Kazakh Kashagan: Who is guilty and what to do

March 12. Trend

By Elena Kosolapova

Kazakh Kashagan: Who is guilty and what to doKazakh Kashagan oil and gas field was expected to be one of the most profitable projects in the world but has become a great disappointment for the country and its operators.

Kashagan is one of the largest oil and gas fields of the world. The total oil reserves of the field amounts to 38 billion barrels, while some 10 billion out of them are recoverable reserves. Moreover there are large natural gas reserves at the Kashagan field – over one trillion cubic meters.

The field is being developed by North Caspian Operating Company (NCOC) which is formed now by Italian Eni, Kazakh KMG Kashagan B.V.( KazMunaiGas subsidiary), French Total, U.S. ExxonMobil, Royal Dutch Shell, each of which owns 16.81 percent share, Chinese CNPC- 8.4 percent and Japanese Inpex- 7.56 percent.

Among the field’s developers were such companies as U.S. ConocoPhillips, British Petroleum, Norwegian Statoil, British BG Group, U.S. Phillips Petroleum which sold there stakes in the project earlier.

Thus the most experienced and reputable world companies worked and are working at the field.

However, the project has been experiencing a lot of projects since the very beginning of its development. The field has experienced several delays in oil production since 2005. Moreover the project has considerably grown in price and became the most expensive energy project in the world, according to the CNN Money rating. Eventually oil production at Kashagan launched in September 2013 was totally unsuccessful.

Oil production at the field was launched on September 11, 2013 and was suspended on September 24, though following detection of gas leak in the onshore section of the gas pipeline running from D Island to the onshore processing facility Bolashak. Oil production was resumed on October 6 as the affected joint was repaired and stopped again on October 9 after another seep was detected. The direct cause of pipeline leaks was cracking under the influence of sulfide compounds, according to the preliminary results. If these results are confirmed the project operator will have to replace the entire pipeline system from the field to the onshore processing facility. Such repair works will require a lot of time and money.

Kazakhstan’s environment ministry announced it would impose a fine of 134.2 billion tenge ($737 million) on the NCOC consortium and Agip KCO, operating the project, because of damage to the environment caused by a gas leak.

The questions are how could such experienced companies fail in their calculation of project’s price, time of development and possible problems? Why the pipes chosen by these companies turned out unsuitable for Kashagan oil? And what could be done to resolve the situation?

Kazakh ecologist and member of the advisory board of the Caspian Sea Rescue Fund, Serikjan Mambetalin believes that technologies for Kashagan development do not exist yet.

“The best Japanese pipes were chosen for the project… But even such pipes could not sustain pressure, temperature and aggressive environment at the field and influence of mercaptan and sulfur containing in its oil,” Mambetalin told Trend.

He noted that oil production specialists all over the world assess Kashagan as the most complicated field due to its location in shallow water, freezing of waters and movement of ice in this region, high pressure and aggressive and poisonous content of its oil.

Kashagan project was originally on the verge of adventurism, Mambetalin believes.

He reminded that the northern part of the Caspian was recognized as conservation area in the Soviet times. Soviet ecologists new that that there were a huge oil field in the northern part of the Caspian Sea even in 1970s, according to Mambetalin. But they understood that this field’s structure is as complicated as the structure of the other large Kazakh field Tengiz located on shore.

“After fire at Tengiz’s 37th well in 1985 which could not be extinguished for a year, specialists realized that it was better not to touch oil in the Caspian Sea northern part. Because if they cannot stop fire in the bare steppe, what will happen in the sea,” he said.

Expert believes the companies engaged in Kashagan development knew the risks of the project from the very beginning. However since northern part of the Caspian Sea is an area of geopolitical interest for many countries it was important for multinational companies not to be late in getting of a piece of this field.

Serikjan Mambetalin on behalf of Kazakh ecologist urges Kazakh Government to ban oil production in northern Caspian Sea for several years to prevent ecological disaster. He thinks that Kashagan developers should also be interested in such scenario because their losses from possible oil spills at Kashagan will be comparable with the losses of BP after oil spill in the Mexican Gulf in 2010.

“Bioresources of the Caspian Sea are worth $2 trillion and in case of large-scale environmental disaster at Kahsagan, its developers will not have enough money to reimburse damage to other Caspian countries. Safe technologies [for Kashagan development] will be invented but not today and not tomorrow. Maybe in 20 years,” he said.

Senior analyst of the Agency for Research of Investments Profitability Murat Abulgazin also believes Kashagan is of geopolitical interests for many countries.

“Kashagan field due to huge hydrocarbons reserves influence the world’s oil and gas policy, and will be able to radically change the balance of geopolitical powers in Eurasia and the world in case of full development and production. The western companies just “staked out” Kashagan field in the 1990s. But since these companies have other available sources around the world they did not hastened to develop it. Caspian hydrocarbons are more of commercial rather than of consumer interest for them,” Abulgazin told Trend.

Due to several delays the pipes were in the aggressive environment of the Caspian Sea for a long time and corroded as a result. This corrosion caused the leaks at the field, he thinks.

Expert believes that involvement of real hydrocarbon consumers such as China and India in the project will help to resolve Kashagan’s problems and fasten its development. Some steps in this direction have been already taken. Chinese CNPC joined the NCOC consortium developing the field in 2013. Indian ONGC also shows great interest for Kashagan and wanted to buy a stake in the project.

Meanwhile Kazakh authorities give no specific forecasts concerning oil production at Kashagan.

In early March head of Kazakh National Oil and Gas Company KazMunaiGas Sauat Mynbayev, said the restart of Kashagan would probably happen in the second half of this year.

“However, we should speak about it in terms of probability, and I withhold comments on the volume of extraction yet,” he said.

Earlier forecasts of Kazakh authorities concerning Kashagan were much more optimistic and certain. In particular the country intended to enter the top ten largest oil-producing countries due Kashagan oil. Now these plans are delayed to long term.

Thus the future of Kashagan remains unclear at least until announcement of the final results of the incident investigation.