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Fitch on pipeline expansions in Kazakhstan

Fitch Ratings says that Kazakhstani oil and gas pipeline operators are set to embark on intensive investment programs over the next five years to capitalize on both favorable oil and gas industry fundamentals, and demand from a rapidly growing Kazakh economy.

Whilst the credit impact of these programs will be more pronounced in the short-term, it could be limited in the long-run based on the nature of projects funding. KazTransGas (‘BB’/stable), a national operator of gas pipelines in Kazakhstan, has increased capital expenditure plans with a view to investing over $8 billion in the construction of three gas pipelines, including the West-South gas pipeline, the China gas pipeline and the By-Caspian gas pipeline. In turn, the national operator of oil pipelines in Kazakhstan - KazTransOil (‘BBB-’/ stable) - intends to invest over $2 billion in the construction of two new oil pipelines, including the Kenkiyak-Kumkol route, which will connect western Kazakhstan to China, and a link between the Kashagan oil field and a new export terminal on the Caspian Sea.

Furthermore, the consortium operating the CPC (Caspian Pipeline Consortium) pipeline is considering the possibility of pipeline capacity expansion, the costs for which are estimated at about $2.5 billion. „Whilst the implementation of the construction and expansion projects unveiled by the oil and gas pipeline operators in Kazakhstan will put pressure on the companies’ credit metrics in the short-term, the impact of escalating capex is likely to be subdued in the medium to long-term due to the flexibility of financing options available to operators,” says Angelina Valavina, Director of Fitch’s Energy, Utilities & Regulation team.

Firstly, non-recourse financing is emerging as an important financing tool in the region, as demonstrated by KTO’s financing of the Kenkiyak-Kumkol route construction. KTG is also currently negotiating for financing of the China gas pipeline to be arranged by its JV counterparty - CNPC - without recourse to KTG. Furthermore, some projects are expected to be partly or fully state-funded given their social and political importance such as the construction of the West-South gas pipeline by KTG.

This project will connect the western gas-producing region of Kazakhstan with the main consuming region in the south and thus will ensure the country’s energy independence. Additionally, construction of some pipelines is pre-conditioned on obtaining secured transportation contracts. This approach is being considered by CPC for its pipeline expansion, where it intends to render transportation services on a ship-or-pay basis.

As another example, KTG plans to increase gas transit tariffs and secure gas transportation contracts with OAO Gazprom (‘BBB’/stable) as part of the By-Caspian gas pipeline construction. In combination, these factors could mitigate the negative impact of large investments on Kazakhstani oil and gas pipeline operators’ financial profiles, albeit with a time lag.

Nevertheless, given the smaller scale of these companies (including KTG and KTO), management should exercise a prudent and disciplined approach to managing their capex. Fitch will continue to monitor how these pipeline projects are financed, as well as any cost overruns and/or delays in their implementation, which, if they materialized, would negatively impact the financial profiles of these companies. (Reuters)