S&P: Energy transition creates short-term opportunities and long-term risks for producers in Central Asia and Caucasus

Recovery in oil exports is expected for the rest of this year and the next for Kazakhstan and Azerbaijan due to expanded oil production, as the Organization of Petroleum Exporting Countries and other major oil producers (OPEC+) agreed to gradually phase out 5.8 million barrels per day of production curbs by September 2022, Report informs referring to S&P Global Ratings Caucasus and Central Asia (CCA) report.

The energy transition creates short-term opportunities and long-term risks for producers in Central Asia and the Caucasus. The upside--with Kazakhstan as an exception--is that the region’s exposure to coal is limited and a large proportion of power generation comes from lower-emitting gas.

Kazakhstan, Turkmenistan, Uzbekistan, and Azerbaijan are large natural gas producers, where low domestic regulated prices help address social issues and support local industries. On the other hand, national oil companies will probably face long-term risks and might struggle to find partners to develop new projects. Moreover, hydrocarbons produced in the region are relatively weak in terms of environmental footprint and many countries could face pressure in sensitive sectors as they try to raise the low gas prices their economies rely upon.

“Increased natural gas demand should also help Uzbekistan and Azerbaijan’s net exports and investment growth. However, the big increases in CCA-6 energy producers’ trade balances this year are likely to soften in 2022 and beyond if, as we expect, energy and metals prices fall back. We recently raised our oil price assumptions and now expect Brent to average $65 per barrel (/bbl) in 2022, up from $60/bbl previously, before moderating to $55 per barrel in 2023 and beyond as supply picks up. Although this is still below the $64/bbl 2019 average,” reads the report.

“Azerbaijan, Kazakhstan, and Uzbekistan are dependent on developments in energy markets. In case of a hard energy price pullback, their economic activity could be directly hit, with knock-on effects for supporting sectors region-wide. CCA-6 energy importers, albeit more diversified, still have significant exposure to commodity cycles, including directly through exports of minerals and metals, or indirectly through remittances from migrant workers in oil-exporting countries (especially Russia). This underscores the region’s vulnerability to a possible subdued outlook for commodity prices,” S&P added.

“In the medium to longer-term, the changing trade dynamics with China and Europe’s decarbonization initiatives pose a risk to the region's current commodity heavy export-led growth model. Kazakhstan and Uzbekistan will see slower future export growth related to China in the medium to long term if the latter moves away from energy-intensive and construction-heavy investments. However, this process may be partially offset by China’s decarbonization efforts. To achieve its carbon neutrality target by 2060, the Chinese government plans to increase the use of renewable energy sources, as well as natural gas, at least in the medium term,” the authors of the report noted.

“Kazakhstan and Uzbekistan possess significant reserves of natural gas, although the potential to increase natural gas production might be challenging, as indicated by a downward trend in recent years. Another risk stems from Kazakhstan and Azerbaijan exporting most of their oil to Europe, which could see lower demand due to future EU decarbonization initiatives.”