Kazakhstan looks to Kashagan return, higher oil prices to revive output

Kazakhstan looks to Kashagan return, higher oil prices to revive output
Kashagan, which is expected to see output restarted on September 23-24.
By Naubet Bisenov in Astana September 19, 2016

Kazakhstan’s troubled giant oil field Kashagan in the Caspian Sea will start producing oil on September 23 and could reach commercial output levels as soon as a month later, government officials have told bne IntelliNews. This, coupled with higher oil prices, is expected to boost the country’s overall oil production, which has taken a hit as low oil prices make production at some of the country’s ageing fields unprofitable.

Speaking at Future Energy Forum held in Astana on September 14-15, Kazakh Energy Minister Kanat Bozumbayev confirmed that “production at the world’s largest field Kashagan will start in the coming weeks”. On September 9, CEO of the national oil and gas company KazMunayGas, Sauat Mynbayev, told a government meeting that Kashagan would start pumping oil on September 24, with commercial production at the field to be reached in mid-November.

Askar Dzhaldinov, spokesman for the Kazakh Energy Ministry, gave bne IntelliNews a more optimistic timeline, saying the authorities are planning to launch production on September 23 so that Kashagan can reach commercial production of 75,000 barrels per day a month later on October 23. This, the spokesman admitted however, depends on the state of new oil and gas pipelines connecting the offshore field with the onshore facilities.

Kashagan, under development by the international consortium NCOC and its predecessors since 2001, finally came on stream on September 11, 2013, but a leak on the gas pipes running to the onshore processing facility at Bolashak led production to be halted two weeks later. An attempt to restart operations was abandoned on October 9, 2013. The consortium has since replaced the pipelines at a cost of $3bn, although the now much lower global price of oil and uncertainty over the still-rising production costs make the field’s prospects uncertain.

The government now expects the average oil price to stand at $55.3 per barrel at the end of 2016 and $64.25 per barrel at the end of 2017. The government also expects the launch of production at Kashagan to add a modest 1mn tonnes of oil to the country’s output in 2016, bringing it to 75mn tonnes, but adda more significant 3mn-4mn tonnes in 2017. The country produced 80mn tonnes of oil in 2015, against 81mn tonnes in 2014.

In July, the shareholders of the Chevron-led Tengizchevroil joint venture, which is developing the major Tengiz field, reached an agreement on a $37bn expansion of the project. This will increase the field’s annual output by 12mn tonnes to 39mn tonnes in 2020. 

“I confirm that the increase in output will mostly come from Kashagan – 3mn-4mn tonnes at Kashagan next year – and in the following years it will come from Kashagan and Tengiz because $37bn invested in Tengiz should translate into 12mn tonnes in three years’ time,” the Kazakh energy minister told bne IntelliNews.

The relatively buoyant oil price, hovering around $50 per barrel at the moment and expected to rise next year, is raising hopes that it will help revive production at Kazakhstan’s existing fields. However, this largely depends on both the price of oil and production costs at these fields, Bozumbayev warned. “I would be very happy if production in Kazakhstan grew at our old traditional fields, but those fields that had been conserved were those with reserves hard to recover and exhausted fields,” Bozumbayev explained to bne IntelliNews. “I believe the price should be a bit higher – perhaps $75[ per barrel] in order for these fields to develop.”

KazMunayGas has been “wisely” investing in new methods of drilling in the Ozen field, which is showing good output growth, and in adopting new reinjection technologies in other fields, Bozumbayev noted.

Ozen, developed by KazMunayGas’s Ozenmunaygas production arm, increased output by 2% year on year to 2.8mn tonnes in the first half of 2016. It increased output by 3% y/y to 5.5mn tonnes in 2015. “Traditional oilfields should also be developing and their output should also go up but all this depends on production costs and the price of oil,” Bozymbayev told bne IntelliNews. “No-one wants to work at a loss,” he concluded.