New Gas Supply Infrastructure in Kazakhstan and Central Asia

1. New Gas Supply Infrastructure in Kazakhstan and Central Asia Andrew Neff IHS, Senior Energy Analyst 20th Anniversary Kazakhstan International Oil & Gas Conference 4-5 October 2012

2. Kazakhstan Gas: Main Points • Kazakhstan is surrounded by other gas producers with larger gas reserves, more gas production • Hence, finding outlets for Kazakhstan to monetise its own gas output is more difficult…or is it? • Investments in gasification are geared to supply domestic energy needs, develop system for potential future exports • What markets are there for Kazakhstan’s gas production? • Kazakhstan is better positioned than Uzbekistan and Turkmenistan to supply gas to Russia…and eventually (maybe) to Europe • Direction of Central Asian gas transit via Kazakhstan is changing • Trans-Caspian Pipeline: premature, but not out of the question

3. Central Asia: Gas Production and Exports Compared Source: IHS CERA

4. Existing and Proposed Gas Infrastructure Source: Intergas Central Asia

5. Kazakhstan’s Gas ‘Role’ in Central Asia…So Far Source: KazTransGas • Primary role as transit state for other exporters • ~80% of transportation volumes are international transit (~10% exports, ~10% domestic market) • Transportation volumes still not recovered to pre-crisis level • Impact of Gazprom dispute with Turkmenistan felt in continued lower transit volumes via Kazakhstan • Reduced utilisation rates on Central Asia-Centre and Bukhara-Urals pipelines (~40%) • Gazprom gas purchases from Central Asia (2011): • 11.2 bcm (Turkmenistan) • 7.95 bcm (Uzbekistan)

6. IGA Gas Transportation Revenue Breakdown* (2011) Source: Intergas Central Asia; * figures in USD

7. Domestic Supply Focus • Economic growth = increasing internal demand for gas • Domestic demand, gas exports constrained by lack of infrastructure • Gross output nearly twice commercial gas production • Re-injected to support oil production • What else to do with it?? • Government support for gas sector • Law on Gas and Gas Supply (Jan. ‘12) • Mandatory utilisation of associated gas • Strategic investments in gasification • KazTransGas as national gas operator (July ‘12)

8. Laying the Ground for Future Exports • Gasification projects galore to supply domestic consumers • Expansion and/or modernisation of pipelines to supply Almaty, Almaty province, city of Kyzylorda, South Kazakhstan province, Zhambyl province, Mangystau province • Two strategic gas pipeline projects of national importance • Beyneu-Bozoi-Shymkent pipeline (1,475km; estimated USD3.6 billion) • Goals: energy independence from Uzbekistan, tie-in to Central Asia-China pipeline • Phase 1: Bozoi to Shymkent/Akbulak (1,164km; construction launched Sept. 2011, due to be completed 2013) • Stage 2: Beyneu to Bozoi (311km; due to start 2014, end 2015) • Kazakhstan-China Main Gas Pipeline (1,304km; estimated USD7.3 billion) • Goals: gas transit from Turkmenistan, Uzbekistan, future exports (5 bcm/y) from Kazakhstan • July 2011: construction launched on Line C (25 bcm/y)

9. Turkmenistan’s Gas Export Options

10. Turkmenistan’s Motivation For TAPI • Turkmenistan has strong incentive to pursue TAPI pipeline construction • TAPI as key economic driver • Soviet-style economy relies heavily on gas export • revenues (estimated at over 50% of GDP) • Long-term gas production and export targets • require additional export capacity • 230 bcm/y of gas output, 180-200 bcm/y in exports (2030) • TAPI as necessary for diversification • Traditional dependence on Gazprom has highlighted Turkmenistan’s vulnerability • Price disputes in 1997 and 2009 led to supply stoppages, dealt heavy blows to • Turkmenistan’s economy • April 2009 explosion on CAC pipeline cut exports to virtually zero; January 2010 resumption • of supplies, but at a fraction of previous level (10-12 bcm/y rather than 40-45 bcm/y) • Risk of new over-reliance on China? • Central Asia-China pipeline shifting Turkmenistan’s dependence on Russia to China instead Source: IHS Global Insight

