Kashagan operator rules out production at giant Kazakh field for this year

By bne IntelliNews April 29, 2014

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Kazakhstan's giant oil field Kashagan will not resume production this year, operator North Caspian Operating Company (NCOC) officially confirmed on April 28. The admission is unlikely to impress Astana, which has made no bones about its displeasure over continued delays on a project it had earmarked to lead economic growth.

Speculation that the $50bn Kashagan could face delays lasting years has been building through April. A senior official from France's Total - one of the partners in the international consortium behind NCOC alongside Exxon Mobil, Royal Dutch Shell, Eni,  China's CNPC, Japan's Inpex and Kazakh state oil and gas firm KazMunaiGaz - warned on April 22 that output is unlikely to be resumed before late 2015. 

Erbolat Dossayev, Kazakhstan's minister for economy told the FT a week later that oil may not start flowing again from the offshore Caspian field until 2016. It was the first public admission by the government that the project would fail to restart this year. 

NCOC had warned of the same on April 22, as it announced it was nearing the end of an investigation into damage to pipelines linking the project to the shore. On April 28 it announced that the results show that the pipelines will likely have to be fully replaced.

"The current assessment, based on investigation results to date, is that both oil and gas lines might have to be fully replaced, to be confirmed once the ongoing investigation is completed," the consortium said in a statement. "The restart of production will depend on the results of the investigation which are due by the end of Q2, but production is not expected to resume in 2014."

"The operator is now developing a full replacement plan, which is expected to be finalised by mid-2014," the statement continued. NCOC said it has already launched the tender process on pipeline purchases to "avoid losing time".

Production at Kashagan, was launched on September 11, 2013, but a leak on the gas pipeline running to the onshore processing facility at Bolashak saw production halted by September 24. An attempt to restart operations was abandoned on October 9. The Kazakh government had originally hoped to see Kashagan start producing oil and gas in 2005.

Astana said earlier this year that it expected Kashagan to resume production in July, and forecast it would produce 2.5-3m tonnes of oil by the end of the year. However, Dossayev admitted on April 14 that there was a risk the field would not be able to reach industrial production in 2014. 

The delay is the latest in a string of setbacks for the enormous Kashagan field, which had originally been scheduled to start production in 2005, after it became the largest reserves discovery in the last three decades in 2000. However, the challenges of getting the project up and running - particularly the climate and high level of sulphur in the deposit - have caused constant delays.

That has infuriated Kazakhstan, which had pinned its hopes of the mega-field to boost it into the top tier of global oil producers, and in turn turbo-charge economic growth and the country's recovery from the crisis. Instead, Astana is facing growing complaints from the population, with a 19% devaluation of the tenge in February a particular focus. At the same time, the continued disputes between Astana and NCOC - which has included bitter tax fights and fines for environmental damage - are also viewed as a black mark on the country's reputation amongst foreign investors. 

Speaking to the FT on April 27, Dossayev said the delay of Kashagan output to 2015 represented a loss of 0.5 percentage points of GDP this year. NCOC announced that Chairman and Managing Director Pierre Offan will resign on May 1.

Astana, meanwhile, has announced it plans to increase oil production by 2.5% this year by raising output at other projects. The government is now in talks with the country's other fields.

 

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