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Kazakhstan’s Druzhba Prospects: Central Asian Oil to Supply Europe?

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Kazakhstan’s Druzhba Prospects: Central Asian Oil to Supply Europe?

As the EU seeks to substitute Russian energy resources, Kazakhstan sees an opportunity.

Kazakhstan’s Druzhba Prospects: Central Asian Oil to Supply Europe?
Credit: Wikimedia Commons

Since the beginning of the full-fledged war in Ukraine in February 2022, top EU bureaucrats and politicians have hastily sought alternative sources of hydrocarbon imports to fuel Europe’s domestic economy without Russian resources. The task is not easy. The EU energy market has been experiencing turbulence since 2021 when the Ukraine crisis was escalating – yet price rises were only half of the problem, as the physical supply of hydrocarbons via traditional routes was not interrupted.

Before the war, Russia accounted for over 40 percent of natural gas and about 30 percent of oil imports to the EU. In May 2022, VOA reported that “Ukraine’s natural gas pipeline operator said it was stopping Russian shipments through a hub in eastern Ukraine controlled by Moscow,” which according to Gazprom reduced natural gas flows to Europe through Ukraine by 25 percent. VOA also noted that about “one-third of Russian gas headed to western Europe passes through Ukraine.

In addition , in September 2022, the explosions on the Nord Stream-1 and -2 pipelines made three of four lines inoperable, further curtailing connections. Despite all of this, however, natural gas and oil from Russia were still imported to the EU in 2022. Yet some EU nations, most importantly Germany, declared that they would refuse to receive hydrocarbons from Russia starting from the beginning of 2023.

In order to diversify its sources of energy imports, EU officials launched a set of major diplomatic voyages and intensified regular mutual visits with Central Asian nations. German Foreign Minister Annalena Baerbock visited Kazakhstan and Uzbekistan in October 2022, and was accompanied by “a delegation of experts in the energy and infrastructure sectors.” Also in October, President of the European Council Charles Michel met with the presidents of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. In November 2022, EU Foreign Relations and Security Representative Josep Borrell also visited Uzbekistan, while Uzbek President Shavkat Mirziyoyev visited France. In all of these visits, the supply of energy and other resources from Central Asia to Europe was a main theme.  

In particular , there have been talks about bringing natural gas across the Caspian Sea from Central Asia, specifically from Turkmenistan to Azerbaijan, and then via TANAP to Europe to ensure stable and voluminous natural gas supply. There is uncertainty about the immediate capacity of Azerbaijan gas fields alone to credibly satisfy Europe’s rising demand, so Turkmen gas is an attractive possibility. However, such talks have re-emerged with a certain regularity since the 1990s and have never proved to be fruitful for various, mainly political, reasons.

Moreover, Central Asian states already have existing contracts to supply China, and frankly lack spare volumes of natural gas to be exported to Europe — Central Asia experiences its own domestic gas deficits despite being a natural gas abundant region.  

If natural gas is not a solution, then the last hope for how Central Asia could be useful in helping Europe to cover its emerging energy resource deficit is Kazakh oil. 

Kazakh Oil in the Druzhba Pipeline 

On January 13, 2023 Kazakh oil transporter KazTransOil announced that it would deliver 300,000 tons of oil to Germany in the first quarter of 2023 via Russia’s Druzhba pipeline system. The application submitted by KazTransOil in December 2022 reserved a capacity of 1.2 million tons of oil for the year 2023. Before the announcement, there was considerable skepticism regarding the possibility of such an plan, with critics noting that it would require Russian permission to allow Kazakh oil to transit its territory on its way to Germany. Some experts justified their skepticism by pointing to several stoppages of flows in 2022 through the Caspian Pipeline Consortium (CPC) line, which also runs through Russia, “each time under a bizarre pretext.”

Yet Russia did grant permission and the first batches of oil found their way to Germany from Kazakhstan earlier this year. A total of 40,000 tons of oil were supplied in February and March, and 20,000 more were to be supplied in April. A precedent has been set. 

The key recipient of this oil is a refining facility, PCK Raffinerie (the majority of shares of which belonged to Russia’s Rosneft until recently), in the city of Schwedt. It is a key gasoline and other fuel supplier for Berlin and eastern Germany, in general, and employs some 3,000 workers. 

Limits of Kazakhstan’s Druzhba Prospects 

In January 2023, Kazakh Minister of Energy Bulat Aqchulaqov said that the first batch of oil was expected to be supplied in January, and the first quarter supply would be 300,000 tons. He also said that the total annual oil supply via this route might be up to 1.5 million tons with maximum limits of Kazakhstan’s capacity equaling 6-7 million tons of oil per annum. But it now seems that none of these expectations and predictions are going to materialize this year. 

