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Financial Times: Eni’s Kashagan oilfield development dogged by delays and doubled costs

By Carola Hoyos, Chief Energy Correspondent
Published: February 24 2007 02:00 | Last updated: February 24 2007 02:00

Development of the world’s most important new oilfield will be delayed by a further three years and require almost double the investment initially anticipated, Eni, the Italian oil group operating the field, said yesterday.

Kazakhstan’s giant Kashagan oil field will now produce its first oil at the end of 2010 and hit peak production by 2019, according to Paolo Scaroni, chief executive of Eni, Europe’s fourth largest listed international energy group.

The field, discovered in 2000, remains the largest to have been found in more than 30 years. It is critical for global supplies; today only three of the world’s 4,000 oilfields exceed the 1.5m-barrel-a-day production Kashagan is expected to achieve.

Announcement of the delay and escalating costs comes two days after ExxonMobil, the world’s largest international energy group, scrapped its $15bn natural gas project in Qatar because of runaway expenses. Cambridge Energy Research Associates, the consultant, estimates costs of big oil and gas projects have risen 53 per cent across the industry because of tight labour and equipment supplies in the past two years.

Kashagan will now need $19bn to develop to the initial stage of producing 300,000 barrels a day by early 2011 – up from the original estimate of $10.3bn and the $14bn-$15bn guidance given to investors at last year’s strategy review.

However, the field’s peak production would be 25 per cent higher than initially thought, Mr Scaroni said.

Kashagan is Eni’s flagship operation. The delay has forced it to lower from 4 to 3 per cent its three-year production growth target, while the cost increases contributed to the 27 per cent jump in its three-year capital expenditure plan to €44.6bn ($58.5bn). Partners, which include ExxonMobil and Conoco-Phillips, of the US, Royal Dutch Shell and Total of Europe, and Inpex of Japan, will also suffer.

A third of the project’s extra cost has arisen from the need to move workers’ quarters away from deadly hydrogen sulphide hazards. The remainder covers foreign exchange, labour and equipment cost inflation and the expansion of the project.

Much of the expense will be borne by Kazakhstan, unless officials decide to rewrite the contract that allows Eni and its partners to recoup their costs.

Sanford Bernstein, the financial services group, earlier this week suggested Kashagan could become as serious a quagmire for Eni as Sakhalin II has become for Royal Dutch Shell. Shell last year lost its majority stake to Gazprom, the Russian gas monopoly, following delays and the admission that the project would cost $20bn, rather than $10bn.

But Mr Scaroni said in an interview: “All the signs we are receiving is that Kazakhstan will accept the cost. The difference with Sakhalin is that KazMuneiGaz, Kazakhstan’s national oil company, is our partner and has known what has been happening.”

Copyright The Financial Times Limited 2007

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