Kazakh confidence

Situated on the Caspian seashore, Kazakhstan holds vast energy resources with oil and uranium as major trump cards in the global energy game.

Oiling its future

Kazakhstan is home to the largest recoverable crude oil reserves of the Caspian region, which produces around 2.8mbpd. In 2007, Kazakhstan delivered approximately 1.45mbpd and with a domestic consumption of 250,000bpd, it net-exported some 1.2mbd. The oil sector’s significance becomes clear when scanning through national economic statistics. It accounts for over half of national export revenues and roughly 30 per cent of GDP. And times have been good to local oil producers. Kazakh national oil company KazMunaiGas expects its revenue to double this year to KZT3tn (US$25bn) following its acquisition of several smaller producers. The country’s National Oil Fund, created by the government to cushion Kazakhstan against price fluctuations for energy and commodity exports, has seen its international reserves and assets double over the year preceding October 2007 thanks to soaring oil prices in the world market.
The country’s oil exports are growing rapidly, delivering it to world markets in all directions with last year’s 1.2mbpd being shipped as follows:
• 408,000bpd northward via the Russian pipeline system and rail network
• 85,000bpd to the east via the Atasu-Alashankou pipeline, arriving in China
• 70-80,000bpd is swapped southward with Iran
• 620,000bpd is carried by the Caspian Pipeline Consortium Project to the west (excluding an extra 720,000bpd of Russian production).

For this year, the country’s crude oil exports are expected to rise modestly to 62.8Mt from 60.8Mt last year, according to deputy energy minister Lyazzat Kiinov. And, not surprisingly, the government is cashing in on its oil export wealth. Following in the footsteps of its neighbour, Russia, Kazakhstan introduced a floating customs duty on crude oil exports last May – currently set at US$109.91/t with a world price at US$714/t. More recently, the authorities decreed that the duty would be nearly doubled to US$203.8/t. And the prospects for Kazakh oil remain excellent with rising production volumes. For 2008 and 2009, the Energy Information Administration expects Kazakh oil production to continue its upward path to 1.54mbd and 1.71mbd respectively.

To capitalise on its increasing output, the country is investing in additional export infrastructure, particularly that carrying oil to the east. The Kazakhstan Caspian Transportation System (KCTS) encompasses a number of projects. Firstly, there is the construction of a 500,000bpd pipeline from Eskene in the west to the port of Kuryk. From there and nearby Aktau port, barges will ship oil across the Caspian Sea to the 1768km Baku-Tblisi-Ceyhan pipeline. The project will double shipments at Aktau to 400,000bpd and include a 760,000bpd oil terminal at Kuryk. Combined with expansions of the oil terminals in Baku and Kuryk, the total price tag for the pipeline is estimated to be at least US$1.5bn.

In addition, oil is transported via the 980km Caspian Pipeline Consortium (CPC) pipeline, which connects Kazakh Caspian Sea oil fields with the Black Sea port of Novorossiysk, Russia. The project is a joint venture between the governments of Russia, Kazakhstan and Oman, together with a consortium of international oil companies, which include Chevron (15 per cent), LukArco (12.5 per cent), ExxonMobil CPC (7.5 per cent), Rossneft-Shell (7.5 per cent) and smaller stakes taken by British Gas, ENI, Kazakhstan Pipeline Ventures and Oryx. Although the pipeline is an expansion of existing infrastructure, it includes new sections from Komsomolskaya (Russia) west to Novorossiysk and from Kenkiyak and Karachaganak to Atyrau. As a result, transport levels peaked in February 2007 when some 800,000bpd were carried by the pipeline system.

Kazakh oil is also earmarked for export via the 981km, 200,000bpd Kazakhstan-China pipeline from Atasu, in the northwest of the country to Alashankou in China’s northwestern province of Xinjiang. In China, the oil is bought via an exclusive deal by PetroChina’s ChinaOil. The last construction stage of the pipeline, between Kenkiyak and Kumkol, connects the previous two phases and is expected to be finalised next year at a cost of US$1bn, doubling its current capacity to 400,000bpd.

Another key piece in the Kazakh oil export system runs north from Atyrau to Samara and carried most of the country’s oil prior to end-2001, when the CPC line was commissioned. The Atyrau-Samara line was recently upgraded with new pumping and heating stations, which increased the capacity to 600,000bpd.

