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Shell slashes $18bn from Kashagan costs

DAILY TELEGRAPH: Royal Dutch Shell has radically simplified the design of the Kashagan oil development, slashing $18bn (£11.5bn) from the cost of the second phase of development as it strives to make the project economically viable.

By Richard Orange in Almaty
Published: 11:38AM BST 25 Oct 2010

The milestone report from Shell’s Kashagan Cost Reduction Team reduces the cost estimate for the second phase of the project from $68bn to $50bn, a senior Kazakh official told The Daily Telegraph.

Shell took control of the planning of the second phase from Italy’s Eni at the start of last year. The Anglo-Dutch company has been working to turn around the economics of the project, which will take production capacity to 1m barrels per day, from the first phase’s production capacity of 450,000.

Even with the reduced cost estimate, the second phase only offers a return on investment of 9.3pc, the Kazakh source said.

“We are culling costs by any type of innovative thinking we can,” Pierre Offant, managing director of North Caspian Operating Company (NCOC), which oversees the overall project, said at this month’s Kazenergy Eurasian Energy Forum in Astana.

When Kashagan was discovered in 2000, it was the biggest oil discovery in more than 30 years, with commercial reserves of some 9bn-13bn barrels of oil.

Italy’s ENI, which was chosen to operate the field in 2001, was forced into a succession of cost increases, and the start date for production has already been pushed back seven years from the initial target of 2005. Control was passed to NCOC, a joint venture of all the partners, in 2009.

The total development costs are estimated at $136bn, making it the world’s costliest project, according to data from the Project Management Institute.

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