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Financial Times: Developing Kashagan is painfully slow but progress is being made

By Carola Hoyos
Published: January 23 2007 02:00 | Last updated: January 23 2007 02:00

When Paolo Scaroni took over as chief executive of Eni last year, his first major overseas trip was to Texas. The newly minted head of Italy’s biggest energy group was due to see Lee Raymond, his counterpart at ExxonMobil – the energy industry’s heavy-weight group.

Exxon was not particularly pleased with its smaller European peer and MrScaroni knew he needed to mend the relationship to ensure the success of Eni as well as one of the world’s most important oil projects: the $30bn Kashagan field.

Disagreements over the past five years between Eni and its partners, which include Exxon and ConocoPhillips of the US, Royal Dutch Shell and Total, the European majors, Inpex of Japan and KazMunaiGaz (KMG), the Kazakh national energy group, had escalated so dramatically that they were delaying the development of the biggest oil field found in the past three decades and costing the companies millions of dollars in overruns and fines. For Eni, which became the lead operator by default in 2001 after larger partners clashed over who should be granted the challenge, Kashagan holds the promise of elevating the Rome-based oil and gas company to the major leagues.

The disagreements between the partners over how to develop the field are often chalked up to partner companies’ frustrations over having failed to win the coveted right to be the operator. But in reality the discord is part of the larger overall challenge that Kashagan poses.

Kashagan is perhaps the world’s most technically demanding oil field, making wrong decisions costly and possibly fatal.

There are no other fields like it and therefore contractors and the oil companies that employ them are breaking new ground at nearly every step. One of the consortium’s first tasks was to build artificial islands to tap the oil from beneath the shallow waters of the landlocked Caspian Sea, which is frozen almost half of every year.

To prevent shifting ice from damaging drilling rigs, artificial reefs and barriers also had to be built.

Frank Verrastro, director of the energy programme at the Centre for Strategic and International Studies, said he was not surprised about the cost overruns, which come amid steep industry-wide price inflation for anything from rigs to steel and labour.

“I don’t think Nazarbayev [Kazakhstan’s president] has helped himself by changing the ground rules,” he added.

Overly optimistic initial deadlines set by the Kazakh government, its insistence on local contractors and on KazMunaiGaz’s inclusion in the consortium, contributed to the project’s delays.

Meanwhile, the environment remained a top priority constantly monitored by the Kazakh authorities still suffering from the legacy of Soviets, whose abandoned well-heads on the sea floor continue to spring leaks, threatening the sturgeon and the lucrative caviar they produce.

However, fish, birds and seals are not the only creatures under threat. This year, the oil companies developing Kashagan were forced to build a 150m pier and move on to it living quarters, control rooms and other facilities after simulations showed they were in danger of mass poisoning.

In fact, the risk of hydrogen sulphide, which is found in high quantities in Kashagan’s oil, escaping as it is being produced and processed is so acute that in certain areas workers must carry gas masks.

All this has delayed the development of the field, which was discovered in 2000, by up to five years, and increased costs by several billion dollars. This has led to the most recent complication, the announcement that KMG would bring in auditors to look into the spiralling costs and delays.

Mr Scaroni played down the probe, saying: “The fact of Eni and KMG sharing the decisions makes us confident about the fact we won’t have bad surprises.”

But amid the constant drip of new challenges, there are signs of progress. The move of the workers’ quarters is complete, as is the development of three key wells. In total the wells pumped about 80,000 barrels a day, double the volume of cautious initial estimates.

This has given engineers the confidence to assume Kashagan will now yield 1.5m barrels a day, 25 per cent more oil when it reaches its peak production at the end of the nextdecade.

Meanwhile, Mr Scaroni’s Texas trip has borne fruit, with Eni recently accepting the secondment to Kashagan of 50 of its partners’ managers, engineers and technical experts, nearly tripling their presence and helping to smooth the groups’ rocky relationship.

Copyright The Financial Times Limited 2007

Related FT article: THE DASH TO KAZAKHSTAN

Published: January 23 2007 02:00 | Last updated: January 23 2007 02:00

October 2000 An international oil consortium developing the Kashagan area of the Caspian sea – originally comprising Phillips Petroleum, Inpex, Eni’s Agip, BG, BP Amoco, Statoil, ExxonMobil, Royal Dutch Shell and TotalFinaElf – hails the results of an initial exploration

February 2001Eni is elected operator of the Kashagan oilfield

October 2005 China National Petroleum Corporation takes over Toronto-listed Petrokazakhstan for $4.2bn, giving it access to 12 oilfields in Kazakhstan

May 2006 First oil flows to China through the new 970km pipeline from Kazakhstan built by KazMunaiGaz, the Kazakh state oil company, and CNPC

June 2006 US sees the completion of the Baku-to-Ceyhan pipeline, which it had championed for more than a decade as a key direct energy link between the Caspian region and the west.

November 2006Europe signs broad energy agreement with Kazakhstan

January 2007Citic Group, China’s state-owned investment company, completes a $1.9bn deal to buy oil assets in Kazakhstan

Copyright The Financial Times Limited 2007

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