The History Of Kashagan Offshore Oil Field Project

Kazakhstan Seeks Better Offer From Oil Majors To End Karachaganak Gas Row

Kashagan, a vast oil field in the Caspian Sea, sent its first crude for export after about 16 years in development and more than $50 billion of investments. The case history of Kashagan involves numerous conflicts, public hearings, as well as court cases.

The Kashagan field is an offshore oil field in Kazakhstan’s zone of the Caspian Sea. Discovered in 2000 and named after a 19th-century Kazakh poet from Mangystau, the field is considered the world’s largest discovery in the past 30 years, combined with the Tengiz field.

Located 80 km off the coast of Kazakhstan near Atyrau, the Kashagan site lies in the northern area of the Caspian Sea. Water depths range fro m 2 m to 6 m, and temperaturesfluctuate between -40°C and 40°C in a year.

Kashagan is the most important field in the 11 blocks falling under the North Caspian Sea Production Sharing Agreement (NCSPSA), covering a total of 5600 km² in the Kazakhstan part of the Caspian Sea. Other fields falling under the same PSA are Kashagan South West, Aktote, Kairan, and Kalamkas. This PSA was concluded between the government of Kazakhstan and the Offshore Kazakhstan International Operating Company (OKIOC) in November 1997.

At the time, the consortium committed to invest USD 7 billion in the project to start oil production in 2005, and to build a pipeline for oil export before 2013, which would have to accommodate the planned production volume of 30 million tons per year.

Background

The story of the field dates back to early 1992, when an exploration program announced by the Kazakh government sought the interest of more than 30 companies to partake in the exploration. In 1993, the Kazakhstan Caspian shelf was formed, which consisted of Eni, BG Group, BP/Statoil, ExxonMobil, Royal Dutch Shell, and Total, along with the Kazakh government. This consortium lasted 4 years until 1997, when seismic exploration of the Caspian Sea began.

Upon completion of an initial 2D seismic survey in 1997, the company became known as OKIOC. In 1998, Phillips Petroleum Company and Inpex joined the consortium. In May 2000, first oil was found at Kashagan with initial estimates suggesting an oil field with reserves of no less than 11 billion bbl. The Kazakh government said the reservoir at Kashagan was likely a continuation of the giant Tengiz oil field on the east coast of the Caspian Sea.

But in July 2000, Kazakhstan’s President Nursultan Nazarbayev said the fieldcould hold at least 50 billion bbl of crude. “Today, I can tell you that this is the largest recently discovered field in the world,” he said.

The consortium changed when it was decided that one company was to operate the field instead of a joint operatorship as agreed upon. Eni was named the exclusive operator in 2001. In the same year, BP/Statoil sold its stake in the project to the remaining partners. The project was renamed Agip Kazakhstan North Caspian Operating Company NV (Agip KCO).

In 2003, BG Group attempted to sell its stake in the project to two Chinese companies, China National Offshore Oil Corporation (CNPC) and Sinopec. However, the deal did not go through because of the partners’ exercise of their pre-emptive privileges. Eventually, in 2004, the Kazakh government bought half of BG’s stake in the contract, with the other half shared among the other Western partners in the consortium that had exercised their pre-emptive rights.

The sale was worth approximately USD 1.2 billion. The Kazakh stake was transferred to the state-owned oil company KazMunaiGas. On 27 September 2007, the Parliament of Kazakhstan approved a law enabling the government to alter or cancel contracts with foreign oil companies if their actions were threatening national interests.

KazMunaiGas further increased its stake in January 2008, after its partners and the Kazakh government agreed on compensation for the probable 5-year delay that was taken in developing the field. Eni operated the project under the joint venture company name of Agip KCO. Following the agreements reached on 31 October 2008 between Kazakh authorities and co-venturers under the NCSPSA, operatorship of the NCSPSA was formally transferred from Agip KCO to a new company, North Caspian Operating Company (NCOC), on 23 January 2009.

In October 2008, Agip KCO handed a USD 31 million letter of intent for front-end engineering design work on Phase 2 of a joint venture involving Aker Solutions, WorleyParsons, and CB&I. WorleyParsons and Aker Solutions are also engaged in Phase 1, carrying out engineering services, fabrication, and hookup.

In November 2012, Oil and National Gas Corporation Videsh agreed to buy ConocoPhillips’ 8.4% stake. The Kazakh government, however, decided in July 2013 to use its preemptive right to buy ConocoPhillips’ stake, which it sold to CNPC later that year.

