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Bad Omen for the Future of Mega-Oil Projects

Seven years and $24 billion. No, that isn’t the price tag for a major project coming online. That’s how late and how much over budget the giant Kashagan oil project in the Caspian Sea ended up being before it started flowing this week.

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Seven years and $24 billion.

No, that isn’t the price tag for a major project coming online. That’s how late and how much over budget the giant Kashagan oil project in the Caspian Sea ended up being before it started flowing this week. Bringing in multiple stakeholders on these complex, challenging megaprojects in the energy industry has become a pretty nasty cocktail for those involved. Are the blunders with Kashagan an exception or the rule when it comes to these major projects? Let’s look at some other major projects going on right now to see what Big Oil has in store for its next big move.

The project to bring the world’s largest oil discovery in the past 30 years has so far been mired in delays, cost overruns, and overall headaches for pretty much everyone involved. With the current bill standing at $48 billion for a paltry production of 375,000 barrels per day divided up among seven companies, the project is averaging a capital cost of $80,000 per barrel of production capacity. To put that in perspective, conventional oil projects in Saudi Arabia today are about one-fifth of that amount.

ExxonMobil — a company that prides itself as one of the best capital allocators in the business — estimates that it will take beyond 2040 for this project to make a reasonable rate of return. In fact, both it and partner Royal Dutch Shell have repeatedly threatened to pull out of the project because of contentious negotiations with the Kazakh government, delays, and a lack of operational control over the project.

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