WSJ: How the giant Kazakh oil project went $30B over budget, years late


Four global energy majors, 10 man-made islands and nearly $50B have added up to zero barrels of current oil production, as WSJ profiles the landmark Kashagan "elephant” project gone awry.

It’s a story of sky-high investment at a time of record-high oil prices that is generating very little in return, as well as the sort of uncapped spending that has characterized the push into new frontiers is now being reined in.

The project - co-developed by Eni (E), Total (TOT), Exxon (XOM) and Shell (RDS.A, RDS.B) - has been plagued by budget blowouts, engineering missteps and management disputes, and miles of leaky pipeline make up what is arguably the world's most expensive plumbing problem.

If the era of big spending is to continue - if the push into the Arctic or deep-offshore Brazil or uncharted territories like Mozambique and Myanmar is going to succeed - then the price of crude may have to move higher.

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Comments (13)
  • Michael Fitzsimmons
    , contributor
    Comments (11718) | Send Message
     
    Sure glad COP exited this project!
    31 Mar 2014, 12:16 PM Reply Like
  • Breezy Breeze
    , contributor
    Comments (55) | Send Message
     
    How about the era of not screwing the people? We shouldnt have to suffer higher prices at the pump because of these companies mistakes. I undertstand why the price might need to move higher but still. Jeez.
    31 Mar 2014, 12:16 PM Reply Like
  • User 353732
    , contributor
    Comments (5166) | Send Message
     
    Oil prices have risen, in nominal terms, by a factor of 3 since the project was conceived. The nominal cost was projected to be $20 billion; now its projected at $50 billion: less than a factor of 3 increase.....it seems that the real economics and true value added of the project are about where they were when first articulated.
    31 Mar 2014, 12:34 PM Reply Like
  • john001
    , contributor
    Comments (1217) | Send Message
     
    The comment "it seems that the real economics and true value added of the project are about where they were when first articulated" is poor justification for the many screw-ups that have plagued the Kashagan project. It is a classic example of how to destroy capital. Perhaps the project should be renamed "Cashagone".
    31 Mar 2014, 12:59 PM Reply Like
  • Michael Fitzsimmons
    , contributor
    Comments (11718) | Send Message
     
    Heh heh - "Cashagone"....good one john001! Not funny for the companies themselves, but got a laugh out of me.
    31 Mar 2014, 07:49 PM Reply Like
  • DrP79
    , contributor
    Comments (2519) | Send Message
     
    Shows the magnitude of the problems of bringing new sources on line, particularly in politically unstable regions. Still you have to go where the oil is found.

     

    Also shows how SMALL the "big" oil companies are compared to the states who they have to deal with.
    31 Mar 2014, 12:56 PM Reply Like
  • jolly1
    , contributor
    Comment (1) | Send Message
     
    Will UK north sea suffer from lack of investment, as the oil majors cut back spending ?
    31 Mar 2014, 01:24 PM Reply Like
  • Michael Fitzsimmons
    , contributor
    Comments (11718) | Send Message
     
    I know one North Sea project that got fully funded: Jasmine. ConocoPhillips says the four Jasmine wells are the most prolific in the entire company:

     

    http://seekingalpha.co...
    31 Mar 2014, 07:50 PM Reply Like
  • philli66
    , contributor
    Comments (78) | Send Message
     
    Cheers to Mr. Fitzsimmons for pointing out the exit of COP from this nightmare. Go COP.
    31 Mar 2014, 01:27 PM Reply Like
  • WyoOil
    , contributor
    Comments (158) | Send Message
     
    The technical complexity, and the associated capital requirements, are significantly greater than development projects in the past. The costs and expertise required are merely estimates until you get into the project. This is not any different than building the F-35 fighter--you can spec whatever criteria you wish, but you really won't encounter the real issues until you starting building it out.

     

    This is a warning to all of those who think that in someway the oil companies, and the people responsible for managing those companies, are inherently evil. The assets and expertise necessary to develop that single additional barrel of oil each year will only increase in price, and errors will be made due to the complexity involved. When dealing in third world countries where the government demands you use local materials and labor, the problems only compound themselves.
    31 Mar 2014, 02:58 PM Reply Like
  • john001
    , contributor
    Comments (1217) | Send Message
     
    WyoOil...The kashakan field is a conventional sour carbonate oil reservoir not any more technically complex than others of this geological type that RDS has developed. Therefore, by the time this project reached the full development stage "The costs and expertise required are merely estimates " and " errors will be made due to the complexity involved." make little sense.

     

    I hope you are wrong when you say "When dealing in third world countries where the government demands you use local materials.." Are you implying that the Kazakhstan government insisted that the pipeline not use the more expensive sour service pipe?

     

    Having said the above, I still wonder who is responsible for the capital destruction of such a great geological prize.
    31 Mar 2014, 04:43 PM Reply Like
  • WyoOil
    , contributor
    Comments (158) | Send Message
     
    John. Point taken. The majors are consumed by their own bureaucracy which makes them extremely inefficient as there are often too many managers/overseers. Decisions are often made too high within those same organizations; i.e. too far removed from where the actual "work" is getting done in the field. They breed their own inefficiencies primarily due to their structure.

     

    However, it is better that these third world projects be left to the major IOC's as (a) the independents who do much of the development in North America do not exist in those countries, (b) those same independents can not assume the capital risk associated with projects of this scale, and (c) the resources are most often "owned" adn the projects are influenced by government (need I say more?).
    1 Apr 2014, 10:30 AM Reply Like
  • Nemisis
    , contributor
    Comment (1) | Send Message
     
    Having been involved in several similar mega projects a "Cashagone" comes about as an escalation of ~2 x the normal baseline cost estimates x a factor equal to the number of partners X the number of "Operator" changes and subsequent disruptions and dislocations: thus: {($Baseline cost) x {4 "Operators" (E, XOM, TOT, RDS) raised to the factor of the sum of "Operator" changes and subsequent redirections}. Estimated Baseline Estimate: (~$400MM x (4^3)=$51.2MMM. Projects usually get into trouble when the non-producing "operators" and other "Owner-reps" outnumber the number of the contracted engineering firms trying to complete multiple competing ideas of what's right and wrong.
    1 Apr 2014, 03:02 AM Reply Like
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