Kashagan: key to Kazakhstan’s future
Once it comes on stream, the giant Kashagan field will establish Kazakhstan as a major oil exporter, says Oliver Adderley
AS KAZAKH AUTHORITIES grapple with the global recession, politicians and bankers privately comment that things would look a lot different had the Kashagan project come on stream as planned in 2008. This is because Kashagan, the huge 38 billion barrel offshore ‘elephant field’, in shallow waters some 70km south of the city of Atyrau, will double the country’s oil production to more than 3 million barrels a day within a few years of coming on stream in the last quarter of 2012 or early 2013.
That will mean a huge ongoing boost to the country’s export income and a shot in the arm for government revenues big enough, and durable enough, to transform the country’s balance of payments and turn the country into a net capital exporters.
At last year’s annual Kioge oil and gas conference in Almaty, Energy Minister Sauat Mynbaev summarised the outcome of many months of often fraught negotiations between the government and the consortium of international oil companies developing the Kashagan project. In return for pledges of heavy continuing investment by the oil companies, and a deal to double the shareholding of state energy corporation KazMunaiGaz (KMG), the government, he said, reluctantly accepted both higher cost estimates and a new timetable for first oil, which will now start to flow eight years later than the original target date of 2005.
The negotiations were sparked off by the oil companies’ admission, two years earlier, that costs had once again spiralled way beyond previous estimates and that another five years of heavy investment were required before oil could start to flow safely from the offshore field to the onshore processing facilities at Eskene, north of Atyrau.
The government accepted that a large part of the cost inflation reflected the steep rise in global prices for steel and other key construction materials and the competition for scarce and expensive drilling rigs and specialist services, as oil prices soared to a peak of $147 a barrel in July 2007. Kashagan was especially exposed to cost inflation because of the huge logistical difficulties involved in getting men and equipment to the offshore site of what one senior oil man describes as “the most complex engineering project in the world”.
Even so, the rise in ‘life of project’ costs from an originally estimated $29 billion to $136 billion has been eye-watering and forced the oil companies themselves to review their own shortcomings over the first years of the project. But with so much money already sunk in the project, and so much hanging on a successful outcome, the government finally agreed to accept the higher estimates, after imposing financial penalties and a deal under which KMG emerged as a co-equal in the consortium set up to exploit the field. The two sides also agreed that first oil production of around 150,000 barrels a day (b/d) would start flowing from the offshore production platforms in the last quarter 2012, or early 2013.
The fact that the initial flow will be both later and only a third of the originally expected 450,000 b/d is compensated for by a major up-rating of the full regime flow, which is now scheduled to rise to 1.5 million b/d before the end of the decade and stay that way for at least two decades.
But for that to happen, several billions of dollars worth of drilling and processing equipment still have to be installed and all concerned have to be absolutely sure that the deadly sulphurous gas associated with the oil can be re-injected safely into the field 5km below the shallow Caspian Sea at super- high pressure. The fact that similar techniques have already been successfully introduced at the onshore Tengiz and Karachaganak fields, which are geologically similar in key respects, has raised confidence in a successful outcome.
The government was not the only party to be dissatisfied with slow progress at Kashagan since commercial quantities of oil were confirmed in the summer of 2000. Shareholders and senior management of the oil companies have been even more dismayed at the prospect of another five years of investing around $3 billion a year without a return on the investment until 2013.
Confirmation that the bone-shaped field, some 75km long and up to 45km wide, was indeed one giant structure triggered the go-ahead for the first stage of a project which, at the time, was expected to cost around $10 billion and produce first oil by 2005, although that date was only reluctantly agreed by the oil companies in the face of heavy political pressure for an early date.
