Kazakhstan Oil Exporters Relieved as Russian Court Lifts Ban on Pipeline

Pipeline politics continues to grab headlines in Kazakhstan. When a Russian court ordered the Caspian Pipeline Consortium (CPC) to halt operations, citing administrative violations, on July 6, Kazakhstani exporters wondered how would they send oil to their foreign customers, as 80 percent of the country’s exports travel through the pipeline.

Political and business pressure helped reverse the court’s decision on July 11, as the 30-day suspension was re-negotiated into a fine equivalent to just $3,250. The oil industry in Kazakhstan sighed in relief.

Built in 2001, the CPC is a semi-private, international pipeline, running from Kazakhstan’s Caspian region to the Russian port of Novorossiysk on the Black Sea. Its corporate structure is split between two companies, one Kazakhstani and one Russian.

The Russian court targeted the documentation regarding the Oil Spill Response Plan of the Russian company, saying the shortcomings represented an environmental threat. The potential one-month suspension of operations at the pipeline – which would have by default involved the Kazakhstani section as well – would have been a massive blow to the government’s budget and the companies’ bottom line.

U.S. major Chevron owns 15 percent in CPC. On July 6, the day of the court decision, Chevron’s share price dropped by 3.5 percent on Wall Street.

The reversal of the potentially crippling suspension into a symbolic fine on July 11 is perhaps a strong indicator that the pressure on the pipeline is principally political.

Just a week before the original sanction, CPC had paid the equivalent of $86.3 million in environmental fines for a 2021 spill in Russia.

Environmental damage claims are among the preferred methods of political pressure on hydrocarbon companies and projects. Both the Russian and the Kazakhstani governments have used environmental fines to extract additional revenue from oil and gas consortia or to acquire stakes in the projects.

This was the case for the Kashagan offshore oilfield in Kazakhstan’s section of the Caspian Sea in the first decade of the 2000s. The same applied in 2012, when an environmental fine was turned into the sale of a stake in the Karachaganak gas and condensate field in northern Kazakhstan.

The rocky relations and public frictions between Russia and Kazakhstan since the start of the war in Ukraine have undoubtedly contributed to the acrimonious management of the issues concerning CPC. In March, a storm allegedly caused massive disruptions at the pipeline’s marine terminal; now the Russian court system essentially flexed its muscles, touting a disruption that would choke Kazakhstan’s main export vector.

In response, President Kassym-Jomart Tokayev called a government meeting to address the situation and potentially find viable alternative routes for the country’s oil exports.

The old Russian route from Atyrau to Samara could only pump a maximum of 15 million tons per year,  which pales in comparison to the 65 million tons that CPC can pump.

Still, the Russian route remains the most economically viable as the pipeline to China can only carry 10 million tons of Kazakhstani oil (another 10 million tons are booked by Russian suppliers through the Kazakhstani pipeline system) and its expansion via rail would entail massive transportation costs, according to industry specialists.

“The railway tariff for oil transportation along the Makhambet-Atasu route is $64-65/ton. […] The railway tariff for the transportation of raw materials along the Makhambet-Dostyk/Altynkol route is $149-150/ton. That’s expensive,” Nurlan Zhumagulov, director of KazService, a lobby group for oil and gas service companies in Kazakhstan, wrote on Facebook.

Another option could be the Trans-Caspian route, which for now entails transferring oil via rail from the extraction sites to the port of Aktau, loading it onto barges and shipping it to Baku, Azerbaijan, where it is then channeled via the Baku-Tbilisi-Ceyhan (BTC) pipeline to a Turkish port in the Mediterranean Sea.

This route, however, has proved to be expensive to scale up and fickle over the past few years. The potential construction of a pipeline was re-kindled in 2017 after the Aktau-Baku connection slowed down to marginal quantities. In late 2015, just like in 2010, it looked like the oil link was at its twilight, but the war in Ukraine seems to have given it a new life.

Relying on transit countries is unavoidable for Kazakhstan, as its geographic distance from its customers in Europe and lack of access to open seas impede a direct connection.

The only substantial direct link is with China. The Russian government is paying transit fees to move oil across the Kazakhstani pipeline system to reach China and fulfill its supply contract. Should the Russo-Kazakhstani relationship further crack and the Caspian route be increasingly threatened, it is possible that the ripple effect will also affect other aspects of energy cooperation between Russia and Kazakhstan.