Biggest Find in Decades Becomes $39 Billion Cautionary Tale

Bloomberg reports that cost blowouts at phase 1 of Kazahkstan’s Kashagan oil field development have made the partners in the project wary of proceeding with the second phase - Biggest Find in Decades Becomes $39 Billion Cautionary Tale

After 11 years and $39 billion of investment, Exxon Mobil Corp., Royal Dutch Shell Plc (RDSA) and their partners have yet to sell a drop of oil from what was touted as the world’s biggest discovery in four decades.

Centered on a man-made island 70 kilometers (44 miles) from Kazakhstan’s coast, the Kashagan project is just months away from completion, $15 billion over budget and 8 years behind schedule. As the milestone of first oil nears, the Kazakh government is pressuring the group for a commitment on an even- bigger second phase, a project the oil companies are undecided on and one analyst says may not make money.

"The biggest worry is whether the project can ever be profitable given the huge cost escalation and start-up delays,” said Julian Lee, a senior analyst for the Centre for Global Energy Studies in London. It may be "impossible for investors to earn a return on any investment in a second phase before their contract for the field expires” in 2041.

Kashagan, which may hold enough oil to supply the world for six months, has become a cautionary tale for oil companies worldwide as they spend an estimated $20 trillion through 2035 finding supplies in ever more difficult places. Expenses mounted as engineers underestimated the complexity of drilling under a region of the Caspian Sea that’s frozen almost half the year. The government accused the partners, which are allowed to recoup spending before sharing the oil, of inflating costs.

Nursultan Nazarbayev, Kazakhstan’s leader-for-life, toured Kashagan in September and declared it a "colossal” work defining his 20-year rule since the Soviet Union’s collapse, which included building a new capital city in the middle of the country’s steppe. When the oil project starts production it will be a milestone for the Central Asian republic of 16.5 million that’s four times the size of Texas.


Kashagan has proved potentially lethal as well as complicated. The crude oil, locked 4,200 meters (2.6 miles) below the seabed in a highly pressurized reservoir, has a high concentration of poisonous "sour gas,” according to North Caspian Operating Co., or NCOC, the venture formed to manage the project. ...

The project’s structures are wrapped in impermeable membranes to keep contamination from the Caspian, home to seals and caviar-bearing sturgeon, and surrounded by barriers to fend off ice. The water at the site is only 3 to 6 meters deep and with low salinity and winter temperatures below minus 30 degrees Celsius (minus 22 Fahrenheit), the northern Caspian Sea freezes for almost five months of the year. …

Kashagan may initially produce 370,000 barrels a day, which will rise to 450,000 barrels a day by 2016, Kazakhstan’s Mynbayev said Oct. 4.