First, the supply only started at the end of February, not in early January, and Kazakhstan was able to transport a much smaller volume of oil than it was expected to initially. This dynamic makes it highly unlikely that Kazakhstan will be able to deliver 300,000 tons by the end of the quarter or get close to 1.5 million tons by the end of 2023, let alone 6-7 million. Kazakhstan’s government is struggling to find spare volumes of oil in its possession to redirect them into the Druzhba pipeline. 

Another useful point of comparison: the capacity of the refinery in Schwedt alone is about 11.6 million tons of oil per year, and before the war Russia was supplying least 110 million tons of oil to Europe. In 2020, for example, Russia supplied 138 million tons of oil to Europe. In particular, Russia supplied about 1-2 million tons of oil monthly via the Druzhba pipeline alone. Before 2022, Russia supplied about 20 million tons of oil via this pipeline. 

More than two-thirds of Kazakh oil is exported via Russian territory, primarily thought the CPC pipeline. Unlike Russia, the ownership structure of Kazakhstan’s oil sector is heavily dependent on foreign companies and investors, which decreases the government’s flexibility in terms of freeing and redirecting oil flows. According to Kazakh expert Olzhas Baidildinov there are almost no spare volumes of oil to be supplied to Europe. State-owned KazMunayGas owns only a 20 percent share in Tengizchevroil, which might generate some extra volumes of oil for export in the future. Currently, KazMunayGas directs almost half of the total production volumes from all of its fields to local oil refineries in Kazakhstan, plus it is obligated to send 5 million tons of oil to two refineries in Romania owned by Kazakhstan, which further limits options.

If export to the German market became a top priority of the Kazakh authorities, the only realistic chances of substantial oil export increases via the Druzhba pipeline are achievable either through redirection of oil from traditional oil exporting routes (including the Russian oil port Ust-Luga) or via swap operations: Russian oil could be bought to load Kazakh refineries while Kazakh oil would be redirected to load Germany’s refinery in Schwedt via Druzhba. In any case this hypothetically possible 6 million tons of oil to Germany would cover only 6 percent of its demand and would not even remotely approach the EU’s objective to substitute massive volumes of Russian oil.

Even then, we are mainly talking about redirecting existing oil volumes, not expanding them. The major expansion of oil exports could be achieved if Russian oil would be blended with Kazakh oil in the proportion of 49 percent to 51 percent, which would technically make the oil “Kazakh.”

Why Druzhba Is Still a Win-win Deal 

There are a number of reasons why such a limited enterprise still presents benefits to all of the involved parties. 

First, for Germany it is a major challenge to find substitutes for Russian oil supplied to the Schwedt refinery. For one, the refinery is directly linked to the Druzhba pipeline, which is the logistical basis for its commercial success and profitability. Second, the refinery used to operate specifically with a Urals oil mixture, and it is said that Kazakh oil has similar qualities or that it would inevitably be blended with Russian Urals once it is injected into the common Transneft pipeline transporting system. This would further reduce costs of the refined product for Germany.

Third, alternative routes to deliver oil to this refinery hardly present great options: the capacity of the Rostock port is small due to its shallow depth, which means that oil from supertankers has to be reloaded to smaller vessels. Fourth, obtaining Kazakh oil, despite the challenges, will provide a chance to keep the refinery operating and continue employing thousands of workers. 

For these reasons Germany is ready and willing to pay extra for Kazakh oil coming via this route, which is the main benefit for Kazakhstan in this Druzhba initiative. The Argus Media group notes that Kazakh oil delivered via the Druzhba pipeline is bought with a $1 premium compared to the price of more expensive Brent crude, while the same Kazakh oil delivered via the CPC pipeline is bought with a discount of $3-4 to the price of Brent crude. At the same time the cost of logistics via Druzhba is cheaper than via CPC, which further increases Kazakhstan’s profits. This extra profit is the main reason why Kazakhstan is eager to redirect its oil from other exporting routes and supply it via the Druzhba pipeline system. 

Finally, Russia and Belarus would receive a little extra money in the form of transit fees while making sure that European energy supply still largely depends on the logistics through their territory (either Druzhba, CPC, or oil ports) in case of further escalation of the war in Ukraine. Moreover, the volumes of oil Kazakhstan could offer are no match to those Russia used to supply before the war, still inflicting substantial costs for Europe’s industry in their attempt to find alternative solutions. Lastly, and perhaps most importantly, Russia might later use its willingness to pass Kazakh oil via its pipeline system to require reciprocal goodwill on behalf of Kazakhstan in transporting Russian natural gas via its territory further into Central Asia, China, or potentially to Iran and South Asia as part of the Trilateral Gas Union initiative proposed by Kremlin in November 2022.