Tengizchevroil’s Pipeline Bottleneck

    By Andrew E. Kramer
    The Tengizchevroil field in western Kazakhstan is capable of producing two-thirds as much oil each day as the entire Gulf of Mexico.
    But it has been operating at half capacity for years because Russia has failed to follow through on a pipeline expansion agreement that Chevron made 12 years ago.
    That may finally be about to change. The Russians have said a final decision on the timing of the expansion will be made in the fall. And contracts for the work are already being negotiated.
    Tengizchevroil’s ability to maximize its earnings was never a question of being able to pump the oil fr om the field below the scrub brush in the Atyrau area near the Caspian Sea. Tengiz, one of the world’s largest petroleum reservoirs, contains more than 100 working wells.
    The challenge has been getting the oil to market.
    Tengiz is tied to a 935-mile pipeline to the Black Sea that the Russian government has long refused to expand. It has refused even though Chevron, the lead company in Tengiz, is a minority partner in the Russian-led pipeline, the Caspian Pipeline Consortium.
    The Russians agreed a dozen years ago to more than double the pipeline’s capacity when demand required. Chevron and the three other Tengiz partners – Exxon Mobil, KazMunaiGas and Russia’s Lukoil -- are still waiting.
    As a result, instead of the 600,000 barrels a day that Tengiz planners had envisioned, the partners have been able to pump only 420,000 barrels a day through the pipeline.
    Chevron has long wanted to increase its investment so it could produce 1 million barrels a day at Tengiz. That would be only a third less than the entire Gulf of Mexico’s output of 1.5 million barrels a day.
    But with the Russian pipeline’s capacity remaining at 420,000 barrels, what would have been the point of a Tengiz expansion?
    For now, Tengizchevroil is moving some of the oil that the pipeline is unable to carry on ships across the Caspian, then railway to the Black Sea. That has led to Chevron becoming Kazakhstan’s largest railroad user.
    “If Chevron had our way and everything worked beautifully, we would have CPC (the pipeline) expanded five years ago,” said Guy Hollingsworth, managing director of Chevron’s operations in Europe and Asia.
    But Chevron is not the one that decided the issue.
    Russia declined to expand the pipeline while trying to line up investors and international rights-of-way for a second, separate pipeline known as South Stream.
    South Stream would go under the Black Sea and to Bulgaria, wh ere it would split into two branches. One branch would go overland to Austria. The other would go under the Mediterranean Sea to Italy.
    In addition to further controlling the transporting of oil in the region, Russia wants to build South Stream to avoid having to ship oil through the Bosporus Straits inTurkey, the passage out of the Black Sea. The straits are a potential bottleneck already operating at full tanker capacity.
    Russian pipeline negotiations with other countries have long been led by the former president and now prime minister, Vladimir V. Putin, who has taken a keen personal interest in Eurasian energy politics.
    The standoff over the CPC expansion is a reminder that global politics can pose as much risk to the industry as business considerations.
    In the years immediately after the breakup of the Soviet Union, many oil-industry leaders hoped the Caspian region could become a second Persian Gulf, lifting the fortunes of companies and countries and helping shift world supplies away from the Middle East.
    The Caspian basin “has been a success, but it hasn’t lived up to the exaggerated expectations,” according to Central Asia expert Svante E. Cornell. He is research director of the Central Asia-Caucasus Institute at the School for Advanced International Studies at Johns Hopkins University.
    “One of the problems has been the Russian government’s unwillingness to expand the flow of oil,” he said.
    Chevron is not the only company in the Caspian suffering transportation problems. Finding an outlet to world markets is a headache for all the companies working in landlocked Kazakhstan.
    The operator of the separate, gigantic Kashagan oil field in the Caspian — a group whose partners include Exxon Mobil, Shell, KazMunaiGas, ConocoPhillips, Total and Eni — has yet to negotiate a suitable route for the exports the project will begin producing in a couple of years.
    Neither has BP, which is managing the big Karachaganak gas field in the region – another project that includes Chevron.
    By comparison with the projects that have yet to find export outlets, Chevron’s Tengiz troubles are more subtle. The field is productive and profitable, but is not yielding nearly as much oil and money as it should.
    Chevron executives emphasize that while rail exports are more expensive, there is value in having a diversified transportation system.
    Chevron won the Tengiz contract in 1993, signing a deal with Kazakhstan’s government, whose national oil company KazMunaiGas has a minority stake in the field.
    Despite the state oil company’s involvement, the government periodically shakes Tengiz for additional taxes and fines to prop up the national budget — something that has become more common since the economic crisis of 2008.
    Just this month, for example, Kazakhstani officials announced an export tax of $2.73 a barrel, which will cost Chevron and its partners $1.6 million a day.
    The government is also investigating what it calls illegal drilling at Tengiz, which could bring huge fines. The consortium has denied it deviated from the state-approved drilling plan.
    Back in the mid-1990s, a plan took shape for a pipeline from Kazakhstan’s western oil-producing heartland through Russia to the port of Novorossiysk on the eastern shore of the Black Sea. It became known as the CPC project.
    From Novorossiysk the oil would be able to move by tanker ship, either to other Black Sea countries or through the Bosporus Straits to the Mediterranean and, from there, to ports around the world.
    Under a 1998 deal, the Russian government agreed to the CPC pipeline being built in two phases. The first phase would have a capacity of 650,000 barrels a day. The second would more than double capacity to 1.4 million barrels a day.
    Phase 1 was completed in October 2001. Phase 2 has yet to begin.
    On the basis of the 1990s-era pipeline plan, the Chevron-led consortium invested hundreds of millions of dollars drilling and bringing wells online.
    An even bigger expense was constructing six multibillion-dollar processing plants to remove hydrogen sulfide gas from the petroleum to make it fit for sale.
    The last to be built, at a cost of $7.4 billion, is a behemoth of pipes and tanks.
    The facility separates oil from vast quantities of hydrogen sulfide, then re-injects some of the gas into the earth.
    It is so huge that before construction was completed two years ago, 18,000 laborers at a time were clambering over the sand, welding and hammering it all together.
    Yet even before the plant was finished, Chevron learned that the CPC pipeline expansion it had counted on was nowhere in sight. An expansion would have allow the company to export the new plant’s entire output of 285,000 barrels of processed oil per day.
    If a second pipeline is built to pump crude out of Kazakhstan’s oil heartland, Chevron said it will use it.
    In the meantime, Chevron still wants the CPC pipeline expanded.
    Russian officials now say a final decision on the timing of the expansion will come in the fall.
    Ian MacDonald, Chevron’s vice president for transportation in Europe and the Middle East, said contracts for the expansion work arealready being negotiated.
    When the pipeline expansion is approved, he said, Chevron will build more facilities at the Tengiz field to elevate its output to close to a million barrels of oil a day, the New York Times reports.