In August 2013, KazMunayGaz agreed to sell an 8.33% stake in Kashagan to CNPC, leaving the Kazakh company with a slightly higher shareholding than before of 16.88%.

Field’s Geology

The field is a carbonate platform of the Late Devonian to Middle Carboniferous age. The reef is about 75 km long and 35 km wide, with a narrow neck joining two broader platforms, Kashagan East and Kashagan West. The top of the reservoir is 4.5 km below sea level and the oil column extends for more than 1 km. The seal is Middle Permian shale and Late Permian salt.

The reservoir consists of limestone with low porosities and permeability. The oil is light, with 45 °API gravity with a high gas/oil ratio and a very high H2S content of 19%. The field is heavily overpressured, which presents a significant drilling challenge.

The figures for oil in place range between 30 billion bbl and 50 billion bbl with a common publicly quoted figure of 38 billion bbl, but because of the reservoir’s complexity, the recovery factor is considered relatively low, approximately 15% to 25%.

The Caspian Sea is 30 m below sea level. Most of its mean water depth is 208 m, although the northeast area is considerably shallower. Temperatures can fall below -40°C in winter and a coating of ice, several meters thick, forms in this part of the Caspian Sea for many months.

Discovery well Kashagan East 1 was a single vertical well that was drilled to a total depth of 5200 m in 2000. During tests, the well flowed at a rate of 600 m³ of oil and 200,000 m³/d of gas on a 32/64-in. choke. Kashagan West 1 was the second discovery well. Drilled in 2001, tests showed that the well flowed at a rate of 3,400 BOPD, while the oil gravity measured between 42 °API and 45 °API. Kashagan East 2 was drilled in late 2001 to a depth of 4142 m and flowed at a rate of 7,400 BOPD.

Challenging project

As well as being one of the largest projects in oil history outside the Middle East, the Kashagan has proved to be one of the most complex. It combines an unprecedented array of characteristics that demand unique technological and logistical solutions.

The Kashagan project has a very high technical complexity due to natural circumstances. The climate is extreme continental with cold winters, hot summers, and drastic variations of temperature.

The waters in the northern part of the Caspian Sea are frozen for 4 to 5 months, from November to March, and the ice thickness averages about 0.6 m to 0.7 m. The combination of ice, shallow water, and sea level fluctuations represents a significant logistical challenge.

Because of the environmental conditions, icebreaking supply boats are used. Most icebreakers work by using the weight of the ship to crack the ice, but this does not work in the shallow waters of the Caspian, so shallow-draught Arcticaborg icebreakers from Finland’s Kvaerner Masa shipyards were brought in to break the ice, using specially designed propellers. Special tugs were also designed to work in these waters, and arrived in the Caspian in September 2002.

Other technological challenges include reservoir depth of 5000 m; high reservoir pressure at –800 bar; high hydrogen sulphide (H2S) content (16% to 20%); management of byproducts such as sulfur; and the use of sour gas reinjection into the reservoir.

Appraisal drilling was started in May 2001 at Kashagan East using the 6,000-ton ice-resistant Sunkar barge. The first appraisal well was completed in mid-2000 and was followed by another at Kashagan West, located approximately 40 km apart, and was completed early the following year. Both wells were successful with production estimated at up to 20,000 BOPD of 42 °API to 45 °API oil, at a high pressure, high gas/oil ratio, and a H2S level between 18% and 20%.

However, drilling the first well at Kashagan from the Sunkar floating rig led to delays in production, so the OKIO consortium decided to develop an offshore complex of artificial islands. It constructed a number of rock structures that became known as “artificial” or “drilling” islands. In total, four drilling islands, Island A and Island D for Kashagan and two separate islands for Aktote and Kairan, have been built.

The four islands, together with a number of other islands, were linked to onshore operations by pipelines. The islands are also used to collect and store oil and ensure the initial separation of oil and gas.

Another of Kashagan’s major challenges is the presence of highly toxic and corrosive H2S in the associated natural gas. With H2S concentrations of 18% to 20% by volume emanating from Kashagan’s wells, the field will produce sour gas with one of the highest levels of H2S encountered in the offshore industry.

According to Agip, since production would reach 14 million MTPA of oil, it would entail the largest amount of H2S gas to be reinjected into high-pressure reservoirs offshore in order to avoid massive sulfur production and gas flaring. To force the gas back into the reservoir, discharge pressures of up to 760 bar are required, the highest pressures demanded to date by a gas reinjection project in the industry.

