Kazakhstan Oil and Gas Report Q2 2008

The latest Kazakhstan Oil & Gas Report from BMI forecasts that the country will account for 5.32% of Central and Eastern European (CEE) regional oil demand by 2012, while providing 16.33% of supply.

CEE regional oil demand rose to an estimated 5.45mn barrels per day (b/d) in 2007and should average 5.59mn b/d in 2008 and then rise to around 6.23mn b/d by 2012. Production of an estimated 12.74mn b/d in 2007 is forecast to reach 15.31mn b/d by 2012. CEE gas consumption in 2007 was an estimated 612bn cubic metres (bcm), with demand of 744bcm targeted for 2012. Production of an estimated 701bcm in 2007 should reach 792bcm in 2012, which implies net exports falling from an estimated 89bcm in 2007 to just 49bcm by the end of the period. Kazakhstan's estimated share of gas consumption in 2007 was 3.76%, while its share of production was 4.14%. By 2012, its share of demand is forecast to be 4.71%, with the country accounting for 8.83% of supply.

Growth in global oil demand is now expected to have been 1.7% for 2007, rising to a little less than 2.0% in 2008. Asia and the CEE continue to dominate. The overall demand outlook for the period to 2012 remains healthy (average growth 1.8%), but subject to review if the macroeconomic outlook deteriorates.

We are still assuming some easing of energy prices during the period, but from a much higher level than envisaged earlier. Supply growth is capable of matching demand expansion - but only if OPEC cooperates as non-OPEC forecasts are fragile. Between 2006 and 2012, we see supply rising by an average 1.7% per annum - subject to OPEC strategy. Our revised central view is that the OPEC basket price will rise from around US$69/bbl in 2007 to US$74 in 2008, before settling around US$71/bbl in 2009 and falling further to US$70/bbl in 2010-12.

Kazakhstan's real GDP growth is estimated by BMI at 6.7% for 2008, down from an estimated 8.7% in 2007. We are assuming 7.9% growth in 2009, followed by 8.6% in 2010, 9.8% in 2011 and 9.4% in 2012.

Consumption growth should accelerate with the improving economy, but is unlikely to have much negative impact on export potential. We are forecasting domestic oil demand reaching 332,000b/d by 2012. State-owned KazMunaiGaz accounts for 12% of oil production and participates in joint venture (JV) projects with international oil companies (IOCs), which should deliver rapid volume growth after the Karachaganak field builds up to full output in excess of 200,000b/d. Expansion of the Tengiz field and activation of the offshore Kashagan project should push Kazakh production towards 2.5mn b/d by 2012.

This implies that oil exports should rise from an estimated 1.20mn b/d in 2007 to at least 2.17mn b/d by the end of the forecast period.

Kazakhstan occupies second place in BMI's newly revised Upstream Business Environment rating, behind only neighbour Azerbaijan. Its oil and gas production growth outlook, asset immaturity, high reserves-to-production ratios (RPR) and competitive landscape work in the country's favour, but are undermined by a relatively unappealing risk environment. Long-term scope exists for Kazakhstan to close the gap on Azerbaijan. The country is in the upper half of the league table in BMI's newly-revised Downstream Business Environment rating, although there are few particularly high scores and progress further up the rankings from fourth place seems unlikely. The low level of retail site intensity represents a strong suit, along with region-leading oil demand growth prospects. Ukraine is just one point below it in the regional rankings, but there is little chance of it challenging for Kazakhstan's fourth place over the medium term.