The Tengiz expansion and other similar investments create prerequisites for the rise in oil prices. Chevron Corp., Exxon Mobil Corp. and several partners on Tuesday committed $36.8 billion to expand an oil project in Kazakhstan known as Tengiz, one of the biggest investments since crude prices collapsed two years ago, the Wall Street Journal reports.
In choosing to invest now, the world’s biggest energy companies get to benefit from a huge drop in drilling costs that has accompanied the oil-price fall. Pumps, valves, drilling rigs, construction and engineering services, steel and even labor are cheaper because the contractors that provided those services have less work than in the boom years after the financial crisis when oil prices traded around $100 a barrel, the newspaper reminds.
"The recent wave of investments may point to confidence in an oil-price recovery — after they collapsed from around $115 a barrel in mid-2014 to a low of $27 in January — but it is still early days," the newspaper writes.
Tengiz is already one of the most profitable projects in the past 40 years. “It’s a terrific time to be making this sort of investment,” Chevron’s president for exploration and production in Europe, Eurasia and the Middle East, Todd Levy, said.
Tengizchevroil General Director Ted Etchison said the project would be financed by a combination of own funds, contributions from partners and borrowings. He did not provide any details.
Chevron owns 50% of Tengizchevroil, Exxon Mobil has 25% and Lukarco, controlled by Russia's LUKOIL, the remaining 5%.
Oil production in 2015 amounted to 27.16 million tons and 7.37 million tons in Q1 2016. As a result, oil production at Tengiz is expected to rise by 12 million tons per year, or 260 barrels per day, and total 39 million tons per year or 850 bpd. During the period of maximum output, the figure will exceed 900 bpd.
Sberbank CIB analyst Valery Nesterov, speaking to Vestnik Kavkaza, stressed in the first place that the Tengiz field is one of the unique oil fields in the world.
"The Tengiz field has a well-developed infrastructure, thanks to which an expansion of the project will be cheaper than any new construction. It is particularly necessary to bear in mind the export pipeline of the Caspian Pipeline Consortium: the oil produced at the field can be immediately exported," he said.
Due to all these favorable conditions, no wonder that Chevron and Exxon have decided to make such significant investments during the times of crisis.
"I would call this event the first sign that the era of low oil prices is coming to an end. But the situation with many smaller projects is different: oilmen have to start almost from scratch and oil production costs are much higher. We should not exaggerate the importance of these investments: there will be no big changes this year and in the next year a small growth is expected," Valery Nesterov pointed out.
"Kazakhstan will increase production not only at the Tengiz field, but the Kashagan field will start to extract up to 15 million tons per year. In Russia, oil production will increase in the coming years, in Iraq, Iran and some other countries it will stabilize, the US shale oil is not going anywhere either. The demand for energy will remain the main factor of the future growth in oil prices, and it is important that there will be no new global economic crisis," the expert added.
A leading analyst of the National Energy Security, a lecturer at the Financial University under the Government of the Russian Federation, Igor Yushkov, agreed that the third phase of Tengiz's expansion is the first sign of the recovery of investment activity of the oil giants.
"Companies around the world are beginning to invest in relatively simple projects. Previously, they invested in offshore and shale projects, which are much more risky and costly, but now, under the conditions of low oil prices, they have returned to secure deposits. Kazakhstan supplies oil either to Russian, or to China. Indeed, it is worth saying that the oil market has reoriented itself and there is no former hype around investments and super cost-effectiveness," he explained.
"Now the oil companies are investing very carefully. We can see that the priority is given to proven onshore fields with developed infrastructure. The market has not fully recovered. It is one of the first phases," Igor Yushkov added.
The expert did not agree with the fact that the supply-demand ratio will be the most important factor in the future.
"Right now, the main role is played by monetary factors, first of all, the Federal Reserve rate, depending on which players monitor the supply and demand balance. If the new Kazakh oil focuses on the European market, then, for example, the production on the shelf of the North Sea may fall, and it might affect Norway. Therefore, to some extent, this new oil will replace the old European oil. But Tengiz will have no global influence on the price of oil. Of course, it is very beneficial and profitable for Kazakhstan," he concluded.