According to a report by the European Union citing Russian and Kazakh scientists, including professor Muftach Diarov, the director of the Scientific Centre of Regional Ecological Problems at the Atyrau Institute of Oil and Gas, the extraction of oil under the huge pressure from subsalt wells, in addition to reinjection of gas, amplify the potential threat for an ecological catastrophe because of the increased potential for technogenic earthquakes.

Numerous Setbacks

According to an NCOC statement, the project started production on 11 September 2013, but operations had to be stopped on 24 September because of a gas leak in a onshore section of a gas pipeline running from Island D to the onshore processing facility at Bolashak.

The affected pipeline transports oil and gas from the island to the facilities. Each of the pipelines is approximately 90 km long, 28 in. in diameter, and of a design specification to be resistant to the water and H2S content found in the Kashagan hydrocarbons. The pipeline’s pools were supplied by two Japanese companies, Sumitomo and JFE, while the Italian company Saipem was contracted for laying the pipes. The field is likely to be delayed by 2 more years while 200 km of pipeline is being replaced.

Kazakhstan’s ex-oil minister, Uzakbay Karabalin, said during the June 2014 World Petroleum Congress that his country will have to “grin and bear” the continued delays at the field, with the full-scale project not beginning until 2016. Karabalin said that multiple delays at the field have had a “significant impact” on its economy, but they would not bring down the its economy or oil industry.

“There are clusters of delays that need to be resolved,” he said. “All challenges got concentrated. Last year, we were happy, really happy with how the wells were performing normally,” he said at the conference. “But when it comes to a very small telemetric object—the pipe—it turns out to be a complicated problem. We just have to grin and bear it, and keep working hard.”

The history of the Kashagan oil field

1998: The US’ Phillips Petroleum and Japan’s Inpex buy into the consortium, and the Offshore Kazakhstan International Operating Company (OKIOC) is formed.

August 1999: OKIOC starts drilling the first exploration well under the NCSPSA.

May 2000: First oil is found at Kashagan with initial estimates suggesting an oil field with reserves of no less than 11 billion barrels. The Kazakh government says the reservoir at Kashagan is likely a continuation of the giant Tengiz oil field on the east coast of the Caspian Sea.

July 2000: Kazakhstan’s president Nursultan Nazarbayev says the field could hold at least 50 billion barrels of crude. “Today I can tell you that this is the largest recently discovered field in the world,” Nazarbayev says.

December 2000: OKIOC members argue over which company will become operator of Kashagan.

February 2001: Partners finally agree to give Eni operatorship of Kashagan, agreeing to begin commercial output by the end of 2005.

June 2001: BP and Statoil announce they want to leave the project, and Total agrees to buy BP’s 9.5% stake and Statoil’s 4.8% stake in OKIOC.

August 2001: Eni forms a new operating company, Agip Kazakhstan North Caspian Operating Company (Agip KCO).

June 2002: The Kashagan partners all exercise pre-emption rights over the sale of BP and Statoil’s stakes to Total. As a result, Kashagan operator Eni, BG, Shell, Mobil (now ExxonMobil) and Total all see their interests increase from 14.29% to 16.67%. The remaining stake shared by Phillips (now ConocoPhillips) and Inpex also increases to 16.67%.

June 2002: Kashagan is declared commercial after a two-year appraisal program. Preliminary estimate of the recoverable reserves said to be in the range of 7-9 billion barrels.

July 2002: BG says recoverable reserves are more likely in a range of 9-13 billion barrels.

March 2003: BG agrees to sell half of its 16.67% stake to China’s CNOOC and half to Sinopec for a total of $1.23 billion, set to mark BG’s exit from the field.

May 2003: All Kashagan partners — bar Inpex — agree to exercise pre-emption rights over BG’s sale to CNOOC and Sinopec. The operating consortium becomes: Eni, ExxonMobil, Shell and Total (20.372% each), ConocoPhillips (10.186%) and Inpex (8.33%).

November 2003: First commercial oil delayed to 2008. Kazakhstan says it will seek compensation of up to $150 million from Agip KCO for the delay in bringing Kashagan on stream.

February 2004: Agip KCO takes final investment decision for Kashagan, while the Kazakh government approves the development plan for the project. Initial production is expected to be 75,000 b/d in 2008, rising to an estimated 450,000 b/d during the first phase of development. Subsequent phases are expected to result in full field production of an estimated 1.2 million b/d.

March 2004: The Agip KCO members agree to pay Kazakhstan cash compensation for the late startup of Kashagan.

