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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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World’s Most Expensive Oil Project Could Finally Come Online

One of the world’s largest oil projects could soon come online, bringing a rush of new supply that could delay the oil market balance.

The Kashagan oilfield is years behind schedule, but the massive project could soon begin operations. Located it the Caspian Sea in Kazakhstan, the oil field was supposed to come online a decade ago, but the uniquely complex project has bedeviled its owners – Eni, Exxon, Shell, Total and the Kazakh government.

The field has a price tag north of $50 billion, raising questions about how and if the companies will ever be paid back. First things first – the operators must bring the field into operation.

In October, that objective could finally be realized. The companies estimate that Kashagan could result in 370,000 barrels per day coming online within the next year, which, if true, could delay the balancing of the global oil market. The IEA already sees supply exceeding demand through the first half of 2017, but an additional 370,000 barrels per day could push the “balancing” back by a few months.

On the other hand, not everyone believes such rosy estimates from Kashagan’s owners. Wood Mackenzie says that the field will still cause problems for Eni and its partners. WoodMac only expects the field to produce 154,000 barrels per day in 2017, not 370,000 bpd. In fact, the consultancy doesn’t expect Kashagan to hit that threshold until 2026 at least, a stark difference from the oil companies’ estimates.

Kashagan began with great promise. It was one of the largest oil discoveries in some four decades when it was made in 2000, but it has been an enormous headache for its owners. That is because of the extraordinary challenges that it poses: The field is located thousands of feet below the Caspian Sea; Eni and its partners had to setup manmade islands to drill through; they have to deal with sea ice in the winter; and the field is also rife with poisonous hydrogen sulfide gas.

It was that deadly gas that corroded a key pipeline connecting the field to onshore processing facilities. When the pipeline leaked in 2013, the whole project was forced to shut down. The companies have been trying to solve that problem ever since.

The laundry list of problems, delays, and cost overruns led The Economist to nickname the project “Cash All Gone,” a play on the oilfield’s name.

But no matter, the oil major’s involved are desperate to bring the field online in order to start to recoup some of the $53 billion they spent on the project. If they succeed, the global oil market will see a new source of supply. As David Sheppard of The Financial Times put it on Sept. 13, “[i]t is, perhaps, one of the great ironies of the current downturn that a project unlikely to be commissioned in today’s environment should set back the long hoped for rebalancing of the oil market.” Related: IEA Claims Oil Will Be Lower For Longer

Indeed, projects like Kashagan would no longer make it in today’s oil market. Projects that take years, cost tens of billions of dollars, and present extraordinary development challenges have almost uniformly been scrapped by oil companies around the world. Of the $1 trillion in spending reductions made by the industry between 2015 and 2020, the megaprojects were the first to go.

Kashagan’s problems are illustrative of many oil projects as a whole, just on a larger scale. Even before the oil price downturn, the industry was plagued with delays and cost overruns. An estimate from Chevron found that only 8 percent of all projects sanctioned between 2007 and 2010 came in on time, on budget and hit their production target. And more than 40 percent of projects from that period were both delayed and had cost overruns.

That is not such a big deal if the project is a shale well, where the cost figures are in the millions, and the delays are a matter of days or weeks. For projects like Kashagan, delays are measured in years, and they can add tens of billions of dollars to the final bill.

Kashagan is a uniquely complex project. It is also likely to be the last of its kind for many years.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Amvet on September 21 2016 said:
    Or perhaps another pipe will rupture?
    I have been following this play since 2000.

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