11. Turkmenistan-Afghanistan-Pakistan-India Pipeline

12. State of Play in the Long-Running TAPI Project • TAPI proposal continuing to move forward, despite security concerns • Alignment of political goals and economic needs among four participating countries • Significant progress post-2009 • Four-party framework agreement (2010) • Uniform transit tariff agreed (2012) • Formal gas supply and purchase agreement (2012) • Pakistan: 38 mmcm/d • India: 38 mmcm/d • Turkmenistan-Afghanistan MoU on gas sector cooperation • Next steps: now the REALLY difficult part starts • Attempts to attract financing (international roadshows) • Formation of consortium to design, build, and operate TAPI • Desire, government political support insufficient to bring TAPI to reality • Security risks can be mitigated, but TAPI needs a commercial champion

13. Uzbekistan Caught in the Middle • Geography and history leaves Uzbekistan few options for its gas • Turkmen gas supplies supplanted Uzbek volumes in CAC flows in Soviet era • Doubly landlocked = no sea access = no LNG export possibilities • China, Russia, India, Iran: all markets with closer suppliers • Vast majority of Uzbekistan’s gas production absorbed internally • Government determined to monetise its gas reserve wealth • Export focus as LUKoil-led projects boosting Uzbekistan’s gas output • Start of Uzbek gas exports via Central Asia-China pipeline (April 2012) • Billion-dollar investments to add value to gas production, find new outlets • Gas-chemical projects with foreign investors: Surgil (Uzbek-South Korean consortium), Mubarek (UzIndorama joint venture), Oltin Yo'l GTL (Sasol, Petronas, Uzbekneftegaz) • CNG retail fuel network expansion to supply vehicle market

14. TCP: Dead, or Just Premature? • Neither Azerbaijan nor Turkmenistan is ready to strike a deal that would pave the way to construct Trans-Caspian gas pipeline (TCP) • External political support/pressure notwithstanding • Azerbaijan focusing on securing routes for its own gas exports • Not ready to transit Turkmen gas when it hasn’t sorted a final plan to monetise its own gas resources • Turkmenistan lacks capacity to supply sufficient gas volumes to make TCP economically worthwhile • Gas from Block 1 insufficient to offset potential further loss of gas exports to Russia • East-West gas pipeline across Turkmenistan still under construction • Kazakhstan taking the “wait and see” approach • Resolution of maritime border dispute could open the door for Kazakh gas supplies

15. Key Questions • Karachaganak dispute resolved, but what future for phase-3 gas? • Russia, yes, but what about China? • What about Tengiz, Kashagan gas eventually? • Kazakhstan is better positioned to replace Uzbek and Turkmen gas volumes sent via CAC to Russia • Loss of Central Asia transit volumes offset by increased exports of Kazakhstan’s own gas • TCP prospects will get a boost with development of ‘southern corridor’ • Will Central Asian gas transit (to China) offset decline in revenues from reduction in gas transit via CAC (to Russia)? • Turkmen, Uzbek gas volumes transiting Kazakhstan in new direction • Kazakhstan’s own gas production, exports will make the difference

16. One Possible Outlook for 2025 2008 2011 2025* Gas exports to Russia from Turkmenistan 38 10 0 from Kazakhstan 14 15 20 from Uzbekistan 10 10 10 TOTAL 62 35 30 Gas exports to China from Turkmenistan 0 15 45 from Kazakhstan 0 0 10 from Uzbekistan 0 0 10 TOTAL 0 15 65 Source: IHS CERA; * indicative projection. All figures in billion cubic meters (Bcm). Kaz participation in trans-Caspian --resolution of Az_Turkmen deal (use info from Caspian Gas internal presentation) --need infrastructure in place (Kaz as wait and see, rather than leader) --flow into Turkmen gas section

17. Questions? Andrew Neff Senior Energy Analyst IHS Energy 7/5, Bolshaya Dmitrovka Street Bldg. 2, 5th Floor 125009 Moscow, Russia andrew.neff@ihs.com www.ihs.com