June 2004: The Kazakh government says it should have exercised pre-emption rights over BG’s former 16.67% stake and notifies the Agip KCO partners it wants to buy the stake, effectively reversing BG’s original sale.

January 2005: State-owned KazMunaiGas agrees to buy half of BG’s stake from the consortium partners for the same price as it was sold — $615 million.

March 2005: After negotiations, BG agrees to a revised sale plan. It agrees to sell the whole 16.67% stake to the original five buyers — Eni, ExxonMobil, Shell, Total and ConocoPhillips — for $1.8 billion.

April 2005: BG closes the sale to the five partners.

May 2005: KazMunaiGas agrees to buy half of the former BG stake from the consortium partners for half of $1.8 billion ($900 million). The partners are now: Eni, ExxonMobil, Shell and Total (18.52% each); ConocoPhillips (9.26%); KazMunaiGas (8.33%); and Inpex (8.33%).

March 2006: Eni says the project is facing cost overruns of up to $5 billion, but first production is still expected in 2008. Official estimates for full field development are put at $31 billion, up from an estimated $29 billion in February in 2004. Unofficial estimates suggest the final figure might exceed $50 billion.

July 2006: Eni says first output could be delayed until 2010.

February 2007: Eni says Kashagan could produce more than 1.5 million b/d after it comes onstream, up from a previous target of 1.2 million b/d.

June 2007: A major setback as estimates suggest the full-field development budget has blown out to $136 billion.

September 2007: Kazakhstan’s government says it wants KazMunaiGas to become co-operator with Eni, and wants a bigger stake in the consortium. Kazakh authorities say they also want to raise the country’s share of profit from oil produced at the field to 40% from 8.33%.

December 2007: KazMunaiGas reaches agreement with all but one of the partners in the Kashagan project on increasing its stake in the project. ExxonMobil is said to be blocking a deal.

January 2008: KazMunaiGas agrees with the entire Kashagan consortium on increasing its stake in the project to 16.81% from 8.33%. Startup of oil production at the field is also postponed to late 2011. The new ownership structure is: KazMunaiGas, Eni, ExxonMobil, Shell and Total (16.81% each), ConocoPhillips (8.39%), and Inpex (7.56%).

May 2008: Kazakhstan says the consortium wants to push start-up back to 2012-2013.

June 2008: All parties agree to delay first oil from the project by two years until late 2013. According to a memorandum signed on June 27, if production does not begin by October 1, 2013, then the expenses incurred by the consortium in the development of the field will not be compensated.

July 2008: Kazakhstan and the consortium agree to appoint Shell as project operator for the second phase of the field’s production.

July 2008: It is agreed to transfer operatorship of the project to a new joint company, with work to be performed by ExxonMobil, Shell, Total and Eni.

September 2008: Commercial production is expected to be pushed back by one year to 2014. September 2008: Kazakhstan’s energy minister Sauat Mynbayev says KazMunaiGas would form a new company — North Caspian Production Operating Company (NCPOC) — with Shell to operate Kashagan production after the start of commercial operations. NCPOC will manage production operations of all phases.

October 2008: New agreements are signed covering operatorship and development of the field, including confirmation of KazMunaiGas’s 16.81% stake. Under the deals, commercial production will start at 75,000 b/d in December 2012 and gradually rise to 370,000 b/d. An add to phase one would see output rise to 450,000 b/d. In a second phase output would be boosted to 730,000 b/d by 2016 and then to a plateau of 1.5 million b/d later in the decade.

January 2009: The new consortium is renamed the North Caspian Operating Consortium (NCOC) and formally becomes operator, taking over the role that was formerly held by Agip KCO.

May 2011: Phase two is effectively frozen as the government is not satisfied with the proposed cost of the first stage.

January 2012: NCOC submits to the Kazakh government a proposal to boost the project’s phase-one budget to $46 billion from $38 billion, which is ultimately approved despite some reluctance.

November 2012: ConocoPhillips agrees to sell its 8.39% stake to India’s ONGC Videsh for some $5 billion.

July 2013: KazMunaiGas says it will exercise its pre-emption rights to buy ConocoPhillips’ stake.

August 2013: KazMunaiGas agrees to sell an 8.33% stake in Kashagan to China’s CNPC, leaving the Kazakh company with a slightly higher shareholding than before: 16.88%.

September 2013: First production at Kashagan commences.

After the start of production from the Kashagan field in September 2013, operations had to be stopped in October 2013 due to gas leaks from the sour gas pipeline.

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