US oil producers operating in Kazakhstan have been under tremendous pressure following President Trump's new round of sanctions against Russia, as it could harm their investments in the Kazakh oil industry. However, the Kazakh government has come forward to assure investors that the restrictions will not affect their investments as it has no direct links with Russia.
About the New Sanctions
The latest sanction against Russia government is the result of Moscow’s alleged interference in US election and targets Russian energy export pipelines. The bill of the sanctions received major support from the Congress before it was signed by President Trump. It bans American entities from providing goods, information, services, technology and support to energy export pipelines of Russia.
Internationally, the new sanctions may affect the €4.75 billion Nord Stream 2 gas pipeline that is being built between Russia and Germany by oil majors like Royal Dutch Shell plc (RDS.A - Free Report) , OMV AG (OMVJF - Free Report) , Engie, Wintershall, Gazprom and Uniper. The pipeline can strengthen Russia’s hold in the European energy market, which makes it a primary target of the sanctions.
Energy companies in Kazakhstan were concerned as they believed oil export from the country along the Caspian Pipeline Consortium (“CPC”) pipeline, which goes through Russia to the Black Sea, could take a hit. Industry experts in America have already warned the congress during the proposition period of the bill, regarding the CPC pipeline, as they thought it needed a presidential waiver.
Moreover, LUKOIL and another Russian company Rosneft jointly own 31% of the CPC pipeline, which passes through 1,000 km Russian territory. These were the main reasons for the American companies to be concerned.
We would like to inform investors that oil export is Kazakhstan's primary source of foreign income and is a huge part of its GDP. There is an oilfield project named Tengiz in the country which is very crucial to its economy. The oilfield accounts for more than a third of the country's total crude output and targets to increase production from the existing 27 million tons to 39 million tons a year by 2022.
US supermajors Chevron (CVX - Free Report) and ExxonMobil (XOM - Free Report) have $37 billion in investments lined up for the Tengiz oilfield project, which uses the CPC pipeline, and thus were consequently under pressure. Investors should note that Chevron, ExxonMobil and Kazakhstan’s state-run oil company KazMunaiGas have 50%, 25% and 20% stake in the Tengiz project, respectively.
LUKOIL also has a 5% stake in the project, making the project a soft target for the sanctions. The Kazakh government said the sanctions from the US board will not affect the Tengiz oilfield project as it has no direct link with Russia.
Chevron has urged the American government to exclude pipelines from the sanctions, which otherwise will delay oil delivery to foreign markets. On the other hand, the Office of Foreign Assets Control is yet to comment on the application of sanctions on potential individual licenses.
Eni S.p.A. (E - Free Report) and TOTAL S.A. (TOT - Free Report) are some of the other big oil companies, which are currently operating in Kazakhstan. Both have a Zacks Rank #3 (Hold). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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