The resumption of oil production at the Kashagan oil field is positive for Kazakhstan's credit profile and should more than offset declining production at other sites, Fitch Ratings says. However, it will be a challenge for partners to recover their investment in the project under our oil price projections, making an expansion of the project unlikely given other risks.
Initially planned for 2005, oil production at Kashagan was briefly launched in September 2013 only to be halted two weeks later in order to replace leaking pipelines. Exports resumed on 14 October. We expect production from the field to reach up to 300 thousand barrels of oil equivalent per day (mboepd) in 2017-2018, assuming there are no further significant technical problems. This would be equivalent to 18% of total hydrocarbon production in Kazakhstan in 2015. Kashagan production will therefore help the country to remain an important supplier of oil to Europe and China as production at brownfield sites declines.
Production from Kashagan will also support economic growth, as the Kazakh economy starts to recover from a fall in government spending and exchange rate devaluation, resulting from lower oil prices. The impact on the balance of payments will not be that great in the near term, as although export earnings will rise, so will related debt repayments and profit repatriation.
As for many other mega oil and gas projects launched over the last couple of years, it will be difficult for Kashagan to recover its USD50bn-plus capex based on our long-term Brent price assumption of USD65/bbl, despite the weak tenge. In Fitch's view, there is a possibility that the consortium that includes ExxonMobil, Shell, Total, Eni, China National Petroleum Corporation and NC KazMunayGas (NC KMG) will postpone the potential project expansion or may not proceed with it, if oil prices do not rebound more strongly from current levels, given the project complexity and the more conservative approach to mega-projects by the majors.
The Kashagan relaunch will eventually generate dividends for NC KMG and is therefore positive for its credit profile in the long term. But the restart of Kashagan also means KMG Kashagan BV, NC KMG's affiliate holding the stake in the project, has to start repaying USD2.3bn of acquisition debt to its consortium partners. We expect that in 2016-2019 NC KMG will apply its share of dividends from Kashagan to repaying this debt. At current prices there is also a risk that the company may need to inject additional funds into KMG Kashagan BV, making the relaunch broadly neutral for NC KMG's credit profile in the near term.
KazTransOil and KazTransGas, NC KMG's oil and gas transportation subsidiaries, will benefit from higher transportation volumes as more hydrocarbons will flow through their pipelines.
Source: Fitch Ratings