Our Take: Kazakh Crisis to Force Rethink on Geopolitical Risk

Latest reports coming out of Kazakhstan indicate the social unrest there has been brought under control. The violence is a reminder of the geopolitical risks that oil and gas companies take on with large projects. As the timeline for oil shortens, with demand set to plateau next decade, major operators need to be sure their multibillion-dollar projects will deliver the cash flows required to at least pay back their costs. Even so, we believe environmental concerns outweigh geopolitical risk as factors influencing future investment decisions.  

• Several international players hold stakes in Kazakhstan’s three major producing fields. Participants in TengizChevroil (TCO), which operates the giant Tengiz onshore oil field, include Chevron (50% interest) and Exxon Mobil (25%). Exxon also holds a stake in the Kashagan offshore oil field, along with China’s CPNC, Japan’s Inpex and European majors Eni, TotalEnergies and Royal Dutch Shell. Chevron, Shell, Eni and Russia’s Lukoil participate in the Karachaganak offshore gas condensate field.   
  
• So far, the impact of the unrest on production has been limited. The country’s leading oil producer, TCO, was forced to throttle back production at the giant Tengiz field, but Chevron says output has now returned to normal: around 600,000 barrels per day. While operations at Kashagan and Karachaganak remain unaffected, state company Kazmunaigas says its production has fallen “slightly,” after some drilling was suspended. 
  
• The political situation in Kazakhstan remains murky, although President Kassym-Zhomart Tokayev has reassured investors by naming a new cabinet that includes a reform-minded energy minister: Bolat Akchulakov. Behind the scenes a power struggle is playing out, with the president hinting he will do battle with the billionaire oligarchs who flourished under the old system.  Whatever happens, Kazakhstan needs the expertise of foreign oil companies to maintain and grow its oil and gas production, so it is unlikely to tinker with the big contracts.  But companies will have to contend with local discontent that was the catalyst for the protests, fueled by rising energy prices and declining living standards.
  
• The events in Kazakhstan show that geopolitical risk remains an important factor in oil project investment decisions, and one that will become more acute as time passes. While organizations from the International Energy Agency to Opec differ in their estimates for when exactly global oil demand will plateau, they agree this will occur during the 2030s. The unrest in Kazakhstan came out of the blue and should unnerve operators, which had previously thought of the Central Asian country as a stable place to do business. With limited time left for megaprojects to run their course, operators must rethink how they factor in geopolitical risk. 
  
• Still, we think the bigger risk for oil megaprojects remains the growing campaigns across the world to curb emissions. These could end up causing oil demand to peak sooner, forcing operators and their financial backers to think harder about whether they should persist with giant oil projects.