In terms of its refining operations, these remain largely in government hands. Unlike other segments of the oil and gas sector, foreign investors have not quite flocked to Kazakhstan to invest in refining. This is partly due to the relatively low domestic prices for refined products – a fact that motivates oil producers to export crude oil abroad rather than refining it within Kazakh borders. Currently, the sector counts three refineries with a total refining capacity of 345,093bpd. The Pavlodar refinery supplies the north with western Siberian oil, while Atyrau focuses on the western region, supplying it with oil from the northwest of the country. Shymkent’s refinery uses product from the Kumkol, Aktyubins and Makatinsk deposits to deliver oil to the southern region. Refinery runs rose by two per cent last year, reflecting increased profitability at the refineries.

Gas: more than a pipe dream

Kazakhstan has large amounts of associated gas at its oil fields, primarily in the west of the country. Its natural gas reserves are estimated at some 100tnft³. Official figures estimate its production in 2007 at 1037bnft³, up by eight per cent from the previous year with over 70 per cent produced by international consortia at Tengiz and Karachaganak.

Like current developments in the oil sector, the Kazakh gas industry is considering, and in some cases building, several new gas export pipelines from the Caspian region, enabling substantial increases in gas exports should these plans come to fruition. Projects include two branches of the Central Asia Center, the key line from Central Asia, which meet in the southwestern town of Beyneu, Kazakhstan. It subsequently reaches Russia at Alexandrov Gay where it feeds into the Russian pipeline system.

December 2007 saw a number of agreements to expand the nation’s gas infrastructure. First, was the pledge by CNCP to invest US$2.2bn in a 1760km, 106tf³ (30bcm) natural gas pipeline that would be able to carry gas from Gedaim on the Turkmenistan-Uzbekistan border through Uzbekistan and Kazakhstan to Khorgos, Xinjiang in northwestern China. The same month also brought the announcement of an agreement between Kazakhstan, Russia and Turkmenistan to carry Central Asian natural gas from Turkmenistan to Russia via the existing Central Asia Center pipeline. Under the agreement, each country would be responsible for building a section of a new pipeline in their own territory, enabling an increase of capacity of from 2.1tf³ (60bnm³) to 2.6tf³ (80bnm³) upon its completion in 2012.

Coal: not all black

While fossil fuels play a considerable part in Kazakhstan’s energy wealth, they are not the sole providers of these riches and its ambitions stretch beyond this type of fuel. The country has been a key source of uranium for over 50 years. It holds a fifth of the world’s uranium reserves, which are all controlled by JSC National Atomic Company Kazatomprom, the state nuclear power company, established in 1997. Its annual production is spread over five mining areas, which all employ the in-situ leaching method to extract uranium from its ore. The Stepnoye or Northern Mining Group is located in the Chu-Sarysu basin and consists of the Uvanas, East Mynkuduk, Akdala and Inkai mines, representing 99,600t of uranium resources and a production target of 6700tpa. Further mines are planned – West and Central Mynkuduk, South Inkai, Budenovskoye and Zhalpak – adding another 120,000t of resources, to be mined at 9000tpa. Also in the same basin is the Central/Eastern Mining Group or Tsentralnoye with production of around 1800tpa, distributed over the four mines at Moinkum, Southern Moinkum, Kanzhugan and Tortkuduk. In the Syrdarya basin, the Southern and Western Mining Groups exist. The Southern Mining Group centres around the Zarechnoye mine with a 1000tpa production capacity and 19,000tpa in reserves. The mine is a joint venture between Kazatomprom, Tenex (now ARMZ) and Kyrgyzstan’s Kara Baltinski Mining Combine.

The Western Mining Group consists of a number of mines:
• Kharasan 1 – with a 41,000t resource
• Kharasan 2 – yielding 3000t and 2000t
• Irkol mine – around 750t is extracted each year from its 30,000t reserve
• Northern and Southern Karamun mines with reserves of 16,000t and 18,000t respectively, exploit a combined 1250tpa.

Finally, there is the Semyzbai mine in the Northern province which is good for an annual output of 500t.

