Kashagan Illustrates Hurdles of New Oil Production

 |  Includes: DBO, OIL
by: Jim Kingsdale

Kashagan is the giant oil field in the Caspian Sea that was supposed to start producing oil in 2005 and ultimately give the world 1.5 mb/d.  Well, that fairy tale is over.  It is now proposed that oil will start flowing in 2013 at 370 kb/d and may reach its ultimate capacity flow by 2020 but some analysts don’t believe those dates either. 

Eni is leading the team of international companies that may build Kashagan for its Kazakh owners.  I say “may” because the deal was put on hold for nearly two years while it was re-negotiated, a process that finished about a year ago.  That process reached Kafkaesque proportions when the consortium began considering whether to boot Eni out of the leadership role.  The ultimate decision to leave the Italian company in charge might have had more to do with the jinxed nature of the project and the unwillingness of any other other company to have its name associated with its leadership than any rational business considerations.

Now the Kazakhs want the deal to go back to the drawing board since Eni has brought them new news of further delays.  The Kazakhs may try to impose more fines on Eni and/or the consortium.   But fines may be the least of the oil company's problems.  It’s not clear what equipment arrangements the group has made or how the huge increases in equipment leasing rates in recent years and the difficulties of even being able to secure drilling equipment at this time might impact a diverse group of loosely led major oil companies and their impatient, unsophisiticated, and probably very angry lease-holder country.

Kashagan may not be typical of all oil projects, but it is not atypical either.   The Khurasani project just brought on stream by the Saudis was over a year behind schedule, for example, and that was built on land by the most oil-sophisticated country on earth for which money is no object, to coin a phrase. 

Kashagan is a more difficult project than most, to be sure.  In fact, it may be the most difficult oil problem in the world.  It is not only a deep water project, but the environmental conditions of the area where it is to be built, particularly in winter, are at Hollywood horror film levels of danger to the people working the rigs. 

I bring your attention to Kashagan because it does exemplify the difficulties many oil projects are having in coming home anywhere near on time or budget.  More important, it also exemplifies the extreme lengths to which oil companies must go these days to add new production. 

People who doubt Peak Oil and call it a “theory” talk glibly about all the oil under the Arctic and all the oil shale in Colorado and Utah.  Well, Kashagan points out the costs of getting oil out of such environments and that is one reason oil is selling where it is. 

I truly doubt that speculators have much to do with the current price of oil.