The unhappiness of both government and the oil companies with the delays and spiralling costs since then meant that last year’s protracted government/ consortium negotiations were as much a forensic examination of what had gone wrong for the oil companies as for the governments
Painfully, members of the AGIP-KCO consortium set up to manage the project in 2000 came to the conclusion that much of the blame lay with the way the oil companies themselves had underestimated the technical and logistical challenges and cobbled together a compromise solution to the big question of who would be in charge of operating the project. France’s Total made clear it would not accept management control passing to Exxon, and the US company was adamant it would not be pushed around by the French. Shell was preoccupied with other problems. In the end, Italy’s ENI was chosen as operator as the compromise candidate acceptable to the other three members of the ‘big four’ stakeholders.
The ‘big four’ were ENI, Exxon-Mobil, Shell and Total. They each held an 18.5 per cent stake in the consortium alongside smaller shareholders Conoco- Phillips, Japan’s Inpex and the Kazakh state energy corporation KMG. After passing what was soon to become a poisoned chalice to ENI’s operating company, AGIP, and setting up the AGIP-KCO consortium, the other oil majors failed to put in the top-level managerial and technical talent needed to supplement ENI’s own technical and other skills. The oil majors had only formed a consortium because the task of developing a massive oil deposit in a greenfleld offshore site, with huge climatic, logistical and safety challenges, at the frontier of several advanced technologies was clearly way beyond the resources of any one of them on their own. But although Italy’s privatised former state oil company is a global operator, it has nothing like the deep pockets, managerial depth and technical expertise in deep and offshore drilling of its bigger partners. Given the scale of the task, each of the partners should have put in their best people and applied their most developed technology to the project – but they didn’t, leaving ENI to struggle with a task beyond its capabilities. The shallow upper Caspian Sea, where Kashagan lies, is ice-bound for more than four months a year, while the main access to the inland sea is through the Russian canal and river system, which is also ice-bound for months, or the over-stretched Russian road and rail system. The alternative is a complex multi-nodal passage involving several transhipments from Bulgarian or Romanian ports across the Black Sea to the Georgian ports of Poti or Batumi, and then by road or rail across Georgia and Azerbaijan to Baku. Only from Baku can cargoes be shipped across the Caspian to ice-free Aktau or the Kashagan supply base at Bautino all year round.
This logistical nightmare gives the consortium only a six-month window each year through which to funnel outsized cargoes too big for road or rail. Another serious problem has been obtaining visas and work permits for the key foreign personnel needed to push forward such a complex, high- tech project. With highly specialised engineers costing up to $18,000 a day to hire, any delay proved hugely expensive.
Any failure to get men and equipment on-site as the weather window opened added hugely to costs. But so did major mistakes, such as under-estimation of the number of drilling islands that were needed and the location of offshore accommodation modules too ^ close to production areas. These had to be expensively re-located away from the wells in view of the extra- stringent health and safety rules in force at all the deep, sub-salt oil and gas projects in the region.
The toughest rules are required because of the deadly nature of the hydrogen sulphide and other poisons that make up more than 17 per cent of the hot, sour and corrosive gas which reaches the surface together with the oil. The need to secure zero leakage and 100 per cent protection for personnel is an even stronger imperative at an offshore operation such as Kashagan, where sleeping and working quarters are pressurised and sophisticated emergency evacuation vessels are on- call and on-site 24 hours a day. The need to re-think, re-locate and re-engineer the offshore housing configuration alone led to an estimated extra $2 billion of costs, but there were other costly mistakes as well.
Once oil starts to flow, some of the associated gas will be carried ashore by pipeline, processed and used to power the huge refining complex at Eskene some 30km north of Atyrau. But the bulk will be re-injected into the deposit at over 800 times atmospheric pressure. Reinjection is needed to keep up the high pressure that must be maintained -» to make sure that 9 billion barrels of oil can be recovered from the field over its lifetime.
All these issues, and others, were thrashed out during lengthy negotiations. The soul-searching allowed all sides scope for self-criticism and serious re-thinking as well as mutual recrimination – but the freezing of all new contract signing for the duration of the talks itself added an estimated 30 months of delay to the project. It was probably worthwhile, however, as the eventual outcome was a radically different organisational plan – and a much greater sense of realism all round.
Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 30-34
Tags: foreign companies, Investment, Kazakhstan, oil & gas, Projects
