Energy analysts, traders, and sources at Western energy majors are saying Russia may close off a critical oil pipeline transporting oil out of landlocked Kazakhstan, shutting off 1% of the global oil supply.
If Russia were to shut down the CPC pipeline, all oil produced in landlocked Kazakhstan would be blocked from reaching the Russian Black Sea export terminal of Novorossiisk. Roughly 1 million barrels per day could be taken off the global energy market, which is already tighter than at any time since the Arab oil embargo in the 1970s.
The pipeline is owned by a consortium of Asian, Russian, Kazakh, and western companies, including Chevron, Exxon Mobil, Shell and Italy’s Eni. It transports oil from Kazakh oilfields, in which many Western companies have stakes.
As a result, western energy majors stand to lose billions of dollars in revenues if Russia shuts off the pipeline flow, given it is almost the only means of exporting oil from the land-locked nation. Even more concerning, western economies, already wracked by inflation due to rising energy costs, stand to be thrown into even worse steads as the price of oil skyrockets in response.
Amrita Sen from Energy Aspects in London said, “Losing one million barrels per day in an already tight environment can lead to an unsolvable problem for the oil market.” Meanwhile JP Morgan has already been warning that if Russia decides to shut off 3 million barrels per day of oil flows from Kazakhstan and Russia, oil could easily skyrocket to $190 per barrel, and if Russia decided to shut off 5 million barrels per day, which their economy could easily withstand, Russia could drive oil to $380 per barrel in short order and crush global economies.
In March, storm damage had interrupted flows through the pipeline, operated by the Caspian Pipeline Consortium.
A court in Novorossiisk ordered the CPC to shut down all pipeline operations for 30 days last Wednesday, citing concerns about oil spill management. On Monday, however, a Russian court overturned the ruling against the CPC, choosing instead to merely fine it roughly US$3.300.
Industry sources however say they still think Russia is planning to shut down flows, and they expect the suspension of operations to be lengthy. Russia, the pipeline’s co-owner, has maintained all pipeline shutdowns have been due to mechanical issues.
Industry sources point to the Sakhalin 1 and 2 gas and oil projects, as harbingers of things to come. When Western oil majors pulled out of Russia following the start of the war in Ukraine, Russia took steps to seize the Sakhalin 1 and 2 gas and oil projects, in which Western majors Shell and Exxon had stakes. A Western oil executive has called that, “a definite sign of things to come for CPC.”
Oil fields in Kazakhstan produce roughly 1.6 million barrels per day of oil, and export about 1.28 million of that volume. Most is routed to the Black Sea through the CPC pipeline, with about 15% exiting over land through Russia, and about 5% leaving through China.
Oil majors have been looking to see if they could reroute shipments out of the country without the pipeline, but they have found all other options are challenging. One western trader familiar with the situation said due to the positioning of the oil fields, “to be honest, I don’t think we can re-route anything.”
Chevron has the largest stake in Kazakh production, with around 380,000 barrels per day, which is 12% of total output.
Elena Nadtotchi from Moody’s said any, “prolonged disruption would be very material to Chevron’s production volumes.” It would also impact Chevron’s future growth plans, as the company had planned to increase output at Kazakhstan’s largest field Tengiz to around 1 million bpd, a roughly 40% increase in output. Credit Suisse estimates that would have increased free cash flow at the company by $3.0-$3.5 billion by 2024, and to $4.0-$4.5 billion by 2026, assuming oil averaged $60 per barrel over that period.
The Chevron-led Tengiz consortium TCO said, “As global oil markets continue to encounter challenges arising from geopolitics, TCO’s primary focus is on maintaining safe operations, and we are exploring potential crude oil exporting options.”
Exxon is second behind Chevron in exposure, with an output of 213,000 barrels per day and 234 million cubic feet of gas. After Exxon is Italian major Eni, with 145,000 barrels of oil equivalent per day. Then is Shell with about 100,000 barrels of oil equivalent, and then is Total Energies with roughly 80,000 barrels of oil equivalent per day.
All majors solicited for comment referred enquiries to TCO.
