

LONDON, July 11 (Reuters) – Western vitality majors will reduce output and lose billions of {dollars} if Russia, as is feared, suspends a pipeline that’s virtually the one export route for oil from land-locked Kazakhstan, firm sources, merchants and analysts say.

The closure of the CPC pipeline that carries oil from Kazakhstan to the Black Sea Russian export terminal within the port of Novorossiisk would shut in additional than 1% of world oil provide, exacerbating what’s already probably the most extreme vitality crunch because the Arab oil embargo within the Seventies.

The pipeline, which runs by means of Russian territory and is owned by a consortium of Western, Asian, Russian and Kazakh firms, has been within the highlight since Russia on Feb. 24 invaded Ukraine in what Moscow calls a “particular army operation”.

Final Wednesday, a court docket in Novorossiisk ordered CPC to droop operations for 30 days, citing concern about oil spill administration. learn extra

A Russian court docket on Monday overturned the ruling towards CPC and as a substitute fined it 200,000 roubles ($3,300). learn extra

The sources, nevertheless, stated they nonetheless thought main disruption probably. Pipeline co-owner Russia has stated all stoppages are pushed by technical points.

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

Main oil firms, together with Chevron, Exxon Mobil, Shell and Italy’s Eni, along with a number of Russian and Kazakh companies have stakes within the CPC. Western firms additionally maintain stakes in Kazakh oilfields.

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

Three sources at Western oil firms working in Kazakhstan, asking to not be named due to the sensitivity of the problem, stated they anticipated a protracted CPC pipeline suspension.

One dealer at a Western main stated such an outage would end in a decline of fifty million tonnes of oil per 12 months (1 million bpd) as a result of land-locked Kazakhstan has restricted different export routes.

Many Western firms have exited operations in Russia, with oil majors among the many first to depart within the days after the battle started. Western sanctions have disrupted Russian exports and pushed up vitality costs.

In response, Russia made steps in direction of seizing oil and gasoline initiatives Sakhalin 1 and a couple of, the place Shell and Exxon have stakes.

A Western govt accustomed to CPC operations stated Sakhalin was “a particular signal of issues to come back for CPC”.

Shortly after Russia’s invasion of Ukraine, worldwide oil costs spiked to their highest ranges because the information of 2008.

They’ve since eased to simply above $100 a barrel because the market anticipates financial weak point will decrease demand, though promoting has been restricted by issues of tight provides that may be exacerbated by a reduce in CPC output.

“Shedding a million barrels per day in an already tight setting can result in an unsolvable drawback for the oil market,” Amrita Sen from Vitality Elements in London stated.

JP Morgan analysts predicted final week oil costs might bounce to an all-time excessive of $190 per barrel if a mixed 3 million bpd of output from Russia and Kazakhstan was hit by sanctions and associated points.

LACK OF ALTERNATIVES

Kazakhstan produces some 1.6 million bpd of oil, and exports about 80% of that quantity, principally by means of the CPC.

Of the rest, 15% leaves the nation additionally by way of Russia, and round 5% goes to China and numerous locations by way of rail and the Caspian Sea, Kazakhstan’s Vitality Ministry knowledge reveals.

Final week, Kazakh President Kassym-Jomart Tokayev instructed his authorities to diversify oil provide routes.

However that may take time, Camille Chautard, analyst at Moody’s rankings, stated.

Oil majors have studied the viability of other routes in latest months, the three sources stated, together with to China and trans-Caspian shipments to Azerbaijan and Georgia. All of these choices are difficult.

The pipeline to China can take oil from east and central Kazakhstan, however many of the giant fields are within the West.

On the Caspian Sea, exporters face tanker shortages and have little capability to take extra oil.

“To be trustworthy, I do not assume we are able to re-route something,” one Western dealer accustomed to CPC operations stated.

CHEVRON MOST EXPOSED

Chevron could be notably uncovered to any pipeline closure as a result of it has the largest Western stake in Kazakh manufacturing at round 380,000 bpd, or greater than 12%, of its complete output.

Latest non permanent disruptions shouldn’t have a fabric impression on the corporate’s credit score standing, however an eventual “extended disruption could be very materials to Chevron’s manufacturing volumes,” Elena Nadtotchi from Moody’s stated.

If Chevron’s investments in Kazakhstan have been impaired or misplaced, that would result in a rankings downgrade, she stated.

A protracted-term closure would additionally threaten Chevron’s future development plans. The U.S. main deliberate to spice up output by 40% at Kazakhstan’s largest area Tengiz to round 1 million bpd.

Credit score Suisse analysts estimate that Chevron, which controls 50% of Tengiz, would have seen free money circulate rising to $3.0-$3.5 billion by 2024 following the growth and to $4.0-$4.5 billion by 2026 on the premise of oil costs of $60 per barrel.

In Could, Chevron flagged the chance of sanctions to its output however stated measures had not but had a fabric impression.

The Chevron-led Tengiz consortium TCO, which additionally contains Exxon, declined to touch upon particular particulars if the CPC pipeline was shut.

“As world oil markets proceed to come across challenges arising from geopolitics, TCO’s major focus is on sustaining protected operations, and we’re exploring potential crude oil exporting choices,” it stated in an announcement to Reuters.

Exxon is the second largest overseas producer in Kazakhstan with output of 213,000 bpd of oil and 234 million cubic toes of gasoline. It’s adopted by Eni with some 145,000 barrels of oil equal per day, Shell with round 100,000 boed and TotalEnergies with some 80,000 boed in 2021.

Shell, Eni and Complete declined to remark, as did Exxon, saying TCO was best-placed to reply.

Modifying by Barbara Lewis

Our Requirements: The Thomson Reuters Belief Rules.