This year, production at the Kazatomprom mines was hampered by a shortage of sulphuric acid, the main chemical reagent for uranium production by using the in-situ leaching method. Nevertheless, the issue was solved and Kazatomprom now expects 720,000tpa of sulphuric acid between 2009-18, supplied by its own 180,000tpa works in Stepnogorsk and an additional plant yet to be built, which should be in a position to supply up to 500,000tpa by 2010. Moreover, output at Cameco’s Inkai mine also suffered through the lack of sulphuric acid, effectively halving its production to 454,545kg (1mlb).
Kazatomprom reported a six-month profit fall, down by 36 per cent YoY to KZT10.8bn as uranium prices tumbled and the sales schedule shifted. Revenues fell to KZT56.3bn during 1H08 from KZT57.9bn over the equivalent period the year before. The company expects to produce 8800t of uranium this year, rising further the year after to 11,000t and 15,000t by 2010, according to Kazatomprom’s president Moukhtar Dzhakishev. “The physical shortage of uranium we anticipate by 2015,” Mr Dzhakishev said.

However, despite the hit taken this year, the country remains optimistic. It is vying for the top spot in global uranium production and wants to surpass current number one, Australia, by 2010. To achieve this goal, it is currently looking to cooperate with foreign majors in the development of new fields as well as raising value-added production, extending its hold on various stages in the nuclear fuel production process (see the panel on the next page).

Earlier in 2008, it announced its ambitious targets to supply 30 per cent of the world uranium by 2015 and through joint ventures, 12 per cent of the uranium conversion market, six per cent of enrichment activities and 30 per cent of the fuel fabrication segment.

At present, Kazatomprom operates uranium extraction (around 46 per cent of nuclear fuel cost), including joint ventures with Canadian and French companies, and the production of uranium dioxide fuel pellets at the Ulba metallurgical plant in Ust-Kamenogorsk.

To complete the fuel production chain, Kazakhstan is gearing up to include conversion activities in its portfolio and is forging alliances to access the enrichment phase. In addition, it is looking to upgrade its Ulba works not only to produce fuel pellets but entire fuel rods, suitable for nuclear reactors.

Conversion

Conversion, the chemical transformation of uranium to UF6 gas, makes up about four per cent of the finished nuclear fuel’s value. To gain a foothold into conversion activities, Kazatomprom signed an agreement in May 2007 with Canada’s Cameco Corporation to investigate the establishment of a uranium conversion plant, using Cameco technology. The research came to fruition last July when the two companies set up a new enterprise, Ulba Conversion LLP, to build a 12,000tpa UF6 conversion plant at the Ulba metallurgical plant. The agreement stipulates that Cameco will supply the technology in lieu of a 49 per cent stake in the project. A feasibility study is due for completion in mid-2009.

Enrichment

Enrichment, or conversion of the UF6 gas into a radioactive compound suitable for civilian fuel production or nuclear weapons (about 30 per cent of the value) needs to be added to the Kazatomprom portfolio to give it control of the entire nuclear fuel manufacturing chain. However, in response to nuclear proliferation concerns, Kazakhstan will not launch into the enrichment business and will outsource the step to Russia. In July 2006, it entered into three 50/50 joint ventures, worth US$10bn, relating not only to new nuclear reactors, but also to uranium production and enrichment. This included a deal with the Russian company Tenex for a uranium enrichment plant at Angarsk in southern Siberia where Russia has its main conversion works and a small enrichment unit. The facilities – the first international enrichment centre, according to the World Nuclear Association – will ultimately be able to enrich the entire 6000t of uranium produced by Russian mining joint ventures in Kazakhstan.

Fuel rod fabrication – Ulba upgrade

Meanwhile, at the Ulba metallurgical plant, Mr Dzhakishev plans to develop the unit’s capability from the manufacture of enriched uranium fuel pellets to the more extensive production phase of fuel rod assembly, adding another 10 per cent to the fuel’s value. Mr Dzhakishev proposes to invest US$850m with a view to integrate the atomic fuel chain and consolidate the market for its 983mlb of recoverable uranium deposits. This would have the advantage of making the company less reliant on the raw ore’s spot market price and almost doubling the value of its uranium products.

To this end, Kazatomprom has signed agreements with various countries and companies. In April 2007, a deal was inked with Japan relating to technical assistance to Kazakhstan in fuel cycle developments. This was followed a year later, last May, by an arrangement on Japanese input in the Ulba upgrade.

However, the deals with Japan are not the only alliances forged. The 10 per cent stake in Toshiba Corporation’s Westinghouse Electric Company of Pennsylvania, bought in 2007, should enable Kazatomprom to access the additional technology required for fuel fabrication. In June 2008, Kazatomprom also entered into partnership with Areva. This enables the company to use the French firm’s engineering expertise as it installs a 1200tpa fuel fabrication unit at Ulba as part of a multi-faceted agreement to be concluded in September.

