Kazakhstan Could Struggle to Meet Chinese Gas Sales Targets: WoodMac
Kazakhstan’s gas industry is “coming of age,” UK consultancy Wood Mackenzie wrote in a research report published September 30, thanks to a contract signed last year on gas sales to China. But inadequate conditions could mean the central Asian state struggles to meet its export commitments.
Kazakhstan is better known for its status as the biggest oil producer in the former Soviet Union after Russia. But in October 2018, state-owned KazTransGaz (KTG) agreed with PetroChina to deliver 1bn ft3/day (around 10bn m3/yr) of gas to China over a five-year period. The contract replaced an agreement reached a year earlier on the shipment of 5bn m3 of gas over 12 months.
“The scale of the new export commitment cannot be overstated,” WoodMac analyst Ashley Sherman said. “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 ft3/day.”
By reaching out to Kazakhstan, China is looking to diversify its central Asian gas supply, much of which comes from Turkmenistan. The five-year deal will allow Beijing to test Kazakhstan's gas supply capability before entering into a longer-term contract. Kazakhstan was able to begin piped supplies to China in 2017 after completing the Beineu-Bozoi-Shymkent (BBS) pipeline, connecting gas deposits in the west of the country with export infrastructure in the east.
Kazakhstan has boosted gas production by almost 50% from 3.6bn ft3/day in 2010 to 5.3bn ft3/day, according to WoodMac. But the consultancy still questioned whether the new supply commitment with China was realistic.
“Seasonal domestic demand will challenge Kazakhstan’s ability to respond in full to China’s peak winter needs,” Sherman said. “In our base case, we anticipate that Kazakhstan’s core gas exports to China will not exceed 0.8bn ft3/day [around 8.27bn m3/yr].”
“And high delivered costs will persist because of the vast distances that need to be covered to reach China’s coastal regions,” he continued. “While China’s gas demand grew in 2018, it now faces downward pressure from economic slowdown.”
Sherman explained that greater commercial incentives were needed for gas development in Kazakhstan. As a result, few new sources of supply will be ready for launch before 2023. And for the international companies developing Kazakhstan’s largest upstream projects – Karachaganak, Kashagan and Tengiz – the future priority will be re-injecting sour gas to maintain reservoir pressure.
The analyst pointed to low domestic gas prices in Kazakhstan that make it difficult for operators to turn a profit at gas projects.
“By our analysis, a standalone non-associated gas development in west Kazakhstan will struggle to break even. 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,” Sherman said. “Without change, Kazakhstan risks not being the reliable long-term gas partner that China hopes and needs.”