Exclusive: Kazakhstan to start selling oil via Azerbaijani pipeline to bypass Russia

Exclusive: Kazakhstan to start selling oil via Azerbaijani pipeline to bypass Russia

An interior view shows a new Caspian Pipeline Consortium (CPC) pumping station near the city of Atyrau, Kazakhstan, October 12, 2017. Portal/Mariya Gordeyeva/File Photo

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  • Russian court threatened to shut down CPC pipeline
  • Several alternatives possible, but less practical
  • The rail option would cross Russia into Georgia

MOSCOW/LONDON, Aug. 12 – Kazakhstan is expected to sell some of its crude oil through Azerbaijan’s largest oil pipeline from September as the country looks for alternatives to a route that Russia was threatening to close, three sources familiar with the matter have said.

Kazakh oil exports account for more than 1% of world supplies, or about 1.4 million barrels per day (bpd).

For 20 years they have been shipped through the CPC pipeline to the Russian Black Sea port of Novorossiysk, which provides access to the world market.

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In July, a Russian court threatened to shut down the CPC, prompting the Kazakh government and major foreign producers to sign precautionary deals for other outlets.

Neither alternative is as practical as the CPC pipeline, increasing the risk of further volatility in energy markets.

Shortly after Russia invaded Ukraine in February, international crude oil prices hit 14-year highs and prices remained elevated, averaging over $100 a barrel in July.

A source with direct knowledge of the matter said Kazmakhstan’s state-owned oil company Kazmunaigaz (KMG) is in advanced talks with the trading arm of Azerbaijan’s state-owned company SOCAR to allow 1.5 million tons a year of Kazakh crude oil to be sold through the Azerbaijani pipeline, which Oil supplies to the Turkish Mediterranean port of Ceyhan.

At just over 30,000 bpd, the volume is a trickle compared to the usual 1.3-1.4 million bpd flowing through the CPC pipeline.

The final contract is expected to be signed in late August, with flow through the Baku-Tbilisi-Ceyhan (BTC) pipeline beginning a month later, the source said.

Another 3.5 million tons of Kazakh crude oil per year could flow through another Azerbaijani pipeline to Georgia’s Black Sea port of Supsa from 2023, two sources said.

Combined with BTC flows, the volume would equate to just over 100,000 bpd, or 8% of CPC flows. KMG declined comment and SOCAR declined comment on the specific deal.

Relying on Azerbaijan would allow Kazakhstan to bypass Russian territory. Last month, BP Azerbaijan said it would divert flows away from the Baku-Supsa pipeline into the larger BTC pipeline. Continue reading

However, the new BTC route means Kazakhstan will have to rely on a fleet of small tankers to get its oil from its port in Aktau, which has limited reserve capacity, across the Caspian Sea to Baku, the sources said.

OTHER WAYS

Tengizchevroil (TCO), a joint venture led by oil major Chevron, has its own marketing arm and negotiates its own pipeline and rail routes separately, two of the sources said.

The BTC pipeline could also be an option for TCO, but a source said that if approved, it could take up to six months for the flow to start. TCO declined to comment.

Quality is another factor that prevents a quick agreement. Kazakhstan’s main grade CPC Blend is a light, sour crude sold at a significant discount to Azerbaijan’s flagship BTC grade, which is an easier-to-refine medium sweet grade.

TCO began diverting a small volume of oil by rail to the Georgian port of Batumi back in April when storm damage rendered part of the CPC terminal unusable.

Two of the sources said TCO is booking more rail volume and they could go up in September or October.

Kazakhstan separately exports up to 1 million tons or 250,000 bpd of Urals via Russia’s pipeline system to Black Sea and Baltic ports.

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Reporting by Portal reporters and Julia Payne in London; additional reporting by Nailia Bagirova in Baku; Edited by Barbara Lewis

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