Naubet Bisenov in Astana -

Kazakhstan still hopes that the embattled giant offshore Kashagan field in the Caspian Sea will rekindle its faltering oil and gas industry, despite the low global price of oil and uncertainty over the production costs. 

First Deputy Energy Minister Uzakbai Karabalin told a news conference during the Kazenergy Eurasian Forum, being held in the Kazakh capital Astana on September 29-October 1, that the government still expected Kashagan to start producing oil by the end of 2016, more than three years after the initial attempt, and to quickly commence commercial production and reach phase one capacity in “a matter of months”.

“The date for the start of production at Kashagan is known and it is [around] the end of 2016,” Karabalin said, answering bne IntelliNews’s question. “No changes have taken place in the schedule of all the work planned for completion as of today.”

“As for reaching the commercial production rate, in fact for such fields like Kashagan it is not a problem given all the equipment operates properly and stably. The output of 70,000-75,000 barrels per day is a matter of months,” he said. “And this is quite possible.”

Leaking pipes linking the offshore field with onshore facilities forced a halt in oil production at the field just two weeks after the launch in September 2013.   An attempt to restart operations was abandoned on October 9.

At the same time, having learnt a lesson from hasty announcements in the past, Karabalin cautioned that the achievement of commercial production at 75,000 barrels a day and sustained production of 375,000 barrels a day during the phase one development depended on the “stable” work of the equipment installed in the field.

“As for achieving 375,000 barrels per day, it will also depend on how stable the equipment’s work is,” he said. “This is an attainable figure and the capacity of the equipment installed in the field and the Bolashak onshore facility is designed for this figure. It is now hard to specify the timeframe because we need first to achieve proper work during the initial output,” he added.

The first deputy energy minister was also circumspect about the production cost of oil produced by Kashagan as cost overruns and the low price of oil have given rise to concerns over the feasibility of the project.

“In order to make estimates of production costs at Kashagan first oil should be extracted from there. The estimates depend on what conditions will be at that time and depend on expenditure [on the project] and on return on investment placed. And they also depend on for how long the project will.” Karabalin also dismissed the link between the current price of oil and the long-term viability of Kashagan’s development, but noted that it depended on investors’ expectations of recouping their investment in the project.

“Major projects like Kashagan, which run for 40 years of contract period and after that they are exploited for similar periods, never live through only periods of stable price, as during these 40 years prices changes many times up and down. That’s why if you ask whether Kashagan will be developed, yes, it will be,” he explained. “Another matter is how quickly investors will be able to recover investment they have placed and how quickly the project pays off and this does depend on price falls and increases.”

The low global price of oil has impacted on the profitability of oil extraction in some Kazakh fields in which the reserves are rapidly depleting. Last October, Karabalin said the average production cost of Kazakh oil was about $50 per barrel, while his superior Energy Minister Vladimir Shkolnik said in February that the production cost at Kazakhstan’s flagship Tengiz and Karachaganak fields was the “lowest” in the country and that he was “sure it will be the same at Kashagan”.

In view of this, the Kazakh government anticipates that the country’s oil output in 2016 will be reduced, as some producers will have to suspend production to minimise losses. “The forecast for the next year is 77mn tonnes at $40 per barrel, 79mn-80mn tonnes at $50 per barrel and 73mn tonnes at $30 per barrel,  said Karabalin. “We have reduced an output target to 79.5mn tonnes and this is a small reduction relatively to an almost 50% decrease in the price of oil.”

In addition, the government cut forecasts of oil output to 92mn tonnes from earlier expectations of 104mn tonnes in 2020. “Those volumes we project for the following years take into account the launch of production at Kashagan,” the Kazakh first deputy energy minister added.