Wednesday, October 01, 2014


Qishloq Ovozi

Shake-Ups At Kashagan

An aerial view shows artificial islands that have been built as part of the infrastructure for developing the Kashagan offshore oil field in the Caspian Sea. (file photo)
An aerial view shows artificial islands that have been built as part of the infrastructure for developing the Kashagan offshore oil field in the Caspian Sea. (file photo)
The setbacks for Kazakhstan's enormous Caspian oil field, Kashagan, seem to just keep coming.
 
Over the course of recent weeks, it was officially confirmed that production at the field, once targeted to start in 2005, will be delayed another two years, the head of the consortium operating the project resigned, Kazakhstan's state energy company restructured its participation in Kashagan, and now the structure of the companies operating the project is reportedly about to undergo a change.
 
Qishloq Ovozi noted earlier that the two pipelines leading from the offshore oil field to Kazakhstan's mainland, each some 90 kilometers long, would probably need to be entirely replaced. That has been officially confirmed since then. Now project officials, Kazakh officials, and oil industry analysts predict production will not start any sooner than the end of 2015 and possibly not until sometime in 2016.
 
Last autumn, as production was finally starting, the North Caspian Operating Company (NCOC), the international consortium running the Kashagan project, was targeting production of some eight million tons of oil from the field this year and some 12 million tons in 2015. Production started in September 2013 and was suspended weeks later when it was discovered the pipelines were leaking.
 
A May 11 report from the Tengrinews.kz website canvassed analysts about the losses caused to Kazakhstan due to this latest delay. The figures ranged from $2 billion to more than $20 billion.
 
The announcement in the second half of April that the pipelines needed to be replaced seems to have set off a chain reaction of events.
 
RFE/RL's Kazakh Service, Azattyq, reported on April 23 that Pierre Offant, the managing director of NCOC announced he was resigning. He left the post on May 1.
 
On April 29, Kazakhstan's state oil and gas company KazMunaiGaz (KMG) announced on its website that it was withdrawing from the KMG Kashagan BV shareholders structure. KMG Kashagan BV is one of the partners in NCOC.
 
KMG said the decision was made on April 25 by the "Sole shareholder of KMG -- 'Samruk-Kazyna.'"
 
Samruk-Kazyna is Kazakhstan's sovereign wealth fund -- it is like the big winner in a game of Monopoly. It owns the railroad company (Kazakhstan Temir Zholy), the electric company (KEGOC), the nuclear company (Kazatomprom), KMG and all or part of other companies that include an airline and the postal service.
 
KMG Kashagan BV owns 16.8 percent of the Kashagan project. The KMG press release said the company has an interest in making a new deal on "agreement about contribution and transference of KMG Kashagan BV shares between KMG, CooperativeKazMunaiGaz and KMG Kashagan BV."
 
The significance of the transfer of KMG's shares in the project to two of its subsidiaries is not immediately clear. The Kazakh news website Ak Zhaik reported  that "Kazakhstan's mass media are perplexed, why KMG requires to delegate the management of 16.8% shares in Kashagan project simultaneously to its two 'daughters.'"
 
Then, in early May, there were reports that NCOC was about to change the project's operator.
 
The current "agent companies," the four companies comprising NCOC, are Agip KCO, an affiliate of Italy's Eni, ExxonMobil Kazakhstan, Shell Development Kazakhstan, and the NC Production Operations Company (NCPOC), which pairs Shell and Kazakhstan's state energy company KazMunaiGaz.
 
Tengrinews.kz reported on May 4 that a new company incorporating Agip, NCOC, and NCPOC would be created. Tengrinews.kz said NCOC had confirmed that information but no official statement about the plans has been made so far.
 
Most analysts in Kazakhstan said the move was natural given that the project has been a failure to date.
 
After the April announcement of this latest delay in production, Kazakhstan's Minister of Oil and Gas Sauat Mynbayev said it was "annoying that the simplest piece of equipment in the project [the pipeline] is the one that failed."
 
"We are hugely disappointed by the way the project is progressing," he added.
 
Hugely disappointed might be putting it mildly. As Jennifer DeLay of the Scotland-based FSU Oil & Gas Monitor told Qishloq Ovozi, Kashagan's operators knew from the start they would be working in a shallow area of the Caspian Sea that froze over in winter and that there were "serious technical challenges posed by high reservoir pressure and the high sulphur content of the oil from the field."
 
DeLay also recalled that the development of the Kashagan field was originally expected to be approximately $50 billion and that has since ballooned to some $136 billion, not counting the cost of removing the faulty pipeline and replacing it with a more durable, and expensive conduit.
 
And, before ending this look at the latest misfortunes of Kashagan, we must include the seemingly inevitable scandal that accompanies so many Central Asian energy deals.
 
Eni, through Agip KCO, was appointed to act as the project's operator in 2001 after the Italian company pledged to launch production by 2005. Its failure to meet that goal led, eventually, to the formation of NCOC in early 2009.
 
On April 1, in an article titled "Kashagan to be ruined by Italian convict and our businessmen in ministerial chairs," the Atyrau-based newspaper "Ak Zhaik" cited reports from the Italian press about the Milan prosecutor's office investigating Eni in connection with at least $20 million in bribes paid to "a certain Kazakhstan politician" during the first stage of the project's development, which lasted until 2007.
 
The Milan prosecutor's office handed over information about the probe to Kazakh law enforcement officials who "showed no interest in the information from Italy and didn't start any investigation of who exactly in Astana got this money."
 
-- Bruce Pannier, with contributions from Yerzhan Karabek of RFE/RL's Kazakh Service
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About This Blog

Qishloq Ovozi is a blog by RFE/RL Central Asia specialist Bruce Pannier that aims to look at the events that are shaping Central Asia and its respective countries, connect some of the dots to shed light on why those processes are occurring, and identify the agents of change. Content will draw on the extensive knowledge and contacts of RFE/RL's Central Asian services but also allow scholars in the West, particularly younger scholars who will be tomorrow’s experts on the region, opportunities to share their views on the evolving situation at this Eurasian crossroad. The name means "Village Voice" in Uzbek. But don't be fooled, Qishloq Ovozi is about all of Central Asia.

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