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Qishloq Ovozi

An oil rig and infrastructure of D Island, the main processing hub, at the Kashagan offshore oil field in the Caspian Sea on August 21
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
Amid events in Ukraine, the European Union is pondering how to decrease its dependence on Russian energy supplies. Already there is talk in Europe, and further away, that as the door to Russian resources closes a bit, the Southern Corridor should finally be opened and realize its potential.

The major hold-up for the Southern Corridor has been the reluctance of Caspian Basin countries, particularly the Central Asian countries, to sign on to any deals until they could see work starting on pipelines. The European side has been waiting for the supplier countries to commit contractually to energy projects before starting construction of pipelines.

But both sides were able to delay making big decisions because of Russia, which supplied Europe with gas and oil and which provided Caspian Basin countries with existing energy-export routes.

Now, not only is the EU more determined to reduce its dependence on Russian energy supplies, but there is also the real possibility that sanctions or an outright suspension of Russian gas through Ukrainian pipelines could leave EU countries with insufficient energy supplies and Caspian Basin countries with a glut of oil and gas.

Kazakhstan’s oil and gas minister, Uzaqbai Qarabalin, told parliament on April 7 the country is looking for additional export routes and named the reason why the issue is important now: fear that sanctions on Russia might leave Kazakhstan without its primary export route.

Kazakhstan exports about one-third of 82 million tons of oil the country produces via Russian pipelines. Qarabalin suggested Kazakhstan’s export potential via Russian pipelines could become limited and said, “We have to think about other possibilities.”

While Qarabalin did not specifically mention the Southern Corridor, he did speak about using Kazakhstan's Caspian Sea port at Aktau, which is one of the links the EU incorporates into its plans for the corridor.

The EU “Southern Corridor” project envisages a network of pipelines, railways, roads and tanker fleets carrying oil and gas from Azerbaijan, Kazakhstan, Turkmenistan, and possibly Uzbekistan, to Europe.

The project has made slow progress since the plan was unveiled in Prague in May 2009, just months after a dispute between Kyiv and Moscow left large areas of eastern and central Europe with greatly reduced supplies of gas.

But there has been some progress in the Southern Corridor scheme in the last five years, and Aktau is one example.

Aktau is undergoing massive expansion and renovation and could, according to Qarabalin, ship up to 20 million tons of oil annually within a couple of years.

Kazakhstan is building up its tanker fleet, as is Turkmenistan, to ship oil and other petroleum products from the eastern Caspian to the Caucasus in the western Caspian.

Late last year, Kazakhstan and Azerbaijan renewed an agreement -- suspended over a pricing dispute in 2010 -- for shipping Kazakh oil through the Baku-Tbilisi-Ceyhan pipeline. This year, Kazakhstan is due to export 4 million tons of oil through the BTC pipeline. Turkmenistan is also regularly sending tankers to Baku with oil to be pumped into the BTC.

Qarabalin also mentioned Georgia’s Black Sea port at Batumi, where Kazakhstan owns the marine terminal. This route involves transportation from Baku by rail; and in order to better service shipments between the Caspian and Black seas, Azerbaijan has in the last few years purchased hundreds of special railway wagons to carry oil and LNG and upgraded the railway lines.

Azerbaijan is the critical link for the Southern Corridor. U.S. Secretary of State John Kerry specifically mentioned Azerbaijan as part of Europe’s energy future during a U.S.-EU Energy Council meeting in Brussels on April 2. Kerry said part of the priority for European energy security “is going to be to look at how do we get more natural gas through...the Southern Corridor, from Azerbaijan to Turkey and on to Europe.”

Azerbaijan and Turkey have already started a new gas route in the Southern Corridor with the Trans-Anatolian Pipeline (TANAP), which in Europe will become the Trans-Adriatic Pipeline (TAP) and bring up to 20 billion cubic meters (bcm) of Azerbaijani gas through Greece and Albania, across the Adriatic Sea to Italy.

There are also several projects that could significantly boost the amount of gas Caspian Basin countries could send to Europe via the Southern Corridor. Among them are the Trans-Caspian Gas Pipeline from Turkmenistan to Azerbaijan, the White Stream pipeline to carry Caspian gas to Romania and Ukraine, and even an evolved version of the Nabucco pipeline project, once the EU’s choice for a gas pipeline between the Caspian and Europe.

More routes would be needed as Russia currently supplies Europe with some 280 bcm of gas and between 70 percent and 80 percent of Russia's 230 million tons of oil exports goes to Europe.

But the economic need for the Southern Corridor to open wide has never been greater, and both Europe and the countries of the Caspian Basin have new impetus to see the plan realized.

-- Bruce Pannier

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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 the dots to shed light on why those processes are occurring, and identify the agents of change.

Content draws 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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