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BIG OIL: Investments

Chevron is expanding in Kazakhstan

08/07/2016|  While the world is still occupied by the implications of Brexit, the US oil giant Chevron approved on Tuesday (05/07) $37bn expansion of the Kazakhstan’s Tengiz oil field. Tengiz is one of the largest oil fields in the world and is the world’s deepest operating super-giant oil field at 12,000 feet below ground. Chevron holds the majority 50% stakes at the Tengizchevroil (TCO) consortium running the field, with 3 additional partners - Exxon (25%), Lukoil (5%), and the Kazakhstan’s state oil company KazMunayGas (20%). The approved investment will facilitate a 40% increase of output to approximately 1mbd as from 2022 using sour gas injection technology. The Chevron move is especially significant given the trend of stalled investment in oil drilling and expansion by oil companies as a response to the global slump in crude prices. The most recent big oil investments of $28 bn in Shah Deniz by BP and $27bn in Russia’s Yamal LNG plant by Total date as far back as 2013, i.e before the 2014 collapse of crude prices. The Tengiz investment capitalises on the decreasing costs of oil industry equipment and services and will bear capital returns at even the current price of $50/b. Additional capacity would be added to the world output in the next couple of years by the coming on stream of Gorgon (Chevron’s Australian megaproject) and the announced expansion of Shaybah and Khurais fields in Saudi Arabia. Chevron is also investing in a series of small, less capital- and time-intensive projects that would bring quicker return to investment, as part of the company's transition away from giant, capex-intensive projects.

Despite this significant investment, the return of big oil is not to be expected. Tengiz is more the exception that proves the rule, rather than a reversal of the trend.

ECEGA's VIEW |  Despite this significant investment, the return of big oil is not to be expected. Tengiz is more the exception that proves the rule, rather than a reversal of the trend. Chevron acquired rights over Tengiz immediately after the collapse of the Soviet Union, and the acquisition has been amongst the most profitable for the US oil giant, with low costs of exploitation (about 70% lower than in the US), it provided just for 2015 a quarter of Chevron’s oil reserves and roughly a half of its total earnings. Thus, the investment is quintessentially low-risk, facilitated by existent infrastructure, low cost of exploitation in Kazakhstan and the shrinking costs of oil goods and services globally. Further, it is conceivable that the investment might have been a strategic move to fortify Chevron's presence in Kazakhstan as the largest private oil producer. Chevron's rights to exploit Tengiz are expiring in 2033. The oil group would likely attempt to expand this contract and making fresh investments will help its bid over the lucrative field, but also entrench its stakes in the Karachaganak field and the Caspian Pipeline Consortium, connecting Tangiz to tanker-loading facilities at Novorossiyask (Russia). Domestic political calculations should not be discounted either. Noursoultan Nazarbaïev - Kazakhstan’s President  for the past 25 years might have favoured the deal to boost his domestic political standing. The collapsing oil prices have depleted the Caspian economy’s coffins and led to widespread political unrests in the past couple of months. The major investment in Tengiz will provide important revenues for the Kazakhstan battling economy both in terms of employment and tax revenues, thereof appease the unrest and boost Nazarbaïev's authority for another decade. Overall, the compilation of the above-mentioned factors favoured this major new oil investment, but it is unlikely they would be replicated elsewhere. ECEGA’s major report Is Green the new Black? Transition pathways for the Oil and Gas Industry in a Carbon Constrained World provides detailed insights for the choices ahead for traditional energy giants. The report is currently available for Premium purchase and a synthesis will be published on ECEGA’s website before the summer holidays. Please contact us for further information and insights. 

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