Kashagan dream lures unlikely bedfellows

from the Financial Times..

July 8, 2013

By Guy Chazan

Flying over the Caspian Sea, an exotic sight comes into view – an archipelago of islands rising up out of a shallow lagoon, protected by a series of curved, elongated atolls.

But as you get closer, the islands and reefs turn out to be man-made. They are in fact a series of state-of-the-art industrial facilities built to extract crude from Kashagan, one of the world’s largest – and most challenging – oilfields.

Kashagan is a supergiant. When it was discovered in 2000, in Kazakhstan’s sector of the Caspian, it was the world’s largest oil find in 30 years. When it finally comes into production later this year, it will catapult Kazakhstan into Big Oil’s premier league.

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“By the 2020s, we will be one of the top five global oil exporters,” says Daniyar Berlibayev, deputy chairman of KazMunaiGas (KMG), the Kazakh state oil company.


Kashagan, in particular, has proved mind-numbingly complicated. Its oil is in an extremely high pressure reservoir, mixed with levels of hydrogen sulphide that are so high they can kill a man in 30 seconds. The northern part of the Caspian, where it is located, is like a shallow paddling pool which the winter wind can whip up into ice drifts thick enough to crush an oil rig. Normal offshore platforms are of no use in such an environment – hence the artificial islands, made of millions of tons of rock pile-driven into the seabed.


Another complication is the unwieldy nature of the consortium developing the field, a roll-call of supermajors that includes ExxonMobilRoyal Dutch ShellEniTotal and KMG – each with 16.81 per cent: ConocoPhillips with 8.4 per cent; and Inpex with 7.56 per cent. No one company has a big enough stake to fully take charge, which has slowed decision making.

It is challenges such as these that have turned Kashagan into the world’s most expensive oil development. The first phase alone, which will bring production to 300,000 barrels a day, has cost $40.6bn. It is not surprising that at one point, the project’s nickname in the industry was “cash all gone”.


However, it is not only the technical issues that play havoc with the project. Rising resource nationalism in Kazakhstan, which coincided with the ramp-up in the oil price in the last decade, has not helped. Angered by escalating costs the Kazakh government launched a major renegotiation of the Kashagan contract in 2007 that took months and ended with KMG expanding its stake in the project. The authorities have often slapped other ventures with huge environmental penalties and tax claims.

“Kazakhstan has always had this problem that once investors do a deal with the government, it always turns round and changes the terms,” says one western lawyer in the commercial capital, Almaty…

Link to the entire article: http://www.ft.com/cms/s/0/413c4d60-e308-11e2-9bb2-00144feabdc0.html#axzz2YZNa23cv


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