Kashagan said in crisis (again)

By bne IntelliNews July 1, 2011

bne -

Shell and its partners developing the Kashagan oilfield will have to ask the Kazakh government for an extension to the 2013 deadline for the first oil from the troubled project, in what would be a humiliating move that could have dire consequences for the future of the project, according to The Daily Telegraph.

The 370,000 barrels a day (b/d) of oil from the first phase of the Caspian Sea offshore project, which has suffered repeated delays going back as far as 2005 even as costs have soared from an initial forecast of $57bn to $136bn, is vital to the Kazakh government's economic plans. As such, Kazakh Oil Minister Sauat Mynbayev has repeatedly threatened the North Caspian Operating Company (NCO) developing the field - which as well as Shell includes Eni, Total, ExxonMobil, ConocoPhillips, Inpex and KazMunaiGas - with heavy financial penalties if it misses the 2013 final deadline.

A last-ditch plan to meet the 2013 deadline involved pumping at least 50,000 b/d of oil directly onshore, bypassing an unfinished processing plant on an artificial island. However, the newspaper quotes an unnamed source at an oil services company in Atyrau, the Caspian Sea harbour city where the project is based, as saying that at an acrimonious meeting a fortnight ago the partners rejected this option, meaning the consortium now has no choice but to ask the oil ministry for an extension. "Our people went to a workshop 10 days ago, and were told that the partners had rejected the 'early oil' concept because it was not sufficiently worked out, and so they now had a brief to go back and ask for an extension to their 2013 deadline," the unnamed source told the newspaper.

A spokesman for the NCO said the consortium had not altered its plans to hit the 2013 target. "We are still working towards the target of the end of 2012 and a lot of effort is going into meeting that date," he told the paper.

Only in May, Eni CEO Paolo Scaroni was insisting that the Kashagan oilfield, which has recoverable reserves of over 10bn barrels, will pump its first oil by the end of 2012 or early 2013. "First oil is expected sometime in December 2012, or two to three months afterward," Scaroni said.

Heading for the exits

The consequences of another delay in the project are uncertain, but are likely to further sour the mood of the foreign partners, which have struggled with the technical complexities of the oilfield. Its oil lies in high pressure reservoirs in shallow waters with a depth of less than 10 metres. Temperatures vary from 40°C in summer down to as low as -40°C in winter, meaning that during the winter the sea freezes over, putting oilrigs in danger from shifting ice packs, while summer storms can cause rapid fluctuations in the sea level.

A long drawn-out dispute over the lengthy project delays and cost overruns was resolved in late 2008 only when the foreign shareholders agreed to cede shares allowing state-owned KazMunaiGas to increase its holding to 16.81%, from 8.33%. The second phase of the project, for which Shell has been appointed operator and is intended to lift production to more than 1m b/d, has effectively been put on ice after the Kazakh government rejected the latest development proposal from the partners as too expensive. Shell then closed its office in Atyrau at the end of May on the orders of the NCO. "The second phase of the project of Kashagan is unfolding much as phase one did - marked by a series of disputes between the consortium and the government over project costs, resulting in delays to the timetable for oil production," says Andrew Neff of IHS Global Insight.

The partners are already balking at the price they are having to pay for their inclusion in a consortium they fought to be part of when the project began over 10 years ago. In June, ONGC, India's state oil company, and GAIL, the Indian gas utility, said in June they were in talks jointly to buy part of ExxonMobil's 16.8% interest in Kashagan. ConocoPhillips has already signalled it's willing to exit the project as the US major looks to sell off assets to reduce its debt.

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