When the “Caspian Pipeline Consortium” (CPC) pipeline became operational for the first time in 2001, nobody anticipated the many obstacles – both political and economic – that its expansion would eventually face. While the first discussions about the drafting of a Memorandum of Understanding between the existing CPC stakeholders started on March 1st 2005, the final document was signed 3.5 years later, in December 2008. Apart from boosting oil exports from the Caspian region, the agreement for the expansion of the CPC pipeline will also significantly improve the chances for the realization of the Burgas – Alexandroupolis pipeline project. CPC is the first privately-owned export pipeline network in the former Soviet Union with an existing capacity of about 28 million tons of oil whereas at the final stage of the expansion it will reach 67 million tons per year. This new capacity would allow Kazakhstan to further increase the volume of its oil exports destined for the European market and thus it will promote the rapid development of the Caspian off-shore oilfields.
However, Russia posed serious obstacles to the new project for years; along with Oman, Russia was expressing discontent about some of the financial aspects of the deal. As a matter of fact, the Consortium finances had been in the red for quite a long time since all of the revenues were diverted to service the outstanding debt. As a result, the revenues of the main participants - Russia, Kazakhstan and Oman – didn’t meet their initial expectations. For instance, the total debt liabilities amounted to USD5.2 billion at the end of 2007, sliding to USD4.6 billion by the end of 2008. Actually, 2008 was the first time that the CPC project recorded net profits amounting to just USD423 million. At the same time, the private CPC partners – amongst them TengizChevroil who uses the CPC pipeline to export oil from the Tengiz oilfield - were pushing hard for lower transit fees.
The disagreements between the stakeholders grew little by little and by the mid-2004 the situation became critical; the CPC participants couldn’t agree any more on any of the issues. Rigorous negotiations on the CPC expansion resulted in a total revision of the stakeholders list and the new agreement allowed for Russia and Kazakhstan to play a more vital role. Oman was the first to opt out; most likely, Oman, taking into consideration the grim global economic conditions and the additional spending needed for the network’s modernization, didn’t regard CPC as a profitable long-term asset. The second participant who lost interest in the CPC was BP which couldn’t see CPC as a rival route to the BTC pipeline and therefore didn’t agree to further finance CPC’s expansion.
Only after such a deep transformation the stakeholders were able to agree on the principles for the expansion and thus the Memorandum of Understanding was finally signed in December 2008. The upgrade is planned to increase the total pipeline capacity from 28 to 67 million tons per annum, or by 1.4 million barrels per day. The construction will take place in three phases; the first scheduled for 2011; the second for 2012; and the third for 2013. According to the agreed plan, the transit capacity of the existing linear part of the pipeline will be increased by installing ten additional pumping stations, six new storage tanks in Novorossiysk and other miscellaneous equipment.
The total budget for the pipeline expansion is expected to surpass USD3.5 billion, whereas in 2005, the same expenses were projected at a range between USD1.9 and USD2.1 billion. Despite the substantial costs, all current project participants express their eagerness to advance the CPC expansion project. The upgraded CPC pipeline will allow Kazakhstan - which is expected to produce up to 100 million tons of crude per year by 2014-2015 - to significantly increase its export capacities. Furthermore, the additional 17 million tons of Kazakh oil reaching the ports of the Black Sea through the new expansion will give a new perspective to the Burgas – Alexandroupolis pipeline; the CPC stakeholders have already agreed to supply part of that oil to the planned GR-BG pipeline decisively improving its chances for economic success.
(Artyom Ustimenko, Deputy Director “Energy Focus”, Kazakhstan)