Kazakhstan: Kashagan Oil Soon to Flow

EurasianNet, Oct 15, 2012
by Joanna Lillis

In the Caspian Sea’s choppy waters off western Kazakhstan’s coast, D-Day is approaching on a man-made mound called D Island. It is the nerve center of the Kashagan field, the world’s biggest oil discovery in decades.

D Island -- a futuristic splash of fluorescent orange and gleaming silver set against the Caspian’s blue-gray waters -- is now gearing up for the historic day when it will start pumping oil. For energy conglomerates wishing to cash in on their investments, and for President Nursultan Nazarbayev’s administration, waiting eagerly -- and not always patiently -- to reap the benefits of the oil bonanza 70 kilometers off Kazakhstan’s coast, the oil cannot start flowing a moment too soon.

That landmark is expected to arrive in 2013 -- eight years behind the optimistic schedule first set by the oilmen of Kashagan. The field, discovered in 2000, represented the most spectacular oil strike since Alaska’s Prudhoe Bay in 1969. Elated by the find, developers were initially blind to the logistical challenges Kashagan would throw at them -- and the ballooning costs and slipping production schedules that would enrage Astana.

The North Caspian Operating Company (NCOC), the seven-firm consortium developing Kashagan, says it will produce first oil sometime in 2013. It is more circumspect when it comes to Astana’s expectation -- voiced by Oil and Gas Minister Sauat Mynbayev -- of seeing the oil flow in March. Astana hopes first oil here will catapult Kazakhstan -- which sits on 3 percent of global recoverable oil reserves -- into the ranks of the world’s top 10 oil producers. It currently ranks 18th.

Roughly 75 by 45 kilometers in area, Kashagan’s size is “spectacular,” says NCOC Planning Director Alain Guenot. It contains reserves of 35 billion barrels of oil, of which NCOC estimates 8-12 billion barrels are recoverable. In a world where many major oil finds of the past century are depleted, this is a juicy prize.

Bringing Kashagan to the threshold of commercial production has been a rocky road for the seven companies comprising NCOC: ExxonMobil, Shell, Total, Eni, and Kazakhstan’s state energy firm KazMunayGaz (KMG), each holding a 16.85-percent stake); plus ConocoPhillips (8.49 percent) and Japan’s INPEX (7.56 percent).

Kashagan has confronted immense logistical challenges, ranging from its geographical position in the landlocked Caspian -- which has meant shipping equipment thousands of kilometers by canal -- to extreme climatic conditions.

The oil lies over four kilometers below the seabed under shallow waters that freeze for five months a year, in temperatures that can plunge to minus 30C during winter. Icebreakers can take 36 hours to reach Kashagan from the main supply port at Bautino to the south, navigating drifting pack ice.

With harsh conditions making conventional oil rigs unfeasible, Kashagan developers laboriously constructed a small archipelago of islands out of local limestone, transported out to sea and positioned using GPS technology, then encased in an impermeable geomembrane. D Island, the hub of this hi-tech operation, is the only one that will be staffed after production starts.

Clearing all the logistical hurdles has translated into cost overruns and delays. The setbacks, in turn, caused acrimony between the Kazakhstani government and the consortium -- then led by Eni -- in 2007, when it was announced that first oil was delayed to 2010, five years behind the original schedule. The deadline has since slipped to 2013.

Overall costs had spiraled from the original estimate of $57 billion to $136 billion (later to a reported $187 billion). These days, NCOC is reluctant to divulge costs, saying only that over $30 billion has already been spent on the first phase of development. Media reports suggest this first phase will cost closer to $46 billion by the time the first oil flows.

Under a 2008 deal, NCOC was created to assume responsibilities as operator, and the state energy firm KMG more than doubled its stake at the expense of the other partners. NCOC now maintains it has got the field back on track. But as Kashagan rides a wave of optimism ahead of first oil, there could be troubled waters ahead.

Initially the field will pump 370,000 barrels of oil per day, but it has the potential to reach a whopping 1.5 million barrels daily – the equivalent of Kazakhstan’s current daily output. Reaching that output target depends on Astana and the consortium agreeing on a strategy for the next phase. In 2011 Astana vetoed a design concept for it, and there is currently no agreed plan in place on how to proceed.

Analysts say some partners are concerned they will not make sufficient profits before their Production Sharing Agreement (PSA) expires in 2041.

“Under the terms of the current PSA, Phase II is uneconomical unless oil prices are high,” Kate Mallinson of London-based consultancy GPW told EurasiaNet.org. “International oil companies are therefore eager to obtain certain guarantees and conditions from [Kazakhstan], including contract extension.”

According to Mynbayev, ConocoPhillips plans to sell its Kashagan stake (the firm refused to comment). Bloomberg has reported that ExxonMobil and Shell are seeking increased stakes and pressuring Astana for a PSA extension beyond 2041, so they can reap the benefits of what they have sowed.

When EurasiaNet.org sought comment from Shell, company representatives referred inquiries back to NCOC. Representatives of ExxonMobil, meanwhile, declined to comment on “rumors or speculation,” adding that it “plans to remain a major investor” in Kazakhstan. INPEX was the only partner to confirm to EurasiaNet.org that it would “continue to participate” in Kashagan. Total and Eni did not respond to requests for comment.

NCOC representatives brush aside suggestions of trouble ahead. “I don’t think anybody wants to say ‘we’re not going invest further in this field’,” says Guenot. “It’s a gigantic field.”

When the black gold starts flowing, it may be hard to find a way back. “The oil,” Guenot says, “is not going to go away.”

Editor's note: Joanna Lillis is a freelance writer who specializes in Central Asia.

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