Overview of the Kazakhstanoil field service market in 2020 - WorldMonitor

Overview of the Kazakhstan
oil field service market in 2020

One of the consequences of the pandemic-related oil price crash has been oilfield service financing cuts. In this article, we discuss the key conclusions from the recent Deloitte Research Centre review of the effects of oil market changes in 2020, as well as the prospects for global and Kazakhsta...

Vitaly Mikhalchuk, Research Supervisor Central and Support Activity Deloitte CIS, Nazira Nurbayeva, Partner Tax and Legal Department Deloitte Kazakhstan

One of the consequences of the pandemic-related oil price crash has been oilfield service financing cuts. In this article, we discuss the key conclusions from the recent Deloitte Research Centre review of the effects of oil market changes in 2020, as well as the prospects for global and Kazakhstan oil production, the financing of oilfield services and the major oilfield service market segments.

Main global oil and gas sector trends

In 2020 Q1, the coronavirus epidemic caused a sharp decline in global hydrocarbon consumption. To eradicate this global misbalance, the major players agreed to limit production in April 2020. In May-June, total oil production cuts according to the OPEC+ deal amounted to 9.7 million barrels/day. This figure was gradually relaxed later in the year to 7.2 million barrels in January 2021. In 2021, OPEC+ has agreed to review oil production cuts monthly, with the base plan involving a relaxing of production restrictions by up to 0.5 million barrels/day per month.

In 2020, total OPEC and OPEC+ member oil production fell 10.6% to 48 million barrels/day. During the December OPEC+ meeting, members agreed to increase monthly total oil production for 2021 by 500 thousand barrels/day. As a result, in January 2021, members agreed that Russia and Kazakhstan could increase production by 65 and 10 thousand barrels/day in February and March. The February quotas for other OPEC+ members remained at the January 2021 level. Saudi Arabia also agreed to keep production in February and March at 1 million barrels/day, which is lower than its quota. The members have preliminarily agreed to a gradual increase after March of 2 million barrels/day against the December 2020 quota, which may be achieved in April-June 2021.

In 2021, total OPEC and OPEC+ oil production may grow by 5.5% year-on-year, to 50.7 million barrels/day. Under current conditions, the OPEC+ deal in 2021 will result in Russian liquid hydrocarbon (including gas condensate) production of 535-540 million tonnes, while in Kazakhstan that figure will be 86 million tonnes.

The global oil consumption recovery rate will depend greatly on the effectiveness of mass vaccination programmes. Many energy-intensive sectors, such as transport and tourism, will continue to struggle for much of 2021, hindering hydrocarbon consumption growth. With this in mind, oil production and consumption will only return to 2019 levels at the end of 2022, provided there are no unforeseen changes in supply.

Global capital hydrocarbon exploration and production costs

In 2020, many major oil and gas companies reported a 20% or higher reduction in capital exploration and production costs for the year. For global oilfield services, this means the end of a three-year growth period that began in 2016.

Geological exploration costs are lower for new site developments, projects producing non-traditional crude and low-profit investment portfolio projects. Infrastructure maintenance and well repair costs at active fields have been less affected.

The majority of major oil and gas companies are not planning to increase capital exploration and production costs in 2021, and many projects affected in 2020 remain in the risk zone and if the current scenario for global oil market recovery plays out, they will be deferred until demand for hydrocarbons returns, i.e., at the end of 2022 or the start of 2023. Total capital exploration and production costs in 2021-2025 will be 15-20% lower than were planned before the start of the COVID-19 pandemic.

In 2020, the global oilfield service market dropped 25% in value to 310 billion USD. By 2020 QIII and QIV, many oil and gas companies had already transitioned to oil prices of 40-45 USD per barrel, creating a swift decline in demand for oilfield services. In 2021-2022, more stable oil prices should see oilfield services recover by 12.1% and 3% year on year, respectively.

