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Kuwait Times: Inept govt compounds $29bn Kashagan oil project woes

KUWAIT: Italian energy company ENI and its partners in developing the Kashagan oilfield in Kazakhstan said the project will run over its original $29 billion budget and will be delayed by two to three years beyond its 2008 completion deadline. It was inevitable that the Kashagan project would run over budget and into delays, because it is one of the most technically difficult energy projects ever attempted. However, these difficulties are being worsened by a demanding Kazakh government and an inept state-run project partner. Yet despite all the angst, agony and project complexities, this project will still happen.

The Kashagan consortium consists of ENI, ExxonMobil, Total and Royal Dutch/Shell (each with 18.52 per cent), ConocoPhillips (9.26 per cent), Kazakhstan’s state-owned KazMunaiGaz and Japan’s Inpex (each with 8.33 per cent). It is considered one of the five largest oilfields in the world-with an estimated 9 billion to 13 billion barrels. The Kazakh government has plugged the Kashagan field into its plans to triple oil output by 2015 — from 1.22 million barrels per day (bpd) to 3.5 million bpd. Approximately 1 million bpd of this production is pinned on the Kashagan field, with the bulk of the remainder coming from the Tengiz, Kurmangazy and Karachaganak fields.

The technical challenges in realising the Kashagan project are enormous. First, Kashagan is located in the northeastern section of the Caspian Sea, which forces the consortium to disassemble its equipment at an ocean port, ship it through Russia and then reassemble it on the Caspian. Second, the relatively shallow (about 10 feet-deep) northern Caspian freezes in winter, and the resulting sheets of ice (which drift because of winds that can exceed 70 mph) could easily move and destroy any floating infrastructure. To counter this, the consortium has to build artificial islands from which to drill.

Third, to reach Kashagan, drills must burrow down some 2.5 miles into the geologically complex and vertical field. And only then does the real work begin; Kashagan’s oil is not only high-pressure, but has a high sulphur content, which necessitates hefty separation, stabilisation and “sweetening” facilities.

Transporting the oil also offers its complications. The oil could be transported east to China, south to Iran, north through Russia or west across the Caucasus to Europe via Turkey. However, all existing infrastructure in the region is already spoken for, so Kashagan will require fundamentally new infrastructure no matter which direction the consortium ultimately decides to ship the oil. The cost of that infrastructure is not included in the current $29 billion price tag.

As if that weren’t enough, the Kazakh government has hardly been burden-relieving. In 2004, the government introduced a new “rent tax” on exports that rises with crude oil prices. This has raised the government’s tax of oil income to between 65 per cent and 85 per cent, even though the government is involved in the Kashagan consortium. The government also has been looking for ways for state-owned oil company KazMunaiGaz to play a larger role in production.

In early 2006, the government demanded that KazMunaiGaz be allocated shares in Kashagan. Eventually, the consortium allocated KazMunaiGaz 8.33 percent worth of shares, which was purchased from British Gas.

Essentially, KazMunaiGaz is deadweight for the project, as it has no contributable skills. Kazakhstan’s goal, however, is to have its state-run company master the applicable technology for use in future projects. Unlike previous delays, which can be blamed on technical hurdles or bickering within the private consortium, the current delays are more accurately laid at the feet a meddlesome Kazakh government.

With such a mess of problems and technical complications, why does anyone even bother with such an expensive and headache-provoking project? The reasons are twofold.

First, there is not a great deal of oil in the world that is not in some way locked under the thumb of this or that national oil company. Western firms are quite simply finding it difficult to keep their production levels steady, and although new technologies are constantly expanding the envelope of what is possible, moving away from national oil firms like KazMunaiGaz is not something that will happen any time soon. Kashagan is a massive field by any measure, and as annoying as the Western firms might find KazMunaiGaz, its behaviour is not nearly as overbearing as more traditional state firms such as Venezuela’s Petroleos de Venezuela, Saudi Arabia’s Saudi Aramco or Russia’s Gazprom.

Second, this is not just about oil. The Western states have a very clear policy when it comes to the Caspian region: Help build infrastructure that will allow the energy resources to flow west rather than north, east or south.

This decision is purely geopolitical. Northern routes that would tap the existing Russian network or southern ones through Iran would be far cheaper than shipping the crude west over (or under) the Caspian through perennially unstable Georgia and geologically complex Turkey. But if the West can establish export corridors, not only Kazakhstan, but also Azerbaijan, Georgia, Turkey and perhaps even Uzbekistan and Turkmenistan could be brought into a Western orbit. This logic is identical to that which drove the development of the recently completed Baku-Tbilisi-Ceyhan oil pipeline, which could not have happened without extensive government-assisted financing.

So Kashagan-though it will ultimately come in well above budget, run considerably after deadlines, fall short of expectations and be an all-around nuisance-will happen. And barring a Russian or Chinese surge that ends Central Asia’s political independence, the crude will flow west. – Stratfor

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