• 19 hours U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 21 hours Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 23 hours Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 1 day Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 1 day Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 1 day TransCanada Boasts Long-Term Commitments For Keystone XL
  • 1 day Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 2 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 2 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 2 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 2 days Venezuelan Output Drops To 28-Year Low In 2017
  • 2 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 2 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 2 days Kinder Morgan Delays Trans Mountain Launch Again
  • 2 days Shell Inks Another Solar Deal
  • 3 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 3 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 3 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 3 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 3 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 3 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 3 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 3 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 4 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 4 days Norway Grants Record 75 New Offshore Exploration Leases
  • 4 days China’s Growing Appetite For Renewables
  • 4 days Chevron To Resume Drilling In Kurdistan
  • 4 days India Boosts Oil, Gas Resource Estimate Ahead Of Bidding Round
  • 4 days India’s Reliance Boosts Export Refinery Capacity By 30%
  • 4 days Nigeria Among Worst Performers In Electricity Supply
  • 5 days ELN Attacks Another Colombian Pipeline As Ceasefire Ceases
  • 5 days Shell Buys 43.8% Stake In Silicon Ranch Solar
  • 5 days Saudis To Award Nuclear Power Contracts In December
  • 5 days Shell Approves Its First North Sea Oil Project In Six Years
  • 5 days China Unlikely To Maintain Record Oil Product Exports
  • 5 days Australia Solar Power Additions Hit Record In 2017
  • 5 days Morocco Prepares $4.6B Gas Project Tender
  • 5 days Iranian Oil Tanker Sinks After Second Explosion
  • 8 days Russia To Discuss Possible Exit From OPEC Deal
  • 8 days Iranian Oil Tanker Drifts Into Japanese Waters As Fires Rage On
Alt Text

Shale Restraint Could Lift Oil To $80

With oil reaching $70 per…

Alt Text

Soaring Indian Oil Demand Grabs OPEC’s Attention

As Indian oil demand continues…

Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

More Info

The World’s Largest Offshore Oil Field Is Back In Action


Without much international fanfare, the world’s largest offshore oil field and the largest discovered in the last 40 years, Kazakhstan’s Kashagan Field, is on the verge of finally moving beyond the manifold impediments that hindered its development.

Discovered in 2000, the 13 Bbbl field (38 Bbbl of oil in place) was set to begin producing in 2005, however, the first start took place only in 2013. The joy lasted for a mere three months, then a pipeline leak on one of the artificially created islands led to a three-year production hiatus. Yet last autumn, Kashagan was producing oil again. In the absence of any further disturbances, it’s set to gradually ramp up to join the world’s Top-3 highest producing oil fields by 2035.

Much of Kashagan’s past problems boil down to the technicalities of the oil field itself. It’s located in a climatically volatile region where temperatures range from +40 °C in the summer to -40 °C in the winter. And it’s in shallow waters; with depths as low as 4-5 meters, it’s completely covered in thick ice during winter months.  

Kashagan’s oil is extremely sulphurous. Along with high mercaptan sulphur rates, it also wields an H2S content of 17 percent. Coupled with significant overpressure (approximately 800 bar), relatively high oil/gas ratio and a reservoir temperature of 100 °C, the field adds up into quite a challenge for upstream specialists.

Related: Does Russia Really Need The OPEC Deal?

Yet good things come to those who wait, since Kashagan remains by all definitions a brilliant spot to develop. Spread on a territory 70 km long and 30 km wide, with the average oil column amounting to 1 km, the oil is light (45° API) and plentiful.

The necessity to take the Kashagan production design through its paces underlies the field’s assorted issues. Due to the shallow water, the field’s drilling is done with the use of four artificially created “drilling islands” that, apart from being interconnected, also pump the produced oil to the mainland by means of four trunk pipelines.

When Kashagan was expected to go online in 2013, the construction design looked completely ready to use... on paper, that is. The pipelines, supplied by Japanese companies and reportedly able to withstand the sulphur levels of Kashagan, got covered in microcracks along pipeline D. This created an immensely difficult situation for North Caspian Operating Company (NCOC), as the waters around Kashagan are brimming with red-listed animals, such as the Caspian seal, various species of sturgeons and even falcons.

