Kashagan Oil Project on Shaky Ground


Even if the Kazak government succeeds in winning greater control of Kashagan, the country’s largest oilfield, NBCentralAsia analysts say it remains unclear when commercial extraction might get under way as the economics of this giant project are uncertain.

On September 26, the lower house of Kazakhstan’s parliament approved amended legislation allowing the government to break or revise contracts with foreign investors involved in mineral resource extraction. The Senate or upper chamber must approve the law before it enters into forces.
The change to the law was prompted by a conflict between the Kazak government and Agip KCO, the international consortium contracted to develop the Kashagan field.
In June, Agip KCO announced that safety considerations meant it would have to postpone oil production until 2010, and that the expected cost of the development phase had risen from 57 to 136 billion US dollars. The start date for Kashagan had already been put back from 2005 to 2008.
In response, the Kazak government accused the consortium of breach of contract and violating environmental regulations. It demanded 40 billion dollars in compensation and an increased share in Kashagan to make the state the second largest shareholder after the lead company, Eni of Italy.
As well as Eni, the Agip KCO consortium, created especially for Kashagan, includes Exxon Mobil, Royal Dutch Shell, Total, Conoco Phillips and INPEX, as well as KazMunaiGaz, Kazakstan’s national oil and gas company.
Kashagan is an offshore field, the largest in the Caspian Sea with potential reserves put at 38 billion barrels of oil (just over five billion tons) by Agip-KCO.
NBCentralAsia analysts say any restructuring of the consortium that comes as a result of the new legislation is unlikely to make it clearer when commercial extraction will start.
Energy expert Valery Markov says it has become virtually impossible to say when the field might start producing oil.
The uncertainty now surrounding the project casts doubt over the government’s entire strategic planning for the future, he added.The government has been pinning its hopes on the field to fulfil its plans to double national oil production from 67 to 150 tons a year by 2015.
“Now all of Kazakstan’s production plans… are really being set back, and it is impossible to guess when they will be achieved. There will be substantial financial and political losses,” said Markov.
NBCentralAsia analyst Yaroslav Razumov does not believe the dispute is about the Kazak government trying to wrest full control of the field, as it does not have the technology to work it.
“The Kashagan conflict may have arisen because its oil reserves might be turning out to be substantially smaller than anticipate,” he said. “Either there is less oil, or it is proving so difficult to get it out that commercial viability is becoming an issue.”
If the field’s reserves were disappointing, Kazakstan’s economic plans would begin to look uncertain.
Analysts point out that neither Agip KCO nor the Kazak government would want to put out bad news about Kashagan, and for this reason they may come to some sort of agreement in an effort to maintain Kashagan’s image as a “21st century supergiant” field.
(NBCentralAsia draws comment and analysis from a broad range of political observers across the region)

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