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Kazakh superfield delayed yet again

By JOHN C.K. DALY, UPI International Correspondent   |   June 26, 2008 at 7:15 PM   |   Comments

WASHINGTON, June 26 (UPI) -- As a world in deep sticker shock over oil at $140 a barrel searches for some relief, many eyes are turning to the petroleum-rich states of the former Soviet Union.

Of the 15 former Soviet republics, Kazakhstan is sitting on the sole "superfield" discovered in the last three decades. With proven reserves of 35 billion barrels, Kazakhstan potentially contains the world's third largest reserves of oil, after Saudi Arabia and Iraq.

The Kashagan Caspian superfield is the largest oil field outside the Middle East and, in terms of reserves, the fifth largest in the world. When fully developed, Kashagan, with its projected peak production of 1.3 million barrels per day, alone will provide foreign consumers more oil than Azerbaijan's entire current output being shipped through the 800,000 bpd Baku-Tbilisi-Ceyhan pipeline.

Discovered in 2000, Kashagan is situated in the northern part of the Caspian Sea about 50 miles offshore from the Kazakh city of Atyrau. The U.S. government's Energy Information Administration last month estimated Kashagan's recoverable reserves as up to 38 billion "probable" barrels, an amount equivalent to the North Sea oil reserves. Kashagan is three times larger than Kazakhstan's onshore Tengiz field.

The bad news is that the site represents formidable difficulties, lying 14,000 feet below the Caspian at high pressures. Furthermore, Kashagan's oil is heavily contaminated with mercaptans and hydrogen sulfide, which must be extracted at enormous expense before the oil is ready for export. The final problem for SUV drivers seeking succor at the gas pumps is that the date of Kashagan coming online has been repeatedly pushed back, from a wildly overoptimistic 2005 to 2013, according to KazEnergy Association Chairman Timur Kulibaev.

Following the initial discovery of the Kashagan deposits in 1990, the Kazakh government began two years later to solicit more than 30 companies to participate in an exploration program. The following year the Kazakh government reached an agreement to form the Kazakhstancaspiishelf consortium with Italy's ENI, Britain's BG Group, the Anglo-Norwegian BP/Statoil, the U.S. firm Mobil, Anglo-Dutch Royal Dutch Shell and France's Total. After initial seismic exploration of the Caspian was completed, KCS became the Offshore Kazakhstan International Operating Co. in 1997, while in 1998 the U.S. based Phillips Petroleum and Japan's Inpex joined the consortium. As the project advanced, in 2001 ENI was chosen as operator of the Kashagan development and BP/Statoil sold their stake to the other consortium partners. OKIOC eventually morphed into the Agip Kazakhstan North Caspian Operating Co. N.V. (AgipKCO).

By 2007 the partnership of the consortium had stabilized into six foreign partners and Kazakhstan's national energy company, with the division of the OKIOC joint venture seeing ENI, ExxonMobil, Royal Dutch Shell and Total holding 18.52 percent, U.S. firm ConocoPhillips with 9.26 percent, while KazMunaiGas and Inpex held 8.33 percent shares.

Late last summer, ominous signs began to appear that all was not well with the project. The previous few years had seen many energy companies in the former Soviet Union feeling pressure from governments determined to gain a greater percentage of joint venture projects, with Russia leading the way in playing hardball. In December 2006, with Kremlin assistance Gazprom secured a majority stake in the Sakhalin-2 Russian oil and gas field formerly led by Royal Dutch Shell; currently British Petroleum, the world's third largest energy company, is facing similar pressure over its TNK-BP joint venture.

Astana was obviously taking notes, as on Aug. 27, 2007, the Kazakh government halted work on Kashagan, citing environmental concerns. The following month Kazakhstan's parliament approved legislation enabling the government to alter or cancel contracts with foreign oil companies if their actions threatened national interests. The next three months saw Astana cite cost overruns and environmental degradation as reasons to renegotiate the project. In January 2008 AgipKCO's foreign partners and the Kazakh government discussed possible compensation for the delays of up to $5 billion and removing ENI as the project's operator before agreeing with the companies to pay an additional $2.5 billion to $4.5 billion in compensation over the life of the production-sharing agreement, depending on the price of oil.

When the dust settled, the new agreement for the Agip Kazakhstan North Caspian Operating Co. (Agip KCO, formerly OKIOC) joint venture saw ENI's, Total's, ExxonMobil's and Shell's share in the project drop to 16.66 percent, while ConocoPhillips and Inpex remained at 8.28 percent, while KazMunaiGas' share of the venture doubled to 16.81 percent, as Eni, Total, ExxonMobil and Shell "voluntarily" relinquished 1.86 percent of their former shares to KazMunaiGas.

While Western oil company executives are doubtless aggrieved about the 1.86 percent losses, they should be grateful that Astana did not follow the example of an increasing number of governments worldwide in nationalizing their assets outright. By any yardstick Kazakhstan's future looks bright.

Kazakhstan has the Caspian region's largest recoverable crude oil reserves and already accounts for over half of the region's roughly 2.8 million bpd production, including fellow former Soviet republics Azerbaijan, Uzbekistan and Turkmenistan. A further solace for Western companies and investors is that the Kazakh government intends to use the Baku-Supsa pipeline, which is completely outside Russian control, as it traverses Azerbaijan and Georgia. Astana is also considering using the BTC pipeline, which is likewise outside Kremlin manipulation.

In 2007 Kazakhstan produced approximately 1.45 million bpd, a figure that the EIA expects to rise to 1.54 million bpd this year and 1.71 million bpd in 2009, while projections estimate that by 2021 Kazakhstan could be pumping up to 4 million bpd, an amount that is only 500,000 bpd short of Iran's current production. As Kazakhstan is not a member of OPEC, its Western inclinations and use of non-Russian pipelines for its expanding output would seem to provide a stable alternative to the volatility of the Middle East and greedy Kremlin policies.

None of this, however, will help Joe Sixpack in the short term fill his gas guzzler in what is already shaping up to be a long, hot and expensive summer.

Topics: John C.
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