In order to avoid an environmental catastrophe, the operating company shut down production and replaced 200 km of pipelines.

Given the length of delays and overall first-phase costs inflating up to $50 billion from the initial $20 billion, it’s remarkable how little the field ownership structure experience changed in the last 10 years. The four main shareholders—ExxonMobil, ENI, Total and Royal Dutch Shell (all own 16.81 percent)—have inalterably persevered throughout the years. But then KazMunaiGas, the Kazakh national oil and gas company, bought ConocoPhillips’ share and divested two-thirds of its shares to CNPC and the national investment fund Samruk-Kuzyna to ease its debt burden.

This is all the more worth noting, as Kazakhstan’s government has subjected NCOC to hefty fines in the past ($120 million for every year of delay), citing production-sharing contract compliance delays as the main cause. The government even pushed through a contract clause stipulating that if oil prices are above $45/barrel, the government is entitled to a 3.5 percent additional royalty. This takes place against the background of an already rigid contractual framework, whereby the state’s current profit oil stake of 20 percent increases with time (in 2030, it increases to 45 percent) toward a full state takeover by 2045.

Kashagan currently produces 200kbpd; if the currently deployed gas re-injection doesn’t hit a nasty barrier, NCOC intends to bring it to 370kbpd by the end of the year. The redesigned compression center project—both more easily deployable (doesn’t require the construction of another island) and cheaper than the previous versions—should bring Kashagan’s production to 450 kbpd by 2019. The international consortium’s plans, however, consist in the earliest possible commissioning of Kashagan Phases II and III.

Although at a high cost (in 2008 the aggregate costs of Phases II and III were evaluated to be around $120 billion), this would allow NCOC to ramp up production first to 900kbpd, and then to 1.5 mbpd. The sooner this happens, the better for the international majors, which in case the current PSA would be subject to renegotiation, would find themselves in a much more difficult position vis-à-vis the fortified Kazakh state than in 1997.

Moreover, any increase in the frequency of technogenic earthquakes caused by the drilling of offshore subsalt resources, as well as any environmental catastrophe caused by oil or gas leaks, would move the goalposts of the Kashagan project, and the state will inevitably move to get a much bigger share than it currently holds.

Paradoxically, export routes don’t represent a massive headache for the NCOC consortium. Kashagan’s current volumes can be fully handled via the Caspian Pipeline Consortium (CPC), which expects to supply 8.1 million tons of Kashagan oil this year to the Russian port of Novorossiysk. After CPC’s throughput capacity extension is carried out late 2017, its 56 mtpa Kazakh quota (of the total 67 mtpa) will allow Kashagan producers not to worry about supply routes.

Related: Supermajors Prepare For A Permian Bidding War

Even the commissioning of Phases II and III won’t fill NCOC with much consternation, given that the Uzen-Atyrau-Samara can be easily made use of (not to mention its possible extension which would further cement the Russia-Kazakhstan energy link), with the trans-Kazakhstani China pipeline and trans-shipment to the Baku-Tbilisi-Ceyhan remaining perfectly acceptable supply routes, too. Thus, even when Kashagan reaches its 60-65 mtpa production peak, getting the oil supplied to its end customer will most likely be one of the least difficult issues.

Kashagan’s production increase will be an indubitable boon for Kazakhstan, but will squash any compliance with the OPEC+ quota Astana has agreed on to fulfill. When the Vienna talks produced the OPEC+ quota distribution, Kashagan was making its first timid steps, therefore Kazakhstani negotiators agreed to a 1.623 mbpd production cap to be reached by mid-2017. However, by July 2017 Kazakhstan was producing 1.724 mbpd of crude, with Astana officials stating that the growing Kashagan production has created entirely new market conditions for them, rendering any further quota compliance almost impossible. Whether the OPEC+ member will allow Kazakhstan to clinch a separate deal, as Astana insists upon, remains to be seen.

Whatever the outcome, after several years of stagnation since 2010, Kazakh crude output will rise in both mid- and long-term. Thanks to Kashagan and Tengiz’s Future Growth Project, its current 80 mtpa volume is destined to increase almost twice, to 135-140 mtpa by the 2030s. Yet for this to happen, Kashagan’s development needs to be undisturbed and steady.

By Viktor Katona for Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News