April is the month people involved in Kazakhstan’s massive Kashagan oil-field project have been waiting for, and many have been dreading.
The consortium operating the oil field is due to present the results of inspections that determined why the frequently delayed project suspended work in September, just weeks after production finally started when the pipeline started leaking.
And more importantly, North Caspian Operating Company (NCOC) should be able to give a new date for when production would start again.
But it appears the news is worse than most expected.
NCOC is expected to release findings soon that show toxic gas has corroded the pipelines leading from the offshore field to the mainland; that those pipelines will need to be totally replaced with much more durable, and expensive, new pipe; and that it will be at least two years until commercial production starts at Kashagan.
Kashagan has proven an elusive prize. The field contains an estimated 13 billion barrels of recoverable oil reserves, one of the largest oil fields discovered in the last 50 years.
But as Jennifer DeLay, senior editor at "FSU Oil & Gas Monitor" (a publication of the Scotland-based Newsbase group), told Qishloq Ovozi, the project is already almost a decade behind schedule and the estimated cost of the project has shot up from the original $50 billion to $135 billion, and that is not counting the cost of the new pipe that seems now to be required.
Some now refer to Kashagan as “Cash-all-gone.”
Steve Levine, who I think anyone would agree is a leading authority on Kazakhstan’s oil sector, wrote on April 6
that the new pipeline will need to be made of a nickel-based alloy that can cost 10 to 15 times more than ordinary pipeline.
And according to Mr. Levine, two nearly 90-kilometer pipelines -- one for oil and one for gas -- will need to be replaced.
Kazakh officials have said the failure of Kashagan to start production is reducing the country’s economic growth forecasts by 2-3 percent.
And the Kazakh government is showing its impatience. The Ministry of Environmental Protection hit the NCOC with a $737 million fine on March 7 for flaring sour gas at Kashagan’s processing plants during the brief time the field was producing.
Just before the announcement of the fine, then-Prime Minister Serik Akhmetov said production at Kashagan could start again by the middle of this year or maybe sometime in the second half of the year.
As mentioned, this is only the most recent problem in a project that has been plagued by setbacks from the start.
DeLay of the "FSU Oil & Gas Monitor" explained that going into the project everyone knew there was big money to be made but there were also some serious challenges to be overcome.
She said high reservoir pressure and high sulfur content posed technical difficulties, and the project “also had to build a platform capable of operating in ice conditions, since the field is located in a section of the Caspian Sea that freezes over in the winter.”
The shareholders in the NCOC consortium have also changed since it was formed in 1993 under a different name (Kazakhstancaspiishelf).
DeLay recounted that Italy’s Eni was appointed to act as the project’s operator in 2001, the same year BP and Statoil sold their shares to other partners and left the project. Eni became the operator of the project in part because the Italian company pledged to start production at Kashagan by 2005.
In 2003 BG followed, but only after the company tried to sell its shares to Chinese companies CNOOC and Sinopec, a move that was halted when consortium partners invoked their preemptive privilege. Kazakhstan’s government took half of BG’s shares, transferring them to KazMunaiGaz, and the other half of BG’s shares were shared out among the consortium partners.
ConocoPhillips tried to sell its 8.4-percent stake to India’s ONGC-Videsh in 2012, but that sale was preempted by the Kazakh government, which later sold the shares instead to the China National Petroleum Corp (CNPC), the same month Kashagan started production.
Currently the consortium comprises KazMunaiGaz 16.81 percent, Eni 16.81 percent, ExxonMobil 16.81 percent, Shell 16.81 percent, Total 16.81 percent, CNPC 8.40 percent, and Japan’s INPEX 7.56 percent.
Some have speculated the Kazakh government might use this latest postponement in production at Kashagan to acquire more shares in the project. The Kazakh government has previously used large fines as a bargaining chip to get shares in projects on Kazakhstan’s territory.
There is also a 2007 law in Kazakhstan that gives the government the right to alter or cancel contracts with foreign oil companies if their activities are deemed to be threatening the national interest.
But DeLay said she did not think the Kazakh government would take such a step just yet. “I would speculate that the government might not be willing to take such a step any time soon, given that yet another shift in the shareholder lineup might lead to even more delays.”
The NCOC website does state: “The Kashagan project is one of the most challenging projects ever undertaken.”
-- Bruce Pannier with contributions from Yedige Magauin of RFE/RL's Kazakh Service