The Kashagan Field Could Be Big Oil's Largest Debacle-Success

Michael Teague  |

The repeated claim throughout 2013 that the North American “shale boom” has irrevocably changed the nature of the oil and gas industry has become an accepted fact, and for good reason. After all, according to the Energy Information Administration, the recently-ended year saw US production of oil and especially natural gas dwarfing the output of the world’s largest producers such as the Saudi Kingdom and Russia.

It remains to be seen how the world will adjust to an energy-independent US, or how many other countries and regions will embark on their own “shale booms” for that matter. But the ramp up in oil and gas production brought about by the increase in development and extraction from unconventional resources has also been attributed with knocking the world’s largest oil companies off of their perch atop the industry food-chain, and making more room for small and independent drillers to enter into the game.

While this claim is far more speculative, however, it is not hard to see why it has been made in various ways and on numerous occasions; most recently, the case of the Kashagan offshore oilfield in Kazakhstan is perhaps one of the best examples of the unwieldy and outmoded nature of big oil’s traditional model, particularly when it comes to securing reserves in foreign countries.

One of the Largest Discoveries of the Last 30 Years

Located in the portion of the Caspian Sea belonging to the Central Asian nation and former Soviet satellite of Kazakhstan, the Kashagan oil field was discovered in 2000. It is thought to contain some 13 billion barrels of technically recoverable crude, and when combined with the neighboring Tengiz field, reserves could be similar to the entirety of what the US is currently sitting on in terms of oil.

It should be noted, however, that Kashagan oil is of a significantly more sour variety than the West-Texas Intermediate benchmark delivered at Cushing, Oklahoma, meaning that it is extremely high in sulfur content and requires a much more costly and potentially dangerous refining process.

Sulfur Content Cannot be Blamed for Soured Prospects

The quality of Kashagan oil is in itself not one of the principal reasons for which the field has yet to fulfill its potential, much less come online in the 13 or so years since its discovery. Rather, a bureaucratic nightmare resulting from a revolving consortium of major producers charged with running the project has caused chaos and confusion since the earliest days.

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The consortium in its current configuration includes ExxonMobil (XOM) , Royal Dutch Shell ($RDS.A) Total SA (TOT) , Eni SPA (E) , Kazakhstan’s state-run KazMunaiGas, and more recently Japan’s Inpex (IPXHF) , as well as China National Petroleum ($CNPC).

Consortiums typically have one company in the lead position. In the case of Kashagan, Italy’s Eni was ostensibly running the show from the beginning until 2009, when years of delays and rising costs forced the companies to share responsibility equally.

In Uniquely Adverse Conditions, Too Many Cooks Spoil the Broth

The new model has hardly been more workable, leading to the failed attempt to bring Kashagan online in October of 2013, when the discovery of a number of pipeline leaks resulted in the immediate cessation of pumping, adding yet another notch on the project’s rap-sheet of delays.

While there has been substantial speculation since 2009 that it was Eni’s lack of experience with such a massive project that lead to its removal as the operator of the consortium, the lack of clear leadership has been cited as one of the reasons for which it has been difficult to pinpoint the source of the piping malfunctions that could originate from any number of sources, including unsatisfactory welding, poor quality materials, and even the substantially more corrosive properties of Kashagan sour crude.

It is even a possibility that the disuse of the pipelines through the years of delays since their installment could have led to a deterioration of quality significant enough to have caused the leaks. For the time being, France’s Total is in charge of sending imaging technology into the tubes to figure out what is going on, with the only certainty coming from the fact that Kashagan will have to wait yet again until it is a commercially viable project.

At What Cost?

Over the last decade, upwards of $40 billion has been invested in Kashagan. The pumping of oil to the surface, albeit brief, was yielding over 75,000 barrels per day, a production figure that was/is expected to hit 370,000 barrels by 2015, on its way to a plateau of 1.5 million barrels.

At present, the replacement work could take anywhere from a few weeks to several months, depending on how extensive the damage.

And the weather will surely have its say as well. In winter conditions, the region is afflicted by sub-zero temperatures that dip into double-digits effortlessly and impede the proper functioning of the equipment needed to access reserves that sit nearly 6,000 yards below the seabed.

But if $40 billion seems like an impossible-to-recover sum of money, just consider that initial production figure of 75,000 barrels per day, multiply it by 365, and then multiply the result by the roughly $95 per barrel at which WTI is currently trading. Those conservative figures add up to over $2.6 billion per year.

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