Production Begins at Kashagan Field

ASTANA – Kazakhstan’s giant Kashagan oil field finally began producing oil on Sept. 11, eight years later than first anticipated, but ahead of an October 2013 deadline to produce or forfeit compensation for expenditures.

The field, operated by the North Caspian Operating Company (NCOC), is currently producing 40,000 barrels of oil a day, according to comments by Kazakhstan’s Oil and Gas Minister Uzakbai Karabalin at a news briefing on Sept. 18th. “We hope they achieve commercial production there by early October,” the minister said.

The oil field in the shallow, icy north Caspian Sea is one of the world’s biggest and is estimated to contain up to 35 billion barrels of oil in place, with up to 13 billion barrels of recoverable oil. It is expected to produce around eight million tons of crude oil in 2014.

Production goals for the first phase of development are 180,000 barrels of oil a day, to move up to 370,000 barrels per day in 2015 and eventually reach 1.5 million barrels per day. Approximately 1.5 billion barrels per day would be slightly less than Kazakhstan’s current total oil production.

Kazakhstan sits on about 3 percent of the world’s total oil reserves. Thirty-four percent of the country’s oil output is controlled by Kazakhstan. The United States holds 25 percent and China 23 percent, according to Karabalin. The Kashagan field was called the biggest discovery in 30 years when it was found in 2000. KazMunayGas, ExxonMobil, Royal Dutch Shell, France’s Total and Italy’s ENI each hold a 16.81 percent stake in the field, Inpex of Japan owns 7.56 percent and China’s National Petroleum Company agreed to buy an 8.3 percent stake in the field for $5 billion on Sept. 7 of this year.

Kashagan’s oil is factoring into predictions about the Kazakh economy’s future growth. Fitch Ratings is predicting 6 percent growth in real GDP for Kazakhstan for 2014 and that its economy will grow more quickly than the median of its current BBB rating. The country’s known reserves are enough to produce oil for the next 50 or 60 years, according to the oil and gas minister.

However, Kashagan has been called “the world’s most expensive oil field” because of cost overruns and delays. It has cost about $50 billion so far for its phase one development, which a decade ago was estimated to cost $10 billion. (The three-phase development plan approved by the government of Kazakhstan in 2004 was priced at $136 billion). The current project agreement expires in 2040.

Despite the launch of production, talk about potential problems at the field continues. In August, a liquified gas leak was detected at the field’s Bolashak plant. There are also reports that because of all the delays to production, much of the equipment at the field is obsolete and production will have to be stopped within the first year for major repairs and upgrades. The cold conditions of the north Caspian with its shallow, icy waters necessitated the building of artificial islands, as oil rigs weren’t adequate to the conditions. The pressure the oil field is under and the gas and chemicals present in the area have all combined to make the project one of the most complex extraction projects in the world.

Analysts from the Eurasia Group risk consultancy have said that “Even after the second phase receives the green light, technical challenges tied to the high sour gas content of the field make it unlikely we will see any meaningful production emerge from the second phase by 2020.” Phase two has been pushed back to 2018-2019.

“A lot of money has been spent [on the project] already, so in order to return the expenses, companies will have to keep the oil production without investing a lot into keeping the development at the current level, which is about 400,000 barrels per day, for 10-12 years at least,” said energy analyst from Russia’s Gazprombank Alexander Nazarov on Sept. 11. “Only after that will they probably be able to receive net inflow.” He also said that the problems that beset the first phase of development could affect the prospects of getting Kazakh government approval for the second stage. However, discussing the country’s oil future, Minister Karabalin said that approval of Kashagan’s second phase would be key to an “optimistic plan” to maintain the country’s oil production in the coming few decades.