Another Champion…

Kazakhstan is having an ambitious goal – to become one of the largest producer of hydrocarbons. Main growth in explored reserves and increase in extraction is expected from offshore deposits because according to certain experts most of on land deposits will be gone through their extraction peak by 2015. Moreover, this is so because geological and exploring works for last fifteen years did not give any results on land, however such offshore deposits as Kashagan, Aktoty, Kayran and Kalamkas have been found.   
For present time in Kazakhstan Caspian Sea defined area of water (KCS) has around 120 structures geological reserves of hydrocarbons which are calculated to be around 12-14 billion tons. 80% of them are located in Northern part of Caspian Sea (including largest Kashagan deposit), around 15% in Middle Caspian region near Buzachi peninsula in Mangistau region (Buzachi oil and gas pond) and 5% in Southern Caspian region (south to Aktau seaport).
It is planed to increase annual oil extraction up to 100 million tons within 7 years. But for now these are only virtual volumes based on governmental statements. Serious correction to these grand plans is needed due to continuous postponement of extraction deadlines in largest oil project – Kashagan. In the beginning it was considered that extraction will start in the middle of 2005 however for that time Agip KCO had financial and technical difficulties, which moved extraction time to the end of 2008. But at that time not very much was lost, cabinet of ministries considering extraction postponement agreed to receive 150 million USD in compensation. In addition, in 2006 Kazakhstan government announced that commercial extraction will start only in 2010 and now this term is not final as well. Consortium was insisting on October 2013, official representatives of Astana agreed in exchange for increase in NC “KazMunayGas” shares in the project from 8.3% to 16.6% and compensation payments in accordance with oil price differences.
However, on third Eurasian energy forum head of “KazEnergy” Timur Kulibayev confirmed that this date might be postponed as well. He said that today Kazakhstan government and Kashagan consortium agreed that major infrastructural units in oil deposit – pipeline, gas-transfer station and others — must be commissioned in autumn 2013. But taking into consideration hard conditions for development of Kashagan, especially in winter period extraction itself will most likely start next year. “We are planning to extract 450 thousand barrels per day in Kashagan in 2014. It just up to this period we have time to solve such issue as construction of objects on land, sea and solve problems of transportation. I consider that all this will be done in accordance with time frame unless some force majeur events will take place”
Kazakhstan government already several times underlined that they are dissatisfied with speed of project’s realization and accused international consortium in all sins possible: where did they look when they were preparing technically – economical base (development expenditures increased from 57 to 136 billions USD) and why they could not solve technical problems? As for the last issue mentioned, official reasons for postponement of extraction time according to operator “difficult geological structure of high pressure reserves” and risks related to high concentration of deadly hydrogen sulphide gas.
For sure there are also some other explanation why Kashagan is going for so long. Since status of Caspian Sea yet to be defined it is difficult to have long term plans and attract foreign investors to the region. Pre – Caspian countries are trying to sell their offshore deposits for highest price possible in order not to lose anything but world oil companies are always willing to pay for such attractive oil deposits for cheapest price. Now we have a two sided puzzle, when seller is trying to increase price of an asset but buyer is not willing to purchase “unknown” because forecasted reserves do not always comply with actual volumes of oil in the deposit. And most important, today are only few people think over if extraction of Caspian oil should be forced soonest possible? Is there a strategic necessity to bring Caspian resources to international energy market?  
Kashagan could become both for Kazakhstan, a wonderful faire tale or big head ache for everybody who works on this project. From one side certain oil plans are related with this oil deposit. However main question is if these are good hopes because of current nervousness in European oil market, failings in American plans, which put under question economical effectiveness of “Baku – Tbilisi – Jeyhan” pipeline, which in turn is main transition corridor from Caspian oil through Caucasus and in general complicates overall situation in oil market. It is known that in reality many potentially attractive projects could be doomed to fail when their actual development is started.
For now further postponement of industrial oil extraction in Kashagan leads to many problems, first of all economical problems. Americans were hoping for Kashagan oil in order to receive at least some financial profit from BTJ, which costs 5 billion USD. Until there would not be oil from Kashagan return of invested capital is under big question. Even though Kazakhstan joined this pipeline two years ago but today filling it with oil is not possible because of the delays in Kashagan field. South Ossetia conflict underlined certain risks of using Georgian territory for transit, especially in large oil and gas projects, which consider using alternative routes without participation of Russia. The risk is that these pipelines opened with solemn ceremonies could be closed at any time due to sabotage or start of new military actions.
Such type of events create many challenges for Europe as well, but it does not ago any further than just discussing alternative routes for oil and gas. Key part of the whole diversification chain is Caspian oil and from some other parts of the world.
Even though there is nothing extraordinary in delay of Kashagan project realization because it happens quite often throughout the world. For example, according to “RBC Daily”, due to higher costs of production and technical challenges related to development of largest oil and gas deposit it is most likely that deadlines of “Sakhalin – 2” Russian project will be postponed as well, plus such oil deposits as “Gorgon” in Australia, “Snohvit” in Norway realized by StatoilHydro, “Thunder Horse” in Mexican gulf and “Tangguh” in Indonesia, realized by BP and “Bonga” in Nigeria fulfilled by British-Holland Shell are to be delayed also.  
How all this situation will affect Agip KCO will be known on October 25, according to the government most of juridical formalities with consortium will be solved by that time and “KazMunayGas” will be officially registered as large participant of the project. Even though there are more challenges than expected with development of the field rich with natural resources and increase in production costs for investors most analytics consider that shareholders will not voluntarily give up the project. Unless of course “KMG” will use continuous delays in production as another reason to increase their participation in the project. Russia has a good example, when Shell has been pressured by the government because of the delays in “Sakhalin – 2” project and problem was solved by giving control of the project to “Gazprom”. That is why it could be considered as a main reason why parties might have agreed to suspend realization of the project up till October. Source familiar with condition of Kashagan agreement of product share explains that there are three main criteria: IRR (internal profitability norms), ratio of income to expenditures and reserves selection. At these conditions suspending commissioning of oil deposit is not deadly for contractor because larger share of the product at low IRR will transfer to him. But if Eni will agree to increase share of Kazakhstan in profitable oil, recoupment of the project for contractor will be stretched out for unknown period. Anyways any further step taken by foreign partners will depend only on next step taken by Kazakhstan government.

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