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Bloomberg: Exxon Steps in on Kazakh Oil Project as Costs Double (Update4)

By Joe Carroll

Aug. 1 (Bloomberg) — Exxon Mobil Corp. sent engineers to advise Eni SpA on how to develop Kazakhstan’s Kashagan field, the biggest oil discovery in 30 years, after costs more than doubled to $136 billion.

Exxon Mobil’s technical advisers will use experience gained from working on other ice-plagued, offshore oil projects to assist Eni, operator of the project, said Margaret Ross, a Exxon spokeswoman. Italy’s Eni will also draw on the expertise of some of its other partners in the field, she said.

Kazakhstan wants to quadruple its share of Kashagan profits to 40 percent amid soaring crude prices, which touched an all- time high today of $78.77 a barrel in New York. The $136 billion estimate is almost seven times the size of Exxon Mobil’s annual budget for exploration, production platforms and refineries.

“The amount of money being spent is mind-boggling,” said Robert Sweet, who helps manage $130 million, including Exxon Mobil shares, at Horizon Investment Services LLC in Hammond, Indiana. “What they want to do is control things in the middle so they don’t get stung in the end. It’ll increase fiscal discipline.”

The revised expense forecast is the second since 2004, when the project was pegged at $29 billion. The price tag for developing new reserves worldwide soared to $14.60 per barrel of crude last year from $3.70 in 2000, the year of Kashagan’s discovery, according to Credit Suisse Group estimates.

Developing the Kashagan field will require financial outlays that exceed the annual economic output of countries such as the Philippines, Pakistan or New Zealand.


Eni and Irving, Texas-based Exxon, the world’s largest oil company, each own 18.25 percent stakes in the Kashagan field.

Kazakhstan, the second-largest oil producer in the former Soviet Union after Russia, is the latest oil-rich nation to demand a bigger stake in energy projects operated by foreign corporations. State-run companies in Russia and Venezuela have wrested control of billions of dollars in assets from Royal Dutch Shell Plc, BP Plc, Exxon Mobil, ConocoPhillips, Total SA and Chevron Corp.

`Unique Challenges’

“Kashagan is a groundbreaking, frontier project that faces a number of unique challenges,” Ross said in the e-mail. Production from the field is expected to reach at least 1.5 million barrels of oil a day, which would exceed the daily output of all the wells in Angola.

Exxon Mobil shares rose 89 cents to $86.02 in New York Stock Exchange composite trading. The stock gained 26 percent in the past year, the third-best performance in the Amex Oil Index after Chevron and Spain’s Repsol YPF SA.

Shell and Total also own 18.52 percent stakes each in the project. ConocoPhillips has a 9.26 percent interest while KazMunaiGas and Japan’s Inpex Corp. each hold 8.33 percent stakes.

The Kashagan field, located off the northern shore of the Caspian Sea near the city of Atyrau, may yield as much as 13 billion barrels of oil. The last discovery of that size was Alaska’s Prudhoe Bay in 1968.

Ice-Choked Seas

Earlier this year, Rome-based Eni postponed the start of oil output from 2008 to 2010. At that pace, it will take a decade from discovery to first production, a year longer than was required for Prudhoe Bay.

Kashagan presents new technical obstacles to engineers trying to tap its reserves because of large amounts of natural gas under high pressure that could damage wells and processing equipment, according to the U.S. Energy Department.

Kashagan’s oil also contains higher-than-normal amounts of sulfur, a corrosive, toxic pollutant that can damage pipelines and refineries, the Washington-based Energy Department said in an October report. The part of the Caspian Sea that includes Kashagan is frozen for six months of the year.

Exxon Mobil has already developed methods for surmounting some of the technical challenges involved in tapping Kashagan.

The company drilled beneath the ice-choked Sea of Okhotsk off Russia’s Pacific Coast to tap the Chayvo field as part of its $17 billion Sakhalin-1 project, which began pumping oil in 2005.

In Canada, Exxon Mobil has experience building and maintaining artificial islands to support drilling rigs from its Norman Wells development. Similar structures are being used at Kashagan to support rigs and dormitories.

To contact the reporter on this story: Joe Carroll in Chicago at [email protected]

Last Updated: August 1, 2007 17:26 EDT and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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