Kashagan super-field will raise Kazakhs to Saudi oil status

December 06. Central Asia Newswire

By Martin Sieff

Kashagan super-field will raise Kazakhs to Saudi oil statusKazakhstan is ending its 2010 year of chairing the Organization for Security and Cooperation in Europe (OSCE) on a high note. Its oil minister announced in New Delhi Monday that the super-giant Kashagan oil field, one of the largest in the world, will be coming online ahead of schedule in 2012.

The timing could not be better from the Kazakhs’ point of view. They have made a robust recovery from the global financial crisis and recession of 2008-9 when three of their five largest banks in the country defaulted and had to be restructured.

But now the euro is stumbling over the financial crises in Portugal, Ireland and Greece, the so-called PIG nations, while fears grow around the world about the stability of the U.S. dollar and the solvency of the U.S. government. U.S. plans to pump another $600 billion of liquidity into its domestic economy has also raised fears of U.S. and consequent global inflation.

However, against this background, the 28-nation International Energy Agency (IEA) based in Paris issued last month a report stating that the age of cheap energy was over. It forecast prices of $100 per barrel of oil within five years and $150 per barrel within 25 years.

In the face of soaring global oil demand – driven heavily by strong economic expansion in both China and India – the strongest hedge Kazakhstan could have against global financial instabilities would be to confirm another massive source of oil coming online. And that is exactly what is happening.

Kazakh Oil Minister Sauat Mynbayev made the announcement during a visit to New Delhi on Monday.

“Contractual obligation was to start in October 2013 but they think they will begin it from the end of 2012,” he said, according to a report from the Reuters news agency.

Kashagan coming online ahead of schedule looks likely to confirm another projection about the crucial global importance of Central Asian energy – and of Kazakhstan’s Caspian Basin oil reserves in particular – that was made only last week in Washington.

The Energy Information Administration of the U.S. Department of Energy said that by 2019, Kazakhstan will rise to become one of the five biggest annual producers of oil in the world. That will put it in the same class as Russia and Saudi Arabia.

(The United States is also in the “top five.” But it is such an enormous consumer of oil, far more per capita than any other major nation in the world, that it has to import vast quantities.)

Previous estimates have projected that by 2015, Kazakhstan’s oil production may exceed 3 million barrels per day, or more than 1 billion barrels per year. Further,Caspian crude is of high quality, like Persian Gulf oil and unlike, for example, Venezuela’s large but very “sour” deposits.

The Kashagan field is defined as a “super oil-field.” When it eventually is brought into full production it will be the second largest producing field in the world, only slightly behind the legendary Ghawar oil field in Saudi Arabia. But the Ghawar field is a mature field which some analysts believe may be coming to the end of its productive cycle.

Even if that is not the case, the Ghawar field may soon require large inputs of natural gas to restore high pressures to allow easy pumping and extraction to continue. By contrast, the Kashagan field is still a virgin field which is just about to start its productive life cycle.

Kashagan is owned and operated by four international oil majors – Agip, Total, ExxonMobil and Shell which each own 16.8 percent, or one-sixth of the development. The other major owner is Kazakhstan’s national oil company KazMunaiGas (KMG). ConocoPhillips and Japan’s Inpex Holdings are minority owners.

The road to bringing Kashagan online has been a long and rocky one. The oil majors had originally been confident it would be in full production as early as 2005.

But the geology of the field beneath the Caspian Sea is extremely complicated and winter weather conditions, compounded by the freezing of the sea, added to the problems and delays. This made for major rows between the government of Kazakhstan and the oil majors. In 2008, the production date was postponed until 2013.  The cost of development soared too.

However, today’s oil prices, which tumbled to as low as $10 per barrel briefly in early 2009, have soared again to a muscular $80-$85 per barrel.

When one factors in the even higher barrel price levels projected by the IEA report last month, this means the government of Kazakhstan and its international partners in the project all stand to more than recoup the extra billions of dollars of investment they had to put in.

In New Delhi Monday, Oil Minister Mynbayev predicted that even before Kashagan came fully online, Kazakhstan’s annual oil production was likely to rise to 90.3 million tons in 2011 and 91.4 million tons in 2012.

Kazakhstan produced 84.2 million tons of crude and gas condensate last year, an 8.1 percent increase on 2008.

When Kashagan comes online, Kazakhstan will become a long-term strategic producer and exporter of high quality crude oil comparable with Saudi Arabia.

At that point, Central Asia will reach the same global strategic significance as the Middle East has held over the past 75 years.