Perhaps overlooked amid the immediate geopolitical risks associated with continued unrest in Kazakhstan, a large nation sandwiched between two great powers in Russia and China, is the resources at stake should the situation worsen. Chief among these is, of course, vast oil fields that make Kazakhstan the 12th largest oil producing nation in the world.
"Deep beneath the western Kazakhstan steppe is a giant reservoir known as the Tengiz Field, where the oil column measures an incredible 1 mile (1.6 km) across," a press release from Chevron (CVX) extolling the reserves in the country reads. "With a surface area more than four times that of Paris, France, Tengiz ranks as the world's deepest producing supergiant oil field and the largest single-trap producing reservoir in existence."
Yet, at present that oil field, which Chevron holds a 50% stake in, is thrown somewhat into question amid protests and labor strikes that have hurt production rates. That is not to mention the rather unclear political situation as Russia mobilizes troops to support its authoritarian ally.
Chevron also holds an 18% interest in the Karachaganak Field alongside Italian giant Eni SpA (E) and Royal Dutch Shell (RDS.A) . Further, Shell holds a nearly 20 percent stake in the offshore Kashagan alongside Eni and Chevron, as well as a majority stake in the Pearls PSC fields in the country. Needless to say, the still-brewing quagmire could have big implications for energy investors as energy markets remain tight.
The two main oil companies in Kazakhstan are Chevron & Exxon, which operate together with state-owned Kazmunaigaz, controlled by the Nazarbayev family. What will happen now? Will Tokayev take over from the Nazarbayevs? Or will the US companies face nationalization? And Putin?
— Anders Åslund (@anders_aslund) January 6, 2022
"The very high gas prices seen in Europe in recent months have become a highly political issue, and gas markets look likely to remain tight through the short and into the medium term," a recent report from the Oxford Institute for Energy Studies declared. "On the oil side, demand rising as economies recover from Covid-related contractions will probably mean global oil markets become firmer as 2022 progresses. And tight markets are less forgiving of any supply problems."
Fueling a Fuel Crisis
In truth, this volatile situation that impacts already tight energy markets stems directly from energy price shocks that sent protestors into the streets.
"Kazakhstan is essentially experiencing two simultaneous crises. Last week, a localized protest over fuel prices triggered nationwide demonstrations calling for improved socio-economic conditions and a more inclusive political system," Ben Godwin, Head of Analysis at PRISM Political Risk Management, wrote for the Center for European Policy Analysis earlier this week. "Concurrently - and very possibly as a result of the protests - Kazakhstan's ruling clique spectacularly ruptured."
For now, the situation appears to be salvageable, especially as the government's allies in Russia move to stem the bleeding and shore up oil production, but situations such as these are far from predictable. As such, a nearly 9% spike in oil prices to start the year is understandable.
"The upward jump in oil prices mostly reflects the market jitters as unrest escalates in Kazakhstan and the political situation in Libya continues to deteriorate and sideline oil output," Louise Dickson, senior oil markets analyst at Rystad Energy wrote in a recent note to clients.
Issues Outside Oil
Of course, the issue stems beyond oil to natural gas, the initial impetus for the unrest and could well curtail uranium production that is seen as a key alternative fuel to wean the world off of fossil fuels.
Kazakhstan produces over 40% of global uranium, making it an even more pronounced risk to this market.
"Any disruption in Kazakhstan could of course be a significant catalyst in the uranium market," Canadian uranium giant Cameco (CCJ) said in a published commentary last week. "If nothing else, it's a reminder for utilities that an over-reliance on any one source of supply is risky. It also reinforces the shift in risk from suppliers to utilities that has occurred in this market."
Kazakhstan produces over 40% of global uranium, making it an even more pronounced risk to this market.
For investors eyeing energy markets, and especially the energy transition, perhaps the dynamics for uranium will usurp interest in the aforementioned oil fields. Indeed, uranium prices have already neared decade highs amid the unrest.
"We expect recent protests and political turmoil in Kazakhstan to be a near-term catalyst for higher spot uranium prices and could prompt increased utility activity in the term market due to concerns over security of supply," RBC Capital Markets analyst Andrew Wong told clients.
Risk Calculation
To be sure, the immediate risk of oil production bottlenecks is not evenly distributed, especially among the supermajors.
Chevron is obviously most vulnerable, with its major projects already established and a $45 billion Tengiz field expansion project already underway. Clearly, these serious investments are now in jeopardy and are, at the least, due for further delays. Shell, Eni and Exxon Mobil (XOM) will also feel some pain should supplies falter given their sizable interests in the country.
Meanwhile, the exits of ConocoPhillips (COP) and BP plc (BP) seem like prescient moves in hindsight.
About a decade ago, ConocoPhillips sold its 8.4% interest in the offshore Kashagan field for approximately $5.4 billion and exited the nation. More recently, BP exited the country in 2021 after failed efforts to negotiate with state-owned enterprises and a turn in strategy from the British supermajor toward a focus on its renewable energy strategy.
As such, tight markets growing tighter amid the commotion could portend for non-exposed energy majors that have already counted themselves as top performers around the turn of the year.
Added Political Pressure
Finally, it should be noted that political consideration from Kazakhstan's powerful neighbors cannot be ignored.
While reaction to Russia's involvement in the country has been muted, save for some harsh commentary from U.S. Secretary of State Antony Blinken, any action from China could severely augment the situation.
This detail is crucial as Kazakhstan is a pivotal energy provider to China, accounting for a significant chunk of oil imports and playing a crucial role in providing natural gas over land to the economic superpower.
"Given the importance of Kazakhstan to China's Belt and Road Initiative and its energy imports, the Central Asian state's stability represents a high stakes issue for China," the state mouthpiece Global Times advised in an Op-Ed. "It is essential for China to not only offer Kazakhstan necessary support to help it restore order but also take this opportunity to actively coordinate security and stability affairs with neighboring countries."
Any movement by China to pacify the situation might not only impact U.S. trepidation about the issue given the great power struggle that continues to play out, but also in terms of a potential Thucydides trap that could emerge from current Russia-China cooperation should each nation's perceived sphere of influence infringe on the other's.
In short, investors will need to hope for a rapid solution facilitated by Russia in Kazakhstan. Any other outcome could exacerbate geopolitical issues far beyond the nation's borders.
