Global energy markets are all over the place. So, we’re doing a short series on the major energy stressors across the globe and how this all is going to play out. Up first, let’s look at the Ukraine War’s impact on oil exports from Kazakhstan.
Ukraine is ramping up strikes on Russian energy infrastructure, but Kazakhstan depends on those same pipelines, processing facilities, and ports to get its oil out. Exports have already fallen off a cliff, and there’s no reprieve in sight.
Hey everybody. Peter Zeihan here, coming to you from the lost wilderness near Denver in Colorado. I am on the lower ramparts of Bison Peak. Bison peaks right over there. That’s my next stop. And today we’re going to stitch together a few things that have come out in this past week that I think are worthy of discussion. First things first. The Kazakhs have published data about how much their exports have been hit by what’s going on with the Ukraine war. Quick recap is that over the course of March through June, the Ukrainians have gotten ever bolder in targeting Russian infrastructure pipes, pumping stations and especially ports. And this really matters for Kazakhstan because it’s landlocked. So it has to use the infrastructure of other people in order to get its stuff to market, by the way. We’re going through the Devil’s Playground area of Bison Peak right now. The key ones are on the Black Sea, specifically Tuapse, and especially Novorossiysk. That is where roughly under normal circumstances, about three quarters of Kazakhstan’s oil exports flow. In addition, the Ukrainians have hit things like processing centers on the Russian side of the Kazakh-Russian border and some of those processing facilities specifically for the Karachaganak field are ones that primarily actually process Kazakh throughput. And without those processing facilities, you can’t pull the sulfur or the natural gas out of the crude stream. And so you can’t put into the normal pipeline network. Anyway, all of these things and more have been hit over and over and over. And according to the Kazakhs, they’ve been looking at a 50 to 70% reduction in output from all of their major fields. So Karachaganak has been hit. The two big ones in the Caspian Sea area are Kashagan, and especially Tengiz and Tengiz actually dates back to the 80s, is the first foreign investment deal ever into the former Soviet Union. The companies that are most affected by this, are Russia’s Lukoil, which is now just an arm of the state, and America’s Chevron and Exxon, the three of those together, the majority of the output here. I’m not counting the Kazakh energy company because it doesn’t do anything it just takes a cut. Anyway, The problem is there are really no good options for the Kazakhs really at all. The in the last month, the Ukrainians have gone from simply attacking physical infrastructure to going after shadow fleet vessels directly both on the Sea of Azov and now in the Black Sea. So I would expect this 50 to 70% drop to be kind of the norm. And this is a country that used to export 2 million barrels a day. And by used to I mean like two months ago. There are really no good alternatives here. Kazakhstan does have a patched together Frankenstein system that exports some crude to China, basically from their eastern and southern regions, but that is typically only a quarter of a million barrels per day. Or on a really, really good day, they might reach a half a million. Everything is really the Black Sea or bust. There is a bypass pipeline in Azerbaijan called the BTC: Baku. Tbilisi Ceyhan starts in Baku. The capital on the Caspian Sea goes through the inner Caucasus zones to Tbilisi, the capital of Georgia, and then on to the Mediterranean port of Ceyhan on the Turkish coast. BTC can handle about a million barrels a day, but it’s primarily an Azerbaijani line and is always at least at half full. So if the Kazakhs were to ship tanker crude across the Caspian Sea, which is its own problem, they could offload at Baku and go to the BTC. But if you take that combined with a Chinese route on a really, really good day, they’re only looking at getting maybe, maybe, maybe, maybe three quarters of a million barrels out. Everything else is going to fall, and it’s highly unlikely that it’s ever going to come back, or at least until such time as the Ukraine war is over. Unlike the Biden administration, that was really hard ass with the Ukrainians about going after Russian infrastructure. The Trump administration really doesn’t care, even though we’re having problems over in the Persian Gulf. And so the Ukrainians are taking out anything they possibly can, and they’ve proven that they can track the tankers that the Russians are using at sea. And now that the ports have been damaged, especially the loading tanks, the tankers can only load up at roughly the pace that the crude is coming in. So it used to be that the tankers would pull up to a dock and you’d have 4 or 5 tanks that were full and they’d all drain down at the same time, and so the tankers could get out of there in just a couple of hours. Now it takes the better part of the day. And with that sort of scenario, the Ukrainians, just using commercial satellite photos know exactly where the tankers are and where to target. So we’re looking at over a million barrels per day going offline, probably permanently. And there’s really nothing we can do about that. That’s piece one.
