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After almost a two-month delay, on February 23, Kazakhstani company KazTransOil finally began exporting oil to Germany, sending the first shipment of 20,000 tons of Kazakhstani oil. In enabling this supply, Kazakhstan reached an agreement with Russian energy company Transneft to use the Druzhba pipeline to export oil via Russia and Belarus to Adamowo-Zastawa in Poland. From there, it will head to Germany’s PCK Refinery in Schwedt, which supplies oil products to Berlin and most of eastern Germany.
Ever since Astana and Berlin reached a deal on oil exports in December 2022, the most gripping question has been whether Kazakhstan will play a larger role in the European energy market. Adding fuel to this conversation, earlier this year, Kazakhstani Energy Minister Bolat Akchulakov stated that the country will eventually increase the volume sent to Germany to almost 7 million tons of oil per year. An additional key consideration has been whether Russia will allow the use of its pipeline infrastructure to bail out what it considers to be an unfriendly country in Germany.
Germany turned to Kazakhstan as a substitute for mostly practical reasons, after efforts to orient the German energy market away from Russia. The option to import crude oil from Kazakhstan via the Druzhba pipeline emerged as the most convenient and cheapest alternative. The shareholders of the refinery in Schwedt were among the first to “propose to buy crude oil in Kazakhstan” in their appeal to the German authorities presented in July 2022. The crude oil from Kazakhstan is of practically similar composition (Urals grade) to what Germany was importing before, which allows the refinery in Schwedt to avoid any costly adjustments. Additionally, the oil exports will arrive using already established pipeline infrastructure, saving the German authorities from dealing with additional logistical hurdles and higher costs related to importing via the Rostock and Gdansk ports.
According to the deal, Kazakhstani state-owned oil and gas company KazMunayGas agreed to send 1.2 million tons of crude oil in 2023, with 300,000 tons expected to arrive in Germany by the end of the first fiscal quarter. The first shipment was expected in January, after the Russian Ministry of Energy formally approved the exports via the Druzhba pipeline on January 13. However, the Kazakhstani side kept delaying the delivery until late February, giving way to various speculations about the future of the deal. Official explanations for the delay, which included “small technical barriers” and the ongoing tender process, were unconvincing and vague. Thus, with only a couple days left until the end of the first fiscal quarter, the modest amount of 20,000 tons exported instead of the projected 300,000 has cast doubt on the hopes that Kazakhstan could effectively rescue Germany and the rest of Europe in an energy crunch.
The most obvious suspect for the delay and possible future blocking of Kazakhstani oil exports is Russia. These speculations are justified given that oil exports from Kazakhstan to Europe via the Caspian Pipeline Consortium (CPC), which runs through Russia, were stopped on several occasions in 2022—each time under a bizarre pretext, including unspecified damages caused by unprecedented sea storms and floating World War II mines.
Even so, Moscow has a number of reasons to back this deal. First, the country will receive transit fees from Kazakhstan for using the Druzhba pipeline. At the moment, it is hard to overestimate the importance of cash revenue for the Kremlin, due to the ongoing war against Ukraine and the decreased cash revenues from energy exports. Second, Russia will retain some leverage over Germany by keeping it hooked on oil imports arriving via a Russian-controlled pipeline. Thus, while the oil itself will arrive from Kazakhstan, Germany will remain dependent on Russia at some level for supporting the exports. Third, keeping the Druzhba pipeline operational leaves the door open for renewed oil exports from Russia in the future.
Perhaps the most banal reason behind the delays and modest export amount is the fact that Kazakhstan simply may not have enough oil supplies available for export to Germany. In 2022, the country produced 84.2 million tons of oil. The production forecast for 2023 is estimated at 90.5 million tons. Oil exports are also expected to increase in 2023 by 6.7 million tons from 64.3 million in 2022 up to 71 million tons. Almost all of this oil is already under contract, meaning Kazakhstan cannot redirect it without financial penalties. Most likely, this growth in production and exports will be achieved via increased production at the Tengiz oil field, operated by the private company Tengizchevroil, which uses the CPC for its exports. And KazMunayGas has no authority over Tengizchevroil to redirect its contracted oil exports. Thus, the Kazakhstani expert community seems adamant that the country does “not have additional free volumes of oil for deliveries to Germany; it must be understood that neither KazMunayGas nor private companies have them”.
In the absence of available oil supplies, either swapping or blending operations seem to be underway. It is likely that KazMunayGas is completing swaps with Moscow by purchasing Russian oil for the refineries in Kazakhstan to which it is obliged to supply crude oil. Alternatively, Kazakhstan may be blending its oil with Russian oil, creating a mixture of 51 to 49 percent, respectively, which legally qualifies the end product as oil from Kazakhstan. Either way, the 1.2 million tons expected to arrive in Germany via the Druzhba pipeline is less than 10 percent of the 11 million tons required to sustain the full operations of the Schwedt refinery.
The war in Ukraine and Western sanctions against Russia have created a unique opportunity for Kazakhstan to fill the void left by Russia in playing a larger role in the European energy market. The deal to send oil to Germany is Kazakhstan’s first step toward fulfilling this potential. However, its dependence on Russia for export routes stands in the way of Astana’s ambitions. Additionally, tied to this challenge is the need to increase production volumes, which requires time and long-term guarantees from buyers. Kazakhstan can certainly play a key role in the European energy market but only if it can significantly increase its production volumes and ensure Russia remains on its best behavior as a partner and transit country. Yet, these are two rather big “ifs” to overcome.
