Kazakhstan reduced oil exports to China on January 16 after discovering the presence of organic chlorides at excessive levels. Crude oil contaminated with organic chlorides is dangerously corrosive for the steel pipes that transport it and for the machinery in the refineries that process it. Tests conducted on the oil pumped by CNPC-Aktobemunaigas revealed a contamination that could have threatened the main pipelines connecting Kazakhstan and China.
Despite plans to increase oil exports to China, Kazakhstan will have to limit its output until the contamination is contained. In a note, Russia’s pipeline monopoly Transneft said it will continue to pump Russian oil through Kazakhstan’s main pipelines. KazTransOil, the state company in charge of oil pipelines in Kazakhstan, said the volumes earmarked for export shrank, and that local refineries are poised to receive fewer shipments of oil in the coming weeks.
Organic chlorides are commonly found in additives used by the oil industry to enhance extraction, especially in older oil fields. “Organic chlorides are not naturally occurring,” Amrita Sen, chief oil analyst at consultant Energy Aspects, told Bloomberg in April, “and must be removed before bringing crude parcels to market.” If still present in the crude sent for refining across thousands of kilometers, these substances could corrode and damage pipelines. In the past year, oil flows across Russia, Kazakhstan, and China have been affected by these chemicals in several instances.
In April 2019, around 5 million tons of contaminated oil flowing westward through the Druzhba pipeline from Russia to Belarus, and farther to Europe, triggered a halt in pipeline operations for weeks. The northern section of Druzhba, connecting Russia and Belarus to Germany, was shut down while it underwent repairs and the contaminated oil was removed. At the time of the incident, Transneft said that a local private company was responsible for knowingly supplying contaminated oil to the pipeline system.
While oil supplies through Druzhba resumed in May, the industry kept a wary eye on the possibility of similar incidents repeating. In fact, Transneft found contaminated oil in its pipelines again in June 2019. At the end of June, China said it would ban imports of crude oil containing high levels of organic chlorides, in response to the repeated incidents with Russia’s oil.
Kazakhstan’s fate is intertwined with Russia’s and China’s in terms of oil connections. During the contamination of oil pumped through Druzhba in April, oil from Kazakhstan was mixed with the “dirty” oil from Russia in six tankers at the Ust-Luga port, near the border with Estonia. Kazakhstan-based companies negotiated a discounted sale of their oil to international traders, while seeking compensation from the Russian government. The contamination of the oil extracted in Aktobe had, conversely, Russia’s Transneft rushing to confirm that it will continue to pump its “clean” oil to China through Kazakhstan’s pipeline system.
Meanwhile, the dispute over oil supplies also entangled Russia, Belarus, and Kazakhstan as the allies in the Eurasian Economic Union project disagreed on tariffs and volumes. On January 21, Alexander Lukashenko, president of Belarus, lamented that Russia had been imposing higher tariffs to allow the flow of Kazakh oil into Belarus.
“There are no alternatives to Russian oil and we have to diversify the sector,” Lukashenko told the press. In the preceding months, Belarus tried to gin up support from Kazakhstan and Azerbaijan in an effort to secure fresh alternatives to Russian oil.
Chemical mishaps are the latest blow to hit Kazakhstan’s oil industry. Maintenance at its three largest oil fields, heated negotiations with international consortia, and a gross non-compliance with the OPEC-plus agreement to cut global oil exports have generated an unusual instability to the sector, gravely hit by the fall in oil prices of 2015.
CNPC-Aktobemunaigas is the engine of the economy in the Aktobe region, in the northwest of Kazakhstan. The company is a quasi-subsidiary of CNPC, which owns around 97 percent of its stakes. The purchase of a majority stake in the Aktobe oil and gas enterprise in June 1997 represented the first significant foreign investment in the energy sector after China became a net importer of crude oil in 1993.
While the incident with organic chlorides is likely to be resolved and oil flows to China are bound to resume, it is important to note that aging oil fields could soon turn into the Achilles heel of Kazakhstan’s oil industry.