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Kazakhstan agrees to later Kashagan oilfield start (Kazakhstan, July 3, 2008-issue 519)

By Charles van der Leeuw

TCA contributor

ALMATY (TCA) – Kazakhstan and a consortium of Western oil companies developing the huge Kashagan oilfield in the Caspian Sea have agreed to put off the start of production until 2013, a senior Kazakh government official said on June 28.

The agreement paves the way for Kashagan’s further development after a year of tension between the consortium and the Kazakh government over production delays and cost overruns at the world's biggest oil discovery in 30 years.

Figures keep changing

“The Kazakh government has agreed to postpone starting of commercial extraction of oil in Kashagan from 2011 to 2013,” Itar-Tass reported on June 28 quoting Energy and Mineral Resources Minister Sauat Mynbayev. “[…] The negotiating team displayed enough adherence to principle to defend Kazakhstan's interests. It achieved the maximum that could be done, Kazakh Prime Minister Karim Masimov noted. At the same time, he hopes that it would be the last postponement.”

At the same time, the figures keep changing. Exploration and development costs are now being put at the dazzling amount of 138 billion US dollars. It remains unclear what the exact reasons are, and on which exchange rate the amount is based. This is crucial since Saipem, subsidiary of former sole Kashagan operator Eni of Italy, charges in the euro. As for reserves, which on the occasion of former delays’ announcements had been upgraded to the ultimate amount of 50 billion tons of which 15 billion, meaning in the order of 100 billion barrels, “could” be recovered. In the latest round of talks, the consortium came up with the far more modest deposit volume of 38 billion barrels of “oil in place”.

‘Floating royalties structure’

The major concession by the Kazakh government is to sustain the exemption of the Kashagan project to a new tax law that replaces the production sharing principle, through which Kazakhstan gets its shares in the form of royalties and so-called pre-earnings tax, by duties on exportation. In exchange, the consortium will have a clearly defined deadline to break even on its balance sheet between yield and expenditure.

“Apart from fixing the schedule, Mynbayev said the memorandum stipulated the consortium would not be able to use proceeds from oil production to compensate for costs sustained after October 2013 -- a move designed to prevent further cost rises,” a Reuters report said. “He said Kazakhstan also rejected the consortium's proposal to extend its production sharing agreement (PSA) beyond 2041. […] Separately, he said the moratorium mapped out a new floating royalties structure for Kashagan requiring it to pay 3.5 per cent of output to the government at global prices above $45 a barrel, 7.5-8 per cent at $130, and 12.5 per cent at $195. Under a January deal, KazMunaiGaz doubled its stake to 16.81 per cent in Kashagan for $1.78 billion and stripped Eni of its leading role in Kashagan. Other shareholders cut their stakes on a pro-rata basis. Mynbayev said the consortium agreed to the latest changes provided that it will be exempted from new taxes and duties Kazakhstan plans to introduce from next year for its key industries to boost revenues and foster diversification.”

Salt dome structures

Environmental concerns by both provincial and national authorities have also made the central government understand that money should be spent on environmental safety by the consortium, lest the state would be charged with them. The northern Caspian, from a geological point of view, is a high risk area. The oil pools are located on top and under salt dome structures, which originate from as far back in time as 180 million years ago, when the Paleo-Tethys ocean dried up, in the process of which lagoons were formed with extremely salty water.

Salt-dome oil’s top layers are sour (meaning rich in sulfur) but light due to the presence of salt that filters out the heavy components. Under the salt domes, where more than 80 per cent of the oil is located, the oil is both sour and heavy. The wells are kept stable by the salt, which is a good conductor. But pressures can easily exceed 1,000 atmospheres while temperatures can be up to 3,000 degrees Celsius. If oxygen gets into the wells, the balance will break, the oil be cooked and the well implode. If the salt is being avoided by the drill, the next danger consists of fault traps, drilling through which makes the well explode resulting in giant gushers which no blow-out preventer can resist. These gushers contain H2S, a lethal gas that kills all life in its immediate surroundings instantly and can turn vast areas into moon landscapes.

Exotic competition

The scary outlook of such a Mad Max scenario has apparently made Astana cautious, since Western operators and contractors remain the best bet concerning safety measures. Another factor that may have prompted the Kazakh government to be lenient to its foreign operators is the fact that all of a sudden Kashagan, long considered the sole world-class discovery since the 1970s, has got exotic competition in the form of another “giant” discovered off the coast of Brazil, which, for all it matters, is also salt-dome based.

The ultimate result may well be that, like tourists in the Dutch beach resorts of Zandvoort and Scheveningen and those in Mexico’s tourist paradise of Acapulco, guests at Copacabana will end up with drilling platforms on the horizon as well. The big difference for operators is that they can work under lavish tropical sunshine, without having to cope with masses of ice pushing against the edges of their rigs for four month per year as is the case in the northern Caspian.

According to Brazil’s head of state, political veteran Ignacio Lula da Silva, as quoted by Bloomberg in a recent report, one block identified by explorers alone contains amounts of oil equivalent to Kashagan and its neighboring fields together. “Tupi is part of an area called pre-salt that stretches 800 kilometers (500 miles) off the coast near Rio de Janeiro and Sao Paulo,” Bloomberg’s news report reads. “Such reservoirs beneath as much as 3,000 meters (9,840 feet) of water and 7,000 meters of seabed may contain 50 billion barrels of oil. […] Oil prices, which jumped above $140 a barrel to a record today, will probably stay high enough to justify exploring the pre-salt fields, Ignacio Lula da Silva said. The Tupi deposit and nearby offshore prospects may cost $240 billion to exploit.”