AIM-listed oil and gas producer Caspian Sunrise PLC (LON: CASP) has been in the news recently with updates on its shallow well 142 which has added new production to its existing capacity in Kazakhstan lifting shares up by 45% over the past month.
However, it has been an up and down ride for the company since the start of the year as sanctions against Russia and most recently against Russian oil have affected the prices of the company’s oil exports.
Caspian Sunrise produces oil at the BNP contract area in Western Kazakhstan which is located near the Tengiz oil field, one of the world’s deepest giant oil fields operated by the Chevron, KazMunayGas and Kazakh subsidies of ExxonMobile and Lukoil.
Most of the company’s current production is from several shallow fields which are part of the MJF structure with producing wells reaching depths of 2.192 and 2,450 metres. The company is also working on developing several deep structures which are subject to a slow-moving licence upgrade application. Like many extraction companies,
Caspian Sunrise just started recovering from the damage inflicted in 2020 when it had to halt some of its operations because of Covid and when a sharp drop in oil prices led it to incur losses before tax of $1.7 million, compared with a profit of $0.9 million in 2019.
Operations picked up in 2021 and initially looked good in 2022 as oil demand and oil prices started rising again but the civil unrest in Kazakhstan forced the company to briefly stop all operations in January. It delayed the re-drilling of the MJF shallow well 142 but when the work was eventually completed in May it doubled the production capacity compared with at the start of the year. It added another 1,400 barrels of oil a day to existing production, bringing the total capacity on the site to 4,000 barrels of oil equivalent a day. The company also plans to re-drill MJF shallow wells 141 and 151 which would further increase the capacity of the shallow structures at the BNG area to 5,000 bopd before the end of the year.
Russia sanctions and oil exports
The war in Ukraine and subsequent sanctions on Russia were a mixed affair for the company. On the one hand, international oil prices started rising, leaving the $16/bbl seen in 2020 far in the rear-view mirror. However, the discount between Brent crude and Urals oil which Caspian Sunrise produces widened to between $30-$35 per barrel.
The sanctions also exposed the company’s vulnerability in terms of export logistics. Oil produced in Kazakhstan is piped from West Kazakstan across Russian territory into a Black Sea port from where it is shipped to Europe and elsewhere. The US and UK have already introduced sanctions on Russian oil and as of Tuesday, the European Union has done the same, with the exemption of the pipelines going through Hungary.
Some of the oil that is exported by Russian tankers is now transhipped under different flags, adding to transport costs which also include pipeline costs.
At the same time, the value of the Kazakh tenge has dropped in line with the Russian rouble resulting in the company’s local expenses including wages becoming much lower in US dollar terms.
The main issue now is whether the company will be able to continue exporting oil via Russian pipelines or whether it will have to opt for a different alternative. Still, the recent sharp increase in oil prices could make up for all the additional costs associated with sanctions complications.
One final thought
What makes us at the Armchair Trader a little bit nervous about any company is when it is impossible to reach a real person to talk to. This is the case with Caspian Sunrise. The website only offers a defunct Kazakh phone number for the company’s chairman and the number for the company’s brokers who are advised not to talk to shareholders. In this day and age when social media and Google allow copious access to information, this lack of transparency is somewhat disconcerting.
