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Sep 11, 2013 | 14:43 GMT

4 mins read

In Kazakhstan, Progress at Last in a Major Oil Project

In Kazakhstan, Progress at Last at a Major Oil Project
(LEON NEAL/AFP/Getty Images)
Summary

Kazakhstan's major oil project, Kashagan, is seeing its first positive steps toward production, but it is still unclear if the project can meet the government's timetable. The North Caspian Operating Co., which operates Kashagan, said Sept. 11 that the project had produced its first barrels of oil after years of delays and price overruns. It is important for the North Caspian Operating Co. to start significant production at Kashagan because the government's budget over the next three years is based on increased oil revenue from the project.

Kashagan is one of the largest conventional oil fields found in the past 40 years, with reserves estimated at 35 billion barrels of oil. However, since it is located in the northern Caspian, where there are massive shifting sheets of ice and high winds that batter the rigs, it is also an extremely technically difficult project. The project was initially supposed to begin production in 2005 at a cost of $10 billion for development, but eight years later Kashagan is only now seeing its first barrels of oil production, and development costs have exceeded $46 billion.

Members of the North Caspian Operating Co., comprising Italy's ENI, France's Total, Dutch-British Royal Dutch/Shell, the United States' ExxonMobil and ConocoPhillips and Japan's Inapex, have also had multiple disagreements over the years. The United Kingdom's BG Group left the consortium in 2004. In 2008, the Kazakh government forced its way into the project in part as a nationalist push against foreign-run projects in the country but also to have a voice in its running and to pressure the project to finally move forward. Most recently, ConocoPhillips decided to leave the project, handing its 8.4 percent share to the Kazakh government to sell.

Kashagan Oil Field

Kashagan Oil Field

The Kazakh government and China National Petroleum Corp. finalized an agreement Sept. 7 for the Chinese firm to purchase the former ConocoPhillips stake. The Kazakh government hopes that China's involvement will give the project a boost, particularly a financial one, since many of the consortium members are nearly capped at putting any more money into the project, according to Stratfor sources. For the Chinese, who are trying to establish a presence in Kazakhstan and in Kazakh energy exports, this is their first foray into the large Kazakh energy projects.

But it is unclear whether this first oil produced at Kashagan is really the start of production. The Kazakh government had set a deadline of Oct. 1 for the consortium to start producing oil at Kashagan or face serious fines, which would make the soaring costs even worse. Stratfor sources say the project will produce only small amounts of oil for the first few months and may be able to ramp up to 75,000 barrels per day this year. That is less than half the 180,000 barrels per day the Kazakh government projected for 2013, but it would mean the consortium had met the government's deadline for production.

The Kazakh government has firm production expectations for the project to produce 370,000 barrels per day in 2014 and 1.6 million barrels per day by 2016 — all doubtful targets at this point. In June, the government revised down the oil production forecasts for each year, with 2016 already revised down 6 percent, due to Kashagan's delays. It also had to lower its natural gas production forecasts because of delays at other large energy projects. The result has been that the government revised forecasts of gross domestic product growth in 2013 from 7.5 percent to 5 percent and reduced the government budget 4 percent.

However, the Kazakh government has some cause for optimism. Oil prices are climbing again, with prices currently at $122 per Brent crude barrel, due to a series of global crises such as Syria. More than half (52.2 percent) of the Kazakh government's budget is based on oil revenues set on a price of $117 per barrel. Therefore, the government's budget is still being damaged by lower oil prices, and it is uncertain how long this recent spike will last, but in recent weeks prices have risen significantly closer to the government's projections.

Additionally, it is encouraging for Kazakhstan that Kashagan has taken its first step forward in years. With fresh partners and financing in the project after China's joining, the long-delayed project could finally be on track to start commercial production. The remainder of the year should give a better idea of which way Kashagan will go and whether the Kazakh government will have to revise its economic outlook yet again.

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