MONTREAL - Western energy majors in
Kazakhstan's offshore Kashagan oil development
project in the northern Caspian Sea have asked the
government in Astana to raise the budget for the
first phase of the project by 22%, due to delays
and cost overruns.
The new figure, at $46
billion, compares with the current first-phase
cost estimate of $38.4 billion and is nearly
double the original estimate of $24 billion.
Formidable technical obstacles have
delayed the development timetable. Temperature
extremes range from -30 to +40 Celsius (-25 to
+100 Fahrenheit), and the shallow waters no more
than a few meters deep freeze over on average for
at least four months
every year. The oil
deposit itself is nevertheless rather deep and
under very high pressure, capped by a dome of
natural gas that in turn is overlain by a salt
dome.
The high sulfur content, estimated
at 16-20%, must be treated and removed so as not
to corrode pipelines. Finally, in addition to
provisions for ecological conversation,
Kazakhstan's law forbids that the gas be flared;
any quantities not re-injected must be siphoned
for domestic consumption.
The consortium's
international partners would themselves bear the
cost during the development period, but would be
reimbursed for it later in kind with barrels of
oil after output begins. They have already
invested $33 billion anticipating such recompense.
As much as one-fifth of that total may,
however, be contested by the government and in the
long run not reimbursed, Bloomberg News reported,
citing an unidentified informant in Kazakhstan's
Oil and Gas Ministry. The project's full
development costs are estimated at $187 billion,
but this figure is likely also to increase
further.
The Italian firm Eni, US-based
ExxonMobil, the Anglo-Dutch Shell, and Total of
France all hold stakes of 16.66% in the
consortium. BG Group was a member of the
consortium until 2004, when it sold its share.
ConocoPhillips and Inpex have smaller stakes,
while Kazakhstan's KazMunaiGaz (KMG), which was
entirely absent from the original
KazakhstanCaspiiShelf (KCS) consortium formed in
1993, holds a plurality stake of 16.81. BP and
Statoil sold their stake in the project to its
other partners in 2001. The KCS morphed as from
1997 into the Offshore Kazakhstan International
Operating Co, operated by the Eni-led AgipKCO
joint venture.
A further restructuring of
the development consortium at the end of the last
decade, which helped to resolve taxation questions
under Kazakhstani law that had come to plague the
Western partners, gave KMG a more central
managerial oversight role.
That
restructuring created the North Caspian Sea
Production Sharing Agreement, now managed by the
newly created North Caspian Operating Co (NCOC).
Astana's intent in promoting the restructuring was
also to improve information transparency. KMG now
assures the functioning NCOC's permanent
secretariat as the titular operating
responsibility rotates among the Western partners.
Discovered in 2000, the field's start-up
production date was first set for 2005, then
postponed to 2008, and then again to 2010, and yet
again to 2014. Smaller-scale so-called
"industrial" production is scheduled to begin by
the end of this year, but even that schedule
appears now to be in doubt, as some reports
suggest this may not occur until the second half
of 2013.
Under the current schedule, sure
to be modified, "experimental" production, that
is, up to 370,000-450,000 barrels per day (bpd),
would not end until 2014, when "commercial"
production would begin, gradually doubling until
2018-2019, when second-phase development is
projected to start. An eventual production rhythm
of 1.5 million bpd is later planned sometime in
the 2020s. However, it is likely that output will
not commence until the second half of next year at
the earliest, rather than at the end of 2012 as
foreseen earlier.
As things stand,
therefore, the initial "experimental" phase may
not end until 2016, as it will at first produce
only 75,000 bpd and according to the US Energy
Information Administration will ramp up only at an
annual rate of 125,000 bpd. The deposit is
estimated to have 7-9 billion recoverable barrels
of oil (some estimates range up to 12-13 billion)
out of 38 billion total reserves. It is the
largest known oil field outside the Middle East,
the fifth-largest in the world in terms of
reserves, and the largest discovered since the
Prudhoe Bay (Alaska) strike confirmed in 1968.
The repeated delays in the development of
the offshore Kashagan deposit together with
continuing unexpected increases in the level of
sunk costs may eventually raise the question of
the very profitability of the project, at least in
the eyes of the Western investors.
Their
contract for exploitation of Kashagan's resources
expires in 2041, and although they have made
noises about seeking an extension of that date in
order to recoup unforeseen expenses, the
Kazakhstani government has so far given no
indication of any sympathy to such a request.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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