Kazakhstan consortium achieves first oil production from Kashagan field

Kazakhstan consortium achieves first oil production from Kashagan field

U.S. Energy Information Administration

WASHINGTON -- During the week of Sept. 9, the North Caspian Operating Company, led by Eni, reported starting production from Kashagan, the largest oil field to be discovered in the past 35 years. Since the field's discovery in June 2000, this consortium, including its four original members (Eni, Shell, Total and Exxon Mobil), has invested nearly $50 billion in the project, in attempts to overcome technical, political and geographical challenges, making Kashagan not only the largest oilfield outside the Middle East, but also one of the world's most expensive.

The recent start of the first of the 21 production wells included in the first phase of production comes eight years later than originally anticipated. This start was in advance of an October 2013 deadline, set in the terms of the consortium's production sharing agreement (PSA). Had this deadline not been met, the consortium would have had to forfeit compensation for expenditures. Eni forecasts output from the initial development to reach 200,000 bopd by the end of 2013, and then rise to the full phase-one target of 370,000 bopd in 2014.

Kashagan is an extremely complex project. Challenges to production include the field's great depth (15,000 ft below the sea bed), reservoir pressure exceeding 10,000 psi, with lethal levels of hydrogen sulfide, and cold temperatures that make it unsuitable for typical fixed or floating platform designs. Many of the participants have developed expertise in managing projects in remote cold areas, but few have managed projects with so many technical challenges.

Kashagan has an estimated 13 billion bbl of oil in proved reserves. This represents most of Kazakhstan's offshore proved oil reserves, and is roughly equivalent to Brazil's entire proved oil reserves, both onshore and offshore. A possible second phase would boost production to 1.5 million bopd. However, the partners will need to determine if they will be able to recoup their expenses and reach an acceptable level of profitability before the project's PSA terminates in 2041.

Kashagan and Tengiz, Kazakhstan's largest onshore field, together account for a significant part of the nearly 4 million bopd of production that EIA's 2013 International Energy Outlook projects Kazakhstan will reach in 2040.

Because Kashagan is located in the northern section of the landlocked Caspian Sea, bringing oil from the field to market also presents significant logistical hurdles. As many of the production group members are also part of the Caspian Pipeline Consortium (CPC) and have rights along the pipeline of the same name, the CPC may be the likeliest route for the early oil. Pipelines would bring the oil to the Russian port of Novorossiysk on the Black Sea, from where it could then reach international markets through the Bosporus Strait.

Kazakhstan also plans on constructing the Kazakhstan-Caspian Transportation System (KCTS), with the help of foreign investment. The plan is to export oil produced primarily at Kashagan and Tengiz to international markets via a new pipeline on the eastern side of the Caspian to a new terminal at Kuryk, before being shipped to Baku to enter the Baku-Tbilisi-Ceyhan (BTC) pipeline. KCTS is expected to supply 300,000 bopd through BTC to global markets, gradually increasing to 800,000 bopd. Costs for the new pipeline are currently estimated by KazMunaiGas to be $4 billion.