kashagan

Up until last fall, the giant Kashagan field in the Caspian Sea was “Exhibit A” of frustration and ostensibly superfluous investment ($50 billion to be precise) in the global oil scene. But after repeated setbacks, it finally commenced production last September. Now, the joint venture operator of the field, located in the Kazakh waters of the Caspian Sea, says that 7.3 MMbbls of crude oil and condensate have been produced since start-up. The North Caspian Operating Co. said that by last October, the first barrels of crude oil were being processed and prepared for shipping. And on January 8, the first one million tonnes of crude oil and condensate were exported.

Several O&G watchdogs, including OPEC and the International Energy Agency, has identified Kashagan as a potential variable in the movement of oil prices this year because of the additional supply that it could send into an already saturated global market. So far, the field is making good on its potential, with the NCOC reporting production so far at about 180,000 bpd. Once production optimization techniques are fully utilized, the JV says output should reach 370,000 bpd.

According to OPEC’s December market report, “Kazakh oil supply in 2017 will grow by 210,000 bpd to average 1.77 M/bpd, through Kashagan’s production ramp-up.” Further, the country’s 2016 production was approximately 1.38 M/bpd with most of the growth coming from Kashagan late in the year. By the end of 2017, the government expects production to reach full Phase 1 capacity of 370,000 bpd once associated sour gas reinjection is started up and optimized.

What makes this state of things particularly interesting is that Kazakhstan is one of the non-OPEC members that agreed to cut supply by about 580,000 bpd per a December 4 agreement. The country pledged to reduce production by 20,000 bpd (to 1.68 M/bpd) for the first half of 2016. Government officials say mature fields in the Kyzylorda and Aktobe regions will bear the brunt of the output reduction, rather than major projects like Kashagan, Karachaganak and Tengiz.

The Kashagan oilfield is one of the largest fields discovered in the past three decades in the world, and the largest field to be found outside of the Middle East. It is estimated to contain 38 Bbbl of oil-in-place- 16 Bbbl of which are potentially recoverable reserves.

The first exploration well, Kashagan East-1, was drilled by ConocoPhillips with the Sunkar drilling rig in 2000 following the company’s 1998 acquisition of interest in 11 blocks off the Kazakhstan coast.

In 2004, a $136 billion development plan was green-lighted that called for a three-phase production development. Development started two years later. But in 2007 the partners amended the development and investment plans due to the need to construct man-made islands to host drilling equipment. This postponed the production date and raised the cost of development.

Production finally started on September 11, 2013, but was stopped after only two weeks because of a gas leak. After the sealing of the leak, output resumed on October 6 after the leak was sealed, but stopped again on October 9 because of another gas leak.

Italy’s Eni SpA operated the field until 2009, when the North Caspian Operating Co took over. The latter told Bloomberg that it is gradually working to boost output capacity to a 370,000 bpd target by the end of next year. However, others are more cautious regarding production expectations. Wood Mackenzie, for instance, expects only around 154,000 bpd on average in 2017.

“Kashagan is not only the largest oil and gas field discovered in the last 50 years, but also one of the most difficult to develop, due to the high concentration of hydrogen sulphide, a huge reservoir pressure and a closed body of water of the Caspian Sea,” General Director of the Association of oil service companies of Kazakhstan (KazService) Nurlan Zhumagulov told The Astana Times.

In terms of its benefit to the Kazakhstan economy, Zhumagulov said, “the state budget has received bonuses in the amount of $1.9 billion. And until the expiry of that agreement in 2041, it is forecasted that Kashagan will bring $25-$77 billion a year in tax revenues and royalties to the state budget, depending on world oil prices. Clearly, the higher the price of oil, the more quickly the cost of development of the Kashagan field will pay off and the state will increase its share of the profits.”

“Tengiz, Karachaganak and Kashagan are the projects that will ensure not only stable production of hydrocarbons, but also the activation of the oilfield services business over the next decade,” he said.

Zhumagulov leads Association of Oil service Companies of Kazakhstan, which is a public association assisting the development of the country’s oil services sector. KazService mediates contractors and oil companies, as well as helps create joint ventures/consortiums between foreign and Kazakh firms to execute capital-intensive O&G projects.

About The Author Jeff Reed

I specialize in analysis of the oil and gas sector- with emphasis on the Middle East, OPEC, and the politics of energy. I hold a BA in Political Science and MA in Theological Studies from the University of St. Thomas. Prior to a career in oil and gas journalism, I was a Roman Catholic priest serving churches in the Houston area. I also taught high school for a year in Oakland, California, and worked for two years in retail management. Among my other areas of interest are political philosophy, religion and society, culture and the arts, and philosophy.