Kashagan consortium awards $3bn pipeline replacement contract

By bne IntelliNews November 7, 2014

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The consortium developing Kazakhstan's giant offshore oil field Kashagan have selected German and Japanese companies for contracts worth $3bn to completely replace a 200km leaking pipeline network that forced production to a halt in October 2013.

German Butting and EBK combined will supply 131.4km of pipes; the remaining 69.9km will be sourced through Japanese JSW, sources familiar with the deal told bne. Deliveries will start in March 2015 and continue throughout the year until the end of December.

The overall value of the contracts, which include coating and other related services, is likely to exceed $3bn, Reuters quoted Kazakhstan's deputy Energy minister Uzakbai Karabalin as saying on November 5.  

“The replacement plan is under finalisation and expected to be available by the end of 2014,” Antonio Vella, head of ENI's upstream operations, said during a conference call on October 30. “The material of the new pipeline is X60 [a measure of the pipe's strength] carbon steel cladded with corrosion resistant alloy (CRA) and 100% of the pipeline material has been ordered,” he added. CRA materials are believed to be the most resistant and expensive option for the replacement plan.

Considered the largest oil field ever discovered outside the Middle East, with recoverable reserves between 9bn and 13bn barrels of oil, delays and cost overruns have hampered developments at Kashagan so far. The operating consortium NCOC has already spent more than $50bn, five times early projections, and full field development costs over the 40-year concession timeline are now forecast at $136bn.

Ballooning costs have gone hand in hand with recurring delays, often associated with the field's size and technical complexity. Initially planned to come online in 2005, production did not start until September 2013.

However, operations were forced to a new, abrupt halt only a few weeks after kicking off when leaks came to light in the 200km pipeline network carrying corrosive and poisonous hydrogen sulphide (H2S), known in the industry as sour gas, from the offshore field in the Caspian to onshore facilities.

An internal inspection indicated potential cracks at the welds of the pipeline spools as well as on some at the pipeline bodies, and the consortium opted for full replacement of the leaking pipes originally supplied by Japanese companies Sumitomo and JFE and installed by Italian Saipem, an oil contractor controlled by Italian ENI, which holds the consortium operatorship for the development of phase 1.

The consortium now aims at resuming production in 2016 when the pipeline will be fully replaced, although initially  “the contribution will be a fraction of the normal [phase 1] 370,000 barrels per day (b/d) production,” Vella said on October 30.  

Kashagan is expected to peak at some 1.6mn b/d once it reaches full production stage. In the few weeks it produced oil during September and October 2013, production did not go beyond 70,000b/d.

NCOC currently includes Eni, ExxonMobil, Shell and Total, holding 16.8% each, Kazakh national oil and gas firm KazMunaiGas with a 16.87% stake, China's CNPC and Japan's Inpex with, respectively, an 8.33% and 7.6% stake. NCOC is transitioning towards a new joint venture renamed North Caspian Joint Venture (NCJV) that will become Kashagan's new operator.

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