The link between oil prices and oilfield service financing shows that if the oil price reaches 53 USD per barrel in 2021, the global oilfield service market will be worth 348 billion USD. It will only exceed the 400 billion USD mark if oil prices exceed 70 USD per barrel. The requirement to reallocate a part of capital costs to green technology to achieve sustainable development goals will also slow down oilfield service growth. On the whole, as with the post 2015-2016 crisis period, the global oilfield service market is unlikely to recover to pre-crisis levels, even in the long term.

Liquid hydrocarbon production in Kazakhstan

In 2020, Kazakhstan agreed with OPEC+ to reduce oil production by 23% in July, 21% – in August-September and 18% – in October-December. Thanks to the significant share of gas condensate in production (11.9 million tonnes in 2019), which is not covered by OPEC+ restrictions, Kazakhstan liquid hydrocarbon production only fell by 5.4% in 2020 (4.9 million tonne drop in 2019).

In 2021, liquid hydrocarbon production in Kazakhstan is predicted to grow to 86 million tonnes based on voluntary production adjustments made following an OPEC+ meeting in March 2021. Liquid hydrocarbon production will start to increase in 2022 as global demand for oil returns to 2019 levels, and after a major expansion project at Tengiz liquid hydrocarbon production at the field should reach 41 million tonnes out of a total of 100.7 million tonnes for the entire country in 2025. Three giant fields, Tengiz, Kashagan and Karachaganak, account for 72% of total production (2020: 63% and 2014: 47%).

Kazakhstan oilfield service market

After the 2015-2016 oil crisis, contrary to events in Russia and across the world, Kazakhstan witnessed an annual 14% recovery of its oilfield service market, which reached 8.9 billion USD and exceeded 2014 pre-crisis levels by 2019.

Major expansion projects at Tengiz (45.2 billion USD in 2016-2023) and Kashagan (commercial production began in 2016, first expansion stage investment – 5 billion USD in 2019-2024) were seen as the main reasons for the growth, with Tengiz accounting for approximately 80% of the total. For example, construction and assembly work on the Tengiz field expansion project grew from 1.7 billion USD in 2014 to 4.9 billion USD in 2019.

2020 saw a significant decline in the oilfield service market after the oil price fell and OPEC+ agreed to limit production in Kazakhstan. According to initial assessments, the oilfield service market in Kazakhstan fell 25% in 2020 in USD terms to 6.7 billion.

In 2020, construction was completed on 807 oil and gas wells (2019: 1,107 wells), while total financing amounted to 0.7 billion USD, exclusive of VAT (2019: 1.1 billion USD exclusive of VAT). Compared to 2014, drilling in 2020 more than halved in physical terms and declined four-fold in USD terms. The average cost of drilling one well after the 2015-2018 reduction stabilised at 900-950 thousand USD, exclusive of VAT.

The largest oilfield service customer in Kazakhstan is Tengizchevroil, accounting for 72% of the total market. Of that amount, construction and assembly, planning and engineering financing makes up 85%, technical maintenance and repair financing – 56%, geological exploration and geophysics financing – 45% and drilling work – 20%. The next largest oilfield service customers are other major Kazakhstan oilfields such as Karachaganak Petroleum Operating, accounting for 8% of the market, North Caspian Operating Company – 7%, and Mangistaumunaigas – approximately 3.5%. All other customers account for roughly 10% of the market.

In 2020, there were approximately 1,000 oilfield service providers in Kazakhstan, of which Kazakhstan companies accounted for 44% in USD terms. Contractors can be divided into local players (including joint ventures with overseas partners) and major international and Chinese oilfield service companies. The number of local companies in the planning and engineering segments is lower (20%), while the figure for the geology and geophysics segments is 35% and 40% in the major construction and assembly work segments. Local companies are most prevalent in the drilling, repair and technical maintenance segments.

In recent years, the Kazakhstan Government and major oilfield service customers took measures to increase the share of local players in Kazakhstan, which led to increases in the number of joint ventures with overseas partners.

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