Finding markets for enhanced output

However, extra capacity and capability across the board will prove of little value without the corresponding markets to sell the expanded product range to. As for the existence of a suitable market for the envisaged increase in output, demand for uranium is booming with China, India and Russia all building new reactors and the West considering a return to nuclear energy in its bid to reduce greenhouse gas emissions while diversifying its energy sources. The World Nuclear Association in London reports that at least 63 nuclear reactors are currently being built outside North America and Europe. US-based Ux Consulting expects global nuclear fuel demand to grow by 29 per cent to US$26.3bn by 2020 with Mr Dzhakishev keen to capture a third of the global market.

At present, Kazakhstan supplies China with 1000tpa of natural uranium and aims to expand its sales to 50 per cent of the country’s requirements in the future when Asia expands its nuclear reactor network. “We were the first country to ever supply natural uranium to China … we will sign an additional agreement by the end of this year and it’s anticipated that in the future value-added products will be shipped to China, including fuel,” Mr Dzhakishev said. China’s 11 reactors currently account for 1.3 per cent of total generating capacity and the country aims to increase this figure to five per cent by 2020. In December 2006, Kazatomprom signed a strategic cooperation agreement with China, followed by pacts on uranium supply, fuel fabrication, Chinese participation in Kazakh uranium mining and Kazatomprom investment in China’s nuclear power industry. In effect, this gives Kazatomprom key access to the Chinese market as it becomes the main uranium and nuclear fuel supplier to the Guangdong Nuclear Power Group Holdings, which accounts for a large share of new Chinese nuclear reactors. The series of deals was then followed by a framework strategic cooperation agreement with China National Nuclear Corporation.

In April 2007 and May 2008, Kazakhstan signed a number of energy agreements with Japan, including some relating to the supply of uranium to Japan It was followed last May by an additional agreement on uranium supply. Moreover, Kazakhstan supplies fuel pellets from Ulba since 1973 to Russia and Ukraine for VVER and RBMK reactors.

At home, there are plans for new reactors after the shutdown of the BN-350 fast reactor at Aktau, on the Caspian seashore, in 1999. Decommissioning of the old unit is well under way with considerable international support. Its spent fuel is stored on-site together with 1000t of radioactive sodium. Looking to the future, Kazakhstan’s latest endeavours in its nuclear programme include large light-water reactors for the southern region, 300MWe class units for its western part and smaller cogeneration units in regional cities.

There are also proposals for a new nuclear plant near Lake Balkash, southern Kazakhstan. The feasibility study for this new 600MWe plant is currently being undertaken and is expected to be complete by 2009. Power from its first unit is scheduled for 2016 and from its second unit in 2017.

Meanwhile, the Kazakh government is looking to cash in on profits made by the uranium producers through a new programme of major taxes. According to a draft law, the country will tax net income that exceeds 25 per cent of the expenses of a natural resources company (Bloomberg). Uranium production in Kazakhstan is still relatively cheap and the move could potentially impact on its joint venture partners, including Areva, Uranium One, Cameco and a number of Japanese utilities. The government is also investigating the introduction of a production tax for natural resource producers.

Setting the global stage

Also reflecting its world ambitions, Kazakhstan has taken the lead in setting the global stage. It proposes the creation of an international uranium exchange. “The uranium market is a closed market, and we do not have market prices. To address this problem we are currently working to set up a [uranium] fund,” said Moukhtar Dzhakishev. The new fund would comprise key uranium producers, consumers and the financial institutions behind the project. “The essence of the idea is simple: we give uranium to the fund and get shares, which are equal to the price of uranium forming the charter capital, in return. For example, if a nuclear company buys one share, it has the right to 1kg of uranium.” The next step would be to create a uranium trading floor where share quotes will serve as “uranium market prices.” According to Mr Dzhakishev, preliminary agreements have been reached with Cameco Corporation, Areva, Russian uranium producers and several Chinese, Japanese, EU and US nuclear power plants. If all goes to plan, the fund will be established next year.

From the above, it becomes evident that Kazakhstan intends to capitalise on its vast energy riches. To achieve its goal it is actively investing in a number of energy sectors: oil, gas, coal and uranium. Therefore, the country looks confidently at the centre position on the global stage as its very own.

For more information, consider visiting the following:
World Nuclear Association
Kazatomprom
Caspian Pipeline Consortium
Bogatyr Access Komir
Cameco Corporation
Areva