WHAT IS KASHAGAN WAITING FOR?

Kadyr Karkabatovich Baikenov, a well-known expert and the first Energy Minister of Kazakhstan following independence, who is currently chairman of the Confederation of Employers of Kazakhstan (CEK) speaks with Exclusive on the diverse aspects of oil extraction in the country, including its condition and prospects.

-The main event during the first half of the current year in the oil industry of the republic was the latest delay in the start of operations at Kashagan. How can this newest setback by the operators of the project be explained? The world energy markets, as it seems, have given a foundation from which to accelerate this process… And beside the operators has had a lot of time to do this.
— Before I answer this question, I think that the reader would be interested in knowing that the operator, Agip KCO, planned on starting commercial operations in 2005. However, in the second half of 2002 the consortium approached the government of the republic with a request to postpone industrial production at the field for two years. After conducting negotiations in September 2003, the government, on condition of financial compensation [for losses in revenues], gave its agreement. Nonetheless, in connection with technical and financial difficulties, the board [of Agip KCO] again decided to allow the deadline to pass. According to the new plan, commercial exploitation of the field is foreseen in 2007-2008. At the same time, extraction of oil at the level of 20-21 mln tons [annually] is planned closer to 2010, with 40-42 mln tons in 2013, and 56 mln tons in 2016. As was recently reported by Interfax-Kazakhstan, referring to Baktykozha Izmukhambetov, Minister of Energy and Mineral Resources, commercial production of the Kashagan field is now anticipated by the end of 2009, or beginning of 2010. To this, should be added the construction of a refinery planned for completion only in June 2008. Hence the new deadline. In practical terms, this [latest] delay in the start of industrial production calls forth the question: What holds them to this [new deadline]? Yet, the reasons are sufficient enough. The Kashagan deposit is somewhat complicated to exploit and the technological infrastructure [needs to be] guaranteed, and is also quite capital intensive. Because of this, exploitation can only be handled by a large company, possessing enough work experience. When in 1993 the consortium was founded for carrying out geological exploration work in the Kazakhstani sector of the Caspian Sea, the agreement foresaw licensing the offshore block to the consortium for exploration and subsequent development of the deposit. Taking into account the complexity of exploiting the Kashagan deposit and the necessity for capital intensive investment, the government selected the composition of the consortium among large, well-known oil companies, capable of realizing the given project. Not to go into too much detail about the development of projects and the resulting problems arising in the course of working on them, but I wanted to note how in any organization, big or small, the reasons for not meeting the deadline for putting a project into operation include the following: design errors and introduction of changes in the project during the course of construction; increases in expenses above the original estimates, which cause a budget deficit; not taking into account the outside environment, such as ecological requirements; bad management (the operator); and force majeure circumstances. I think that these factors, excepting the last one, have in their whole measure been present in the Kashagan project, bringing about the delay in holding to the original plan for developing the deposit.

— Taking into account that the deadline for [the start of] production has already been changed in accordance with tradition, can one suppose, in your opinion, this is the last postponement?
— It is difficult for me to say, not being in possession of satisfactory information on the [project’s] budget. However, I think that it will be the last, otherwise it would become necessary to change the consortium’s operator.

— How real are the plans for achieving the total oil production volume target in Kazakhstan in the first half of the next decade [beginning from 2010], as was announced lately?
— At the official level those figures already announced for annual oil production volumes are specifically 100 mln tons in 2010, [and] 150 mln tons in 2015. In my opinion, the actual volumes expected in 2010 totals 88-90 mln tons, with contributions to this from Kashagan of 5 mln tons, Tengiz – 26 mln tons, and Karachaganak – 15 mln tons. In 2015, the overall volume of oil production will total 130-135 mln tons, and of this Kashagan [will contribute] 22.5 mln tons, Tengiz – 36 mln tons, [and] Karachaganak – 20 mln tons. After 2015, Kashagan will expand output up to 56 mln tons per year, while production volumes at Tengiz and Karachaganak will begin to decline at around 2015. In the Caspian Sea, extraction at other fields will begin, which today are still in the exploration stage. As for the other oil fields currently been exploited onshore, the production levels will decrease, so the prognosis for oil production by 2020 is around 160 mln tons per annum.

— Does the unlucky situation with regards to drilling at the Tyub-Karagan and Kurmangazy oilfields result in more cautious estimates as regards the total hydrocarbon potential of the shelf? Could these facts have indirectly effected the start of production at the Kashagan field?
— Carrying out any oil-related operation is always risky. The exploratory drilling carried out at the Tyub-Karagan and Kurmangazy fields proves such a statement to be true. A similar situation occurred in the Azerbaijani section of the Caspian Sea, when their drilling operations only resulted in dry wells. Despite the bad luck with drilling, the Tyub-Karagan and Kurmangazy fields have not been closed. Drilling works will continue on there, and only after their completion will final decisions be made. The dry wells at the abovementioned oilfields did not effect Kashagan at all, as those wells drilled there showed positive proof of the presence of oil.

— In your opinion, can we expect new discoveries of oil and gas fields on the Kazakhstani sector of the Caspian shelf?
— Surely. According to preliminary exploration carried out, more than 400 structures have been defined in the Kazakhstani sector of the Caspian Sea, which may possess deposits of hydrocarbons, and of these 30% may be of practical interest for oil exploitation.

— Taking into consideration the situation regarding the increase in oil production, how can you estimate the prospects of filling the first stage [volume] of the Kazakhstani-Chinese oil pipeline and [eventually] reaching its full capacity?
— The prospect of filling the Atasu-Alashanko pipeline is quite real. As is widely known, during the first stage this oil pipeline is supposed to transport 10 mln tons per year, with a further increase of up to 20 mln tons. In order to fill the pipeline up to 20 mln tons per year, it is necessary to build a Kumkol-Aralsk-Kenkiyak oil pipeline to transport Caspian and Aktobe oil. The Chinese companies that are operating oil fields in Aktobe, Kyzylorda and Mangistau oblasts produce as much oil as is necessary to fill 50% of the pipeline’s capacity. Other companies have already stated their interest in delivering oil to China. At present, the pipeline is filled with Kumkol and Aktobe oil [only], and aside from this, a preliminary agreement with Russia’s Rosneft also exists to put about 1.2 mln tons of oil into the pipeline. Lukoil has also expressed its interest in providing oil for the pipeline that it is extracting in Kazakhstan. According to official information, in 2007 this pipeline will be filled with 8 mln tons. Supposedly, by 2011-2012, following the construction of the Kumkol-Aralsk-Kenkiyak pipeline, and the start of oil production at Kashagan, Caspian oil will also be directed into the pipeline, thus allowing the pipeline to reach its capacity of 20 mln tons. In my opinion, this will only be possible in 2014-2015.

— Already in 2001, in your interviews with Kazakhstani newspapers, you noted a very sharp problem regarding a deficit of highly qualified specialists in the country. And recently, being five years following those interviews, Mr. Iskander Beisembetov, rector of KBTU [Kazakh-British Technical University], stated the same information (Exclusive journal, No. 8-9, 2006). It appears to be an untenable situation when a lack of qualified specialists in the country’s primary industry is observed. What do you believe the reason for this is?
— The problem of a shortage in human resources really does exist, and not just in the oil and gas industry. This is explained by the fact that the state policy in the sphere of preparing specialists of different levels does not correspond with the real needs of the economy. I spoke about this at conferences devoted to the problems of domestic human resources training, which had been organized by the CEK. The deficit in qualified technical personnel in higher education has led to the shortage of skilled laborers. As for qualified engineers, there is also a dearth due to an imbalance in the structure of the higher education system. At present, the project institutes (editor’s note: today, these are private businesses that provide technical assistance and analysis to production companies) that are operating in the oil and gas sphere also face a shortage of qualified engineers. To place all the blame on the state for present problems in HR training would not be wise. Employers are also responsible for the existence of this difficulty. I see the solution of this issue to be found only in regular joint efforts between employers, local governmental bodies and representatives from the educational sphere. If at present we continue to teach our students with the existing technical materials, then in five to ten years, we will still have a deficit of qualified specialists. The educational system today requires a very deep and comprehensive approach, and only through this can we achieve those results we truly desire.

— In practically all spheres of the domestic economy there exists a serious problem of deterioration as regards assets. When you commented on this problem five years previously, you stated that the oil pipelines in our country had deteriorated by 70%, and generally in the oil and gas sector the equipment and assets have achieved a very high rate of deterioration. How do you assess this situation today?
— The oil and gas pipelines have truly deteriorated by a great amount. This can be proven by such facts as limits on transport capacity, explosions in gas pipelines, and oil seepage resulting from holes [in pipelines]. Currently, the situation has become slightly better, due to the replacement of some of the sections, especially in gas pipelines, and pumping stations. Operating companies have taken loans, or invested their own funds, into reconstruction. Let us recall what the oil price was five, or even ten, years ago. Due to the low price for oil and high costs of production, oil and gas companies lacked the financial means to carry out replacement of their technical equipment. The increase in the global price of oil has permitted our oil companies to allocate funds for the updating of equipment, as well as for the purchase of new equipment and technologies. I am quite happy to note that the process of updating equipment has begun at those oil companies operating in Kazakhstan, though not on all fields are they using modern methods for production, especially at older oilfields. The technical level of oil companies is defined by how qualified their employees are, both those working directly for the company and at the project institutes, the latter of which are responsible for technical plans for the development of new fields and the rehabilitation of older ones. Unfortunately, the shortage of qualified engineers at present cannot permit me to say that the updating of technical equipment is being carried out to the level required.