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And So It Goes: The Story of Kashagan
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 again 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 companies’ 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 to on time or on budget. More important, it also exemplifies the extreme limits 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. If Kashagan is the marginal project, it defines the marginal costs of the oil industry today, which costs must be a fraction of the potential rewards if the oil is ever to be surfaced. That is one reason oil is selling where it is.
I do truly doubt that speculators have much to do with the current price of oil.
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7 responses so far ↓
1 Lou Grinzo // Jun 24, 2008 at 12:37 pm
As many others have said, it’s not the size of the barrel in the ground, but the size of the straw we can use to empty it.
In my experience in writing and giving presentations about peak oil, this fundamental misunderstanding of the difference between stocks and flows is one of the biggest roadblocks to getting people to understand the topic. I’ve even heard people accuse those of us who think peak oil is a real and imminent phenomenon of “moving the goalposts” by talking about flows, when that’s the very definition of peak oil–a peak in the rate of supply.
2 mark // Jun 24, 2008 at 1:19 pm
If it was the speculators, the price would have already gone up, given the attention…………
I still can’t understand why the Congress has no clue given the expert analysis in session? Is it still votes?
3 mark // Jun 24, 2008 at 1:20 pm
gone down………sorry.
4 Darek Urbaniak // Jun 25, 2008 at 3:07 am
Other even more severe problems with Kashagan that the author did not mention are related to the environmental and social impact of this giant project.
See: “Kashagan oil field development” at:
http://www.foeeurope.org/publications/2007/KashaganReport.pdf
NGOs express grave concerns about environmental, health and social impacts of the Kashagan oil field development
A coalition of NGOs monitoring the detrimental impacts of the Kashagan oil field in Kazakhstan urged the European Commission, the Italian government and public and private financial institutions to conduct a full environmental social and health impact assessment of the Kashagan oil field development before restarting operations.
The Kazakhstan government suspended activities in August accusing the consortium operating the field of environmental violations, but this week the oil companies, the Italian government and the European Commission have been pushing for an agreement to conclude the ongoing renegotiation of the Production Sharing Agreement (PSA) and restart operations in Kashagan.
Friends of the Earth Europe, Friends of the Earth France, Campaign to Reform the World Bank, CEE Bankwatch and Globus have just completed an international fact finding mission organized to asses the environmental, social and health impact of the Kashagan oil field development. Investigations were conducted in the Atyrau and Mangistau regions (cities and vicinities of Aktau, Atash, Atyrau, Bautino, Bolashak, Karabatan and Koshanai) - locations of the onshore operations of the Agip Kazakhstan North Caspian Operating Company N.V. (AGIP KCO).
Based on the findings and previously conducted research, the NGOs express serious concern about environmental, social and health effects of the field development. NGOs collected evidence that sulphur emissions and storage pose serious threat for the communities close to the Kashagan oil facilities and for the Caspian environment. Thousands of people have been already relocated in the region because of emissions of sulphur and other highly poisoning chemicals such as mercaptans, which are present in Northern Caspian oil. Unprotected storage of large quantities of sulphur is also recognized to be a major cause of acid rain on a global level.
Darek Urbaniak, Extractive Industry Campaign Coordinator for Friends of the Earth Europe said:
“EU Energy Commissioner Andris Piebalgs is set to head to Kazakhstan to defend European oil companies whose operations may cause severe environmental damage and violate access-to-information laws. It is not acceptable that the European Commission prioritises EU energy security over the people of Caspian region’s right to healthy lives and a safe environment.”
According to Gwenael Wasse, Corporate Social and Environmental Responsibility Campaigner at Friends of the Earth France:
“While the media attention is currently focused on ENI as a project operator, the other consortium’s companies also share a big responsibility in the potentially catastrophic impacts of the operations. For instance, Total should be aware that being part of the Kashagan project seems very contradictory with its sustainable development voluntary approach, may it be only in regard to insufficient transparency and environmental assessments.”��
Elena Gerebizza of Campaign to Reform the World Bank said:
“Governments and institutions financing Kashagan should look at the threat that the developing of this project may pose to the hundreds of thousands of people living in the Northern Caspian. Before pushing for a conclusion of the current renegotiation of the PSA, the Italian Prime Minister Romano Prodi should ask AGIP KCO to release all information available on the health and social impacts that waste treatment, sulphur emissions and storage will have on the people and the whole fragile Caspian ecosystems. As requested by the local communities, he should promote an