Why is Kazakhstan Reducing Oil Production?

Kazakhstan plans to reduce oil production as part of its OPEC+ agreement despite consistently exceeding quotas, Orda reports.

Kazakhstan set production records of 2.12 million barrels per day in February after launching the new Tengiz project. The Ministry of Energy has confirmed that Kazakhstan will reduce production to 1.5 million barrels daily after negotiations with foreign investors at Tengiz and Kashagan.

Oil analyst Nurlan Zhumagulov, director of Energy Monitor, explains this reduction is due to oil prices falling to a three-year low. However, it may delay the full launch of Tengiz's expansion project.

While Kazakhstan isn't formally obligated to comply with OPEC, it can't ignore the agreement entirely.

Oil analyst Artur Shahnazaryan explains: 

We are not members of OPEC, we do not need to leave it. There is some kind of OPEC+ agreement with Russia, and given that our transport outlet goes through Russia, we had to formally participate as well. By and large, we pretend that we want to fulfill this agreement. More than half of OPEC members themselves never really fulfill their quotas. It's all about Saudi Arabia: it can quickly flood the market with oil and cause an oil crisis. 

Contrary to rumors about a 70% reduction in oil transportation via the CPC pipeline, Zhumagulov clarified:

What does a 70% reduction in oil pumping via CPC mean? This means a 60% reduction in Kazakhstan's daily oil production! This means a complete suspension of Kashagan and half of Tengiz! CPC is not that damaged. The point is that in February, Kazakhstan increased oil production by 279 thousand barrels per day above the OPEC+ plan (the target is 1.5 million barrels per day, but in fact, average production was 1.75 million). Therefore, Kazakhstan must reduce oil production in March by at least 16% from February values to meet OPEC+ commitments.

Fears about Ukrainian drone strikes on the Kropotkinskaya station severely impacting exports were exaggerated.

Shahnazaryan noted:

Our oil exports were not affected by the strike. The equipment at the Kropotkinskaya pumping station, which pumps the Russian share into the CPC, was damaged. But in any case, the CPC needs to be repaired. The damage is not critical: there are eight gas turbine units at the Kropotkinskaya, and only one is inoperational. 

Zhumagulov adds that oil pumping through CPC continues with additives, though the pipeline is operating at its limit:

Most likely, CPC is physically unable to pump a record 6.7 million tons of oil in March, according to requests from Kazakhstani shippers.

Shahnazaryan views the current situation as giving Kazakhstan a convenient opportunity to appear compliant with OPEC while likely exceeding quotas by year-end when Tengiz expansion is complete:

This is more of a PR game: at the end of the year, it may turn out that we have again failed to meet our cutback obligations. But we cannot withdraw from the OPEC+ agreement because we are directly connected to Russia. It's all about the CPC.

Kazakhstan's current compliance with OPEC appears to be diplomatic posturing. Once able to increase production and exports again, the oil-dependent country will likely do so.

Original Author: Nikita Drobny