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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.

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

Offshore

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.

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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

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