Kazakhstan gas stretched by commitments to China

Kazakhstan’s gas sector is coming of age

In 2018, state-owned KazTransGas (KTG) signed a five-year export deal to deliver up to 1.0 bcfd (10 bcm per year) to China. Kazakhstan began oil exports to its eastern neighbour in 2006 and has exported gas to China via the Turkmenistan-China Gas Pipeline since 2017. The scale of the new export commitment cannot be overstated. It represents nearly one-third of Kazakhstan’s marketed gas output and is almost on par with current domestic demand (1.5 bcfd).

Can Kazakhstan deliver on its commitments?

A new piece of the China gas supply mix

Central Asia meets about 15% of China’s ever-growing gas demand, and Kazakhstan has joined the party. In signing the contract, China is aiming to hedge its bets against future underperformance from its anchor Central Asian gas suppliers, Turkmenistan and Uzbekistan. The five-year deal will also allow China to test out Kazakhstan’s supply capacity before it commits to a longer-term agreement.

Kazakh gas not immune from market headwinds

Seasonal domestic demand will challenge Kazakhstan’s ability to respond in full to China’s peak winter needs. And high delivered costs will persist because of the vast distances that need to be covered to reach China’s coastal regions.

While China’s gas demand grew in 2018, it now faces downward pressure from the economic slowdown.

In our base case, we anticipate that Kazakhstan’s core gas exports to China will not exceed 0.8 bcfd. To reach the agreed 1.0 bcfd would require stronger Chinese gas demand growth and much clearer commercial incentives for gas in Kazakhstan’s own upstream sector. Unfortunately, commercial incentives are no clearer than they were five years ago.

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Strong volume growth, but sector still behind the curve

On the positive side, a meteoric rise in gas production has boosted Kazakhstan’s volume growth. Since 2010, production has increased by almost 50% from 3.6 bcfd to 5.3 bcfd. And gas sales to domestic and export markets grew by 75%.

But the sector is behind the curve in terms of development maturity and diversity. Few new sources of supply are ripe for commissioning before 2023. And for the largest upstream projects – the playground of the Majors – sour gas re-injection is the future priority.

Internal gas economics are challenging

A range of commercial obstacles means that Kazakh domestic gas prices are generally on the low side, with some exceptions. And under the current commercial framework, neither upstream producers nor the national operator can be confident of near-term profits. By our analysis, a standalone non-associated gas development in Western Kazakhstan will struggle to break even.

So, what can be done to position Kazakhstan to fulfil its near-term market commitments? Learn more in the insight below.

A new roadmap is needed

For Kazakhstan to realise its potential, much clearer commercial incentives are needed. And this will require collaboration. Operators and state entities must work together to trial new approaches and maximise the utilisation of existing gas processing capacity. Without change, Kazakhstan risks not being the reliable long-term gas partner that China hopes and needs.