Monday, March 31, 2014

A Never-Ending Story: The Kashagan

Background

Over the years, much has changed with regard to the Kashagan (see original post; compare those notes with the Diplomat link, October 17, 2106. Data points:
  • consortium: Eni, Shell, XOM, Total, CNPC (China), Inpex, and Kazakhstan-state oil company
  • at the end of the 20th century, the Kashagan was the largest oil discovery in a generation
  • production had begun in late 2013 but immediately suspended due to faulty pipes
  • back on-line late 2016
  • now very cautious optimism
  • early production (late 2016 when brought back on-line): 90,000 bopd (compare with 1 million bopd from North Dakota, mostly the Bakken)
  • costs continue to be a headache
  • behind schedule; significantly over-budget
  • since contract signed in 2000, costs have surpassed $53 billion
  • below $100/bbl, the companies running the North Caspian Operating Consortium will incur losses
  • it is estimated that production costs at Kashagan exceed $50/bbl
  • despite that, the government directed that Kashagan go back on-line
  • first phase: in a couple of years, at its peak, Kashagan projected to yield 370,000 bopd; pretty puny in the big scheme of things (at $60 oil, if the full $60 was profit [and, of course it isn't] it would take almost seven years of producing at its peak of 370,000 bopd to pay off the $53 billion)
  • second phase: no timeline yet -- hope to get to 1 million bopd
  • government is anxious about the project getting through its first winter (2016 - 2017)
Updates

October 20, 2016: analyst's note

October 15, 2016: Kashagan back on line

March 13, 2015: Rigzone is reporting --
Production from Kazakhstan's giant Kashagan oilfield is expected to resume in 2017, more than three years after being suspended due to a pipeline leak, stake holder Royal Dutch Shell said. Operations at the major field, expected to reach production of 300,000 barrels of oil equivalent, started in September 2013 and were halted a month later due to gas leaks from the sour gas pipeline.
October 1, 2014: Rigzone is reporting --
Kazakhstan expects its oil production to stay around 2013 levels until 2016, when it hopes to restart the giant Kashagan oilfield halted by an industrial accident, a senior Kazakh official said on Wednesday.
The Central Asian nation aims to produce 81.8 million tonnes (1.64 million barrels per day) of crude this year, Deputy Energy Minister Magzum Mirzagaliyev told reporters on the sidelines of an international oil and gas conference.
"Next year production is expected to be at the 2014 level," he added.
The second-largest ex-Soviet oil producer after Russia raised its oil output to 81.7 million tonnes last year from 79.2 million tonnes in 2012. A further increase in production after the 3 percent rise last year has been thwarted by delays at the giant Kashagan oilfield in the Caspian Sea.  
Original Post
 
This never-ending story really is a never-ending story.

The WSJ is reporting: the Kashagan oil development in the Caspian Sea off Kazakhstan is years late and more than $30 billion over budget.

$30 billion over budget.
Both sides are straining to understand what went wrong. They complain about an unwieldy management structure. Western oil executives say the Kazakh government has held up decisions and imposed onerous requirements for employing local workers. The Kazakhs say the companies made mistakes that included underestimating the challenge of corrosive gas, making plans that needed frequent revision and not doing the welding right.
Eni Chief Executive Paolo Scaroni said his company's relationship with the government "has been excellent" considering the years of trouble. A senior official of Kazakhstan's state-owned KazMunaiGas, or KMG, disagreed. "It's a marriage that is made in hell," he said.
The Kashagan project's travails—reconstructed from interviews with some 40 people involved in it—come at a time when relationships between Western oil companies and resource-owning governments are more important than ever. To replace what they pump, oil companies need to collaborate with state-owned companies that control 90% of the globe's remaining oil reserves, by a World Bank estimate. But governments often give foreign oil companies access only to the hardest-to-develop acreage. Kashagan's large-scale stumble shows how collaborations in these difficult fields can go sour for both sides.
Within Kazakhstan, an earlier and smaller oil project has fared better. Tengiz, about 80 miles east of Kashagan, has helped the country raise its oil production through the years to over 1.6 million barrels a day. But Tengiz didn't have several rival oil companies with equal shares jousting for position—Chevron Corp. is the dominant partner—and it is on land, not offshore.
As much as Kashagan's costs have risen, they don't necessarily mean the project can't someday be profitable, given that oil prices have also climbed sharply since it began. The costs of $50 billion or so—about $42 billion for development plus $8 billion spent toward the second, production phase—have been paid by all of the oil companies involved, including state-owned KMG. The deal gives most production to the oil companies until their development costs are recovered. 
Okay, let's put that that bit into perspective. Repeating, from the story:
As much as Kashagan's costs have risen, they don't necessarily mean the project can't someday be profitable, given that oil prices have also climbed sharply since it began.
Didn't Barron's just report, this weekend, that oil was head sharply down over the next five years?

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