Thursday, May 26, 2016

Chevron to Lead $37 Billion Investment in Tengiz Oil Field

In an interview on Wednesday, May 25th, the Kazakh energy minister, Kanat Bozumbayev, announced plans for $37 billion to be invested in the Tengiz oil field led by Chevron Corp. Since 1993, the oil-rich basin has been known as one of the largest crude reserves in the world pumping out over 200,000 b/d worth of crude oil production. The local company, Tengizchevoil (TCO) is in charge of the operations with equity in the operations divided across Kazakh, Russian, and U.S. sources. According to the Wall Street Journal, Chevron owns 50 percent, Exxon-Mobil owns 25 percent, Kazakhstan's Kazmunaigas owns 20 percent, and Russias Lukarco owns 5 percent.

from IEA
The new investment plans mark one of the first announcements of major capital spending by an oil major since oil prices caused capital expenditures to be reduced. The Wall Street Journal reported that "companies have been forced to delay or cancel about $270 billion in projects through March." With oil prices plunging at the beginning of 2016, hopes of an oil recovery were abandoned and only the most economical plays were kept online. Weekly estimates from the Energy Information Agency show that U.S. production is in a freefall dropping below 9 million b/d this year. Shale producers have been cutting their plays in search of cheaper oil in domestic and international plays. The size and location of the Tengiz and Kashagan oil fields in Kazakhstan may prove to be cheaper operations with relatively easy transportation to China, Russia, and Europe. If the optimal scenario is played out, the project would be good news for both Chevron and Kazakhstan.

From Resilience.org
Estimates of Tengiz production are around 500,000 b/d according to the Wall Street Journal. Chevron planned to expand output to as high as 760,000 b/d before the slump delayed the investments that would help achieve the higher production levels. Equity analysts are saying this newly developed component in Chevron's portfolio will be "the most visible component of Chevron's growth beyond 2019." The large oil field is connected to the now expanding Caspian Pipeline Consortium which Chevron says, "provides an important export route." The new investments will only solidify the claims over equity in Tengizchevroil which has a promising potential growth in the long-term. Estimates for the Tengiz reserve size start at 6 billion and go up to 9 billion barrels says Tengizchevroil. Since 1979, the field has provided anywhere from 17 to 20 billion barrels to the oil markets. Chevron will also gain access to the Karachaganak fields which boast the second largest petroleum reserves in Kazakhstan. These two plays not only bolster the Chevron position but its dominance in a more competitive, blood-thirsty market which is just now experiencing the oil economics without OPEC.



Using Chevron's numbers, one can assess the potential daily realization of the project assuming a consistent expansion in production over time. Using the World Bank's projection of Brent crude prices, it can be shown that the projects revenue should match 2014 levels in 2017 and surpass it in 2018. The output should double over the three years, so costs would increase proportionately with operation costs jumping with each barrel. Transportation costs may see a small decrease as the CPC pipeline expansion adds to export efficiency with more access to regional demand. This all contingent upon spot prices in the $50 a barrel range which may prove to be a likely scenario in the coming years with that level being approached now. Chevron's plan to invest this money might have been triggered by a $50 a barrel. Additionally, Kazakhstan's desperate economic situation has no doubt forced them to provide extra incentives in the deal. The Future Growth Project is definitely something to be bullish as it could translate to future Chevron growth and hint at the reemergence of capital spending from oil majors like Chevron and Exxon-Mobil.

On the Kazakh side, this deal is necessary to relieve the desperate financial situation in which they find themselves. The local energy minister has even admitted, "For us it's good news. This future growth project is very important for us." As an emerging economy that has felt very hard done by the oil crash, any foreign capital looking to develop the natural resources into jobs and revenue is quite desirable. According to the Extractive Industries Transparency Initiative, the oil and gas sector accounted for about 25 percent of the total Kazakhstan GDP in 2013. As this sector deflated, its GDP entered negative territory in 2015. The new deal with Tangiz shareholders could bring as many as 20,000 jobs by 2018 according to the same source. Chevron itself cites its work with the Union of Artisans which has 100 Kazakh members. The company also referenced work with the British Council Kazakhstan in improving local education. Tengizchevroil, from 1993 to 2014, has plowed more than $995 million into "social projects for the community and employees in Atyrau Province." There's no doubt that the growth project will help the Kazakh economy get back on the path to development. Because of this, cooperation and desperation will make Tengiz investments welcome and as the country seeks to expand.

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