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Shell shuts Caspian office, $50bn Kashagan project on ice

Royal Dutch Shell will shut its Caspian office for the giant Kashagan oil field at the end of this month, effectively putting the crucial £30bn ($50bn) project on ice for at least two years.

Staff at Shell Development Kashagan in Atyrau have been laid off or relocated and the office closes on May 30. Photo: ALAMY

Richard Orange
By Richard Orange, in Aktau 3:32PM BST 24 May 2011

The move followed the Kazakh government’s decision to reject a new lower-cost design for the crucial main development phase of the oilfield which has the potential to produce more than 1m barrels a day.

Staff at Shell Development Kashagan in Atyrau, a port on Kazakhstan’s Caspian coast, have been laid off or relocated over the past few weeks, and on May 30, the office will be closed.

The move follows a warning from Karim Massimov, Kazakhstan’s prime minister, that the project would not go ahead unless the disagreements on cost were overcome.

“This is an issue about cost,” he told Financial Times in an interview published on Monday.

Shell is shutting down Shell Development Kashagan, the orders of the North Caspian Operating Company (NCOC), the joint venture which manages the development.

SDK is tasked with managing offshore development for the crucial second phase, and its closure means that NCOC is convinced that the start of project will be delayed at least two years.

This could push first production well into the next decade, making it all but impossible for Shell and its partners to make an acceptable profit before the contract expires in 2037.

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. But it is also one of the world’s most difficult fields, and under Italy’s ENI, the company chosen to operate it, costs soared to $136bn, making it the costliest project anywhere in the world.

At the end of last year, a set of new lower cost design options, drawn up by Shell’s Kashagan Cost Reduction Team – one of which reduced development costs for the second phase from $68mn to $50bn – was presented to the Kazakh oil ministry by the project partners.

But the Kazakh oil minister Sauat Mynbayev in January rejected the new designs as “inefficient from an economic point of view.”

On February 14, NCOC gave the order to wind down the work on the crucial second phase.

According to a report this month from Wood Mackenzie, the oil industry consultants, the decision was confirmed in April.

Shell Development Kashagan’s main office in The Netherlands is also being shut down and all staff will be moved elsewhere by June 30.

The team which developed the Kashagan Cost Reduction Plan will refine the low-cost design for NCOC, and submit it again to the Kazakh oil ministry in the second half of the year.

Wood Mackenzie’s report estimated that a delay of two years would bring the Kazakh government an extra $400m a year in revenues from the time the field goes into production at the start of 2013 until 2017, and up to $600m if it then only approves a gradual development.

State oil company Kazmunaigas (KMG) is already struggling to meet its share of spending, which was $1.4bn this year alone.

Wood Mackenzie argues that the Kazakh government will ultimately pay the highest price for the delay, however. It estimated that a delay of two years would cut $8.5bn from the $79.8bn net present value of the project for the government, but only $5.2bn from the $70.7bn net present value for Shell and its partners.

The delay also makes it unlikely that the field will ever reach the 1.5bn barre-per-day peak originally envisaged. The first phase of the project will take oil production to 370,000 b/d, the second phase was supposed to push that to 1m b/d.

The Kashagan consortium is led by Shell, ENI, France’s Total, ExxonMobil, and KMG, which each have 16.81pc stakes in the field. ConocoPhillips, from the US, and Japan’s Inpex each hold 8pc.

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