Kazakhstan Looks to Azerbaijan for Gas Transit

Kazakhstan is exploring options with Azerbaijan on finding new export outlets for its mounting natural gas production as an alternative to existing routes to the international market.

Discussions on technical fixes for the ambitious agenda were discussed at this week’s Azerbaijan-Kazakhstan intergovernmental commission on economic cooperation in Baku.

“One option we are considering is the construction of a [liquified natural gas, or LNG] plant in western Kazakhstan for the further transportation of this commodity through Azerbaijan to the global market,” Energy Minister Kanat Bozumbayev was quoted as saying by Informburo this week.

Kazakhstan is producing ever larger amounts of gas — far more than required for internal consumption — but is struggling to find profitable markets where to sell it. The Energy Ministry estimates gas output this year will reach 50 billion cubic meters, 10 percent up on 2016. And Bozumbayev said in Baku that this upward pattern is only set to continue.

But the problem is what to do with this gas bonanza. 

According to recent research, around 30 percent of gas extracted in Kazakhstan is used for internal consumption. Another 40 percent or so is re-injected back into the oil wells to maintain pressure. What remains is sold abroad.

One obvious buyer is China. Kazakhstan and China in October reached a one-year commercial agreement on the supply of 5 billion cubic meters of gas — a deal that gas transportation operator KazTransGaz said will generate $1 billion in export revenue. KazTransGaz said the fuel would come from fields in western Kazakhstan and from its own storage facilities.

Kairat Sharipbayev, vice president for gas transportation and marketing at state-owned oil and gas company KazMunaiGaz, said at the time that this marked a bold step forward in finding new export destinations for the country’s gas.

“Diversification of transit and export routes for the transportation of Kazakhstani natural gas, and also an increase in exports are important strategic tasks set by the president of Kazakhstan,” Sharipbayev said.

The reality is, however, that Kazakhstan must jostle for room in that China-bound pipeline with Turkmenistan, which sells its own fuel at basement-bargain prices.

As Sharipbayev noted in October, Kazakhstan’s President Nursultan Nazarbayev has insisted on the need to “create new transportation corridors,” which is where Azerbaijan may come in.

Not so fast though. As a source in Azerbaijan’s state energy company SOCAR told 1news.az, although the idea of pursuing an LNG fix is being considered, the conditions are not yet right.

“At the moment we do not have the necessary infrastructure, we also need to think through the logistics,” the source said.

Although it may be very early days, there is something significant about the fact that Kazakhstan is thinking out loud about pragmatic potential solutions to its export conundrum. Neighboring Turkmenistan has also long aspired to pump its own vast gas riches in the direction of Europe, via Azerbaijan and then further into Turkey. And yet, Ashgabat’s plans have typically been contingent on a highly contentious trans-Caspian Sea pipeline that has been much spoken about but little acted upon. Just as tellingly, Turkmenistan has been profoundly reluctant to even talk about committing its own resources to making this vision come to fruition.

Talk of near-Caspian LNG terminals may sound exotic for now, but Astana’s apparent readiness to contemplate what would inevitably become costly infrastructure investments is a noteworthy demonstration of intent.