Kashagan Giant Oil Field to Begin Production over Next Six Months

ASTANA, January 11 – The Kashagan giant oil field is set to enter commercial production in the first half of this year.

The field is located in Kazakhstan’s offshore waters in the northern Caspian Sea and is the largest oil field in the world to be found and developed over the past 30 years.

Ruslan Davletov, deputy manager of the new Bolashak oil and gas complex that will serve the field, said the commercial production of oil will start in the coming months and the complex will come up to full capacity by mid-2013.

By June 2013, Phase I of the development of the field for commercial use should be completed and the field should by then produce 370,000 barrels of oil per day.

In Phase II, production will be increased to 375,000 barrels per day for the next three years. Eventually, total production may reach 1.5 million barrels per day.

The Kashagan oil field was discovered in 2000 on the 150th anniversary of the birth of Kashagan Kurzhimanuly, a 19th century Kazakh poet from Mangistau, and was named after him.

The oil field is close to Atyrau and covers an area of approximately 5,500 square kilometres (2,100 sq miles). It lies more than four kilometres (2.4 miles) below sea level. It is highly pressured (770 bar of initial pressure) and contains high amounts of sour gas. These geological conditions presented major challenges to the engineers working on the project.

Kazakh geologists estimate Kashagan has total oil reserves of 4.8 billion tons. The North Caspian Operating Company (NCOC), which is developing the field, puts its total oil reserves at 38 billion barrels (six billion tons) with a recoverable volume of about 10 billion barrels. Natural gas reserves are estimated at over one trillion cubic metres.

CNN Money estimates the Kashagan oil field costs $116 billion to develop, making it the most expensive energy project in the world. Over the past 12 years, the international consortium funding NCOC has invested nearly $50 billion in the first phase of the project.

Experts believe the Kashagan field has recoverable reserves of 13 billion barrels of crude oil. Harsh conditions, such as sea ice during the winter, temperature variation from -35 to 40°C (-31 to 104°F), extremely shallow water and a high level of hydrogen sulphide make it one of the most challenging oil megaprojects.

Under the North Caspian Sea Production Sharing Agreement, the Kashagan oil field is developed by a consortium of major oil companies led by KazMunayGas (KMG), the Italian oil major Eni, Total of France and ExxonMobil of the United States, which each own 16.81 percent of the shares. The Anglo-Dutch Shell Corporation owns 17 percent of the shares, ConocoPhillips owns 8.4 percent and Inpex North Caspian Sea owns 7.56 percent. (Late last year, news surfaced of ConocoPhillips’ desire to sell its stake.)

The government of Kazakhstan and investors signed the contract to develop the Kashagan oil field in 1997 for 40 years. Under the terms of the contract, the cost of exploration of the oil field will be reimbursed by the commercial production of oil. Currently, foreign investors are seeking to extend the contract for another 20 years.

Malik Salimgereev, managing director of the Samruk-Kazyna Sovereign Welfare Fund dealing with KMG, said the issue of extending the Kashagan contract will be discussed in 2014-2015 after the shareholders of the consortium decide how to further develop the oil field.

The consortium is considering various transport routes and international markets for exporting Kashagan’s output. They include using existing infrastructure, such as the Caspian Pipeline Consortium pipeline, the Atyrau-Samara pipeline and the construction of a new pipeline to connect the Bolashak production center with the Baku-Tbilisi-Ceyhan pipeline. The Volga Canal, despite its seasonal nature, is another option.

NCOC Managing Director Pierre Offan said construction work on the project was the most demanding and complex of its kind in the world and involved both marine and land-based operations.

The drilling rigs complex includes several artificial islands. It has a capacity to process 22.5 million tons of oil and 6.2 billion cubic metres of gas per year.

This year, a contract between the Atyrau oil refinery and a consortium of companies from Japan and China will come into force. The upgrading of the Atyrau refinery plant will cost $1.8 billion. Once the upgrading is completed, the plant will produce a full range of light oil products, which will allow Kazakhstan to stop importing them. The refinery will increase national production of Euro-5 standard light oil products to 1.5 million tons per year. The Atyrau refinery upgrade will take 41 months to complete. When it is fully operational, it will increase the percentage of petroleum products refined in Kazakhstan from its domestic production from the current 50 percent to 85 percent.

In his state of the nation address on December 14, Kazakhstan’s President Nursultan Nazarbayev defined a national goal of creating an efficient, modern oil and gas industry through the new Strategy-2050 plan.

Atyrau Refinery Director General Arman Kayrdenov said it should produce 5.5 million tons of refined oil products per year by 2016, including 1.5 million tons per year of gasoline and 1.5 million tons per year of diesel fuel, all up to Euro-5 standards.

Nurkasym Zhumatayev, deputy director of the Atyrau refinery’s construction department said the Axens Company of France, UOP-UK from Britain and Foster Wheeler of Italy were introducing advanced technologies in the refinery. Other modernization programmes are being carried out at the Shymkent and Pavlodar refineries. These upgrades will make Kazakhstan a net exporter of refined fuels to neighbouring countries through 2025.

The Customs Control Committee of the Ministry of Finance said Kazakhstan exported 62.9 million tons of crude oil and condensed gas worth $52.2 billion in the first 11 months of 2012. This was a 1.1 percent fall in total export volume compared with the same period in 2011, but was a 3.9 percent increase in revenue earned from the sales.

The largest purchasers of Kazakh oil were Italy, which bought 16.4 million tons for $13.7 billion, China, which bought 9.2 million tons for $7.5 billion, The Netherlands, which bought 7.4 million tons for $6.2 billion, France, which bought 5.9 million tons for $5.1 billion, Austria, which bought 5.9 million tons for $4.6 billion, Romania, which bought 3.5 million tons for $2.7 billion, Canada, which bought 3.2 million tons for $2.9 billion and Switzerland, which bought 2.4 million tons for $1.9 billion.

Kazakhstan’s oil industry has always been attractive to international investors, and analysts predict this interest and investment will continue to grow. The full-scale development of the Kashagan oil field will allow Kazakhstan to become one of the world’s top five producers and exporters of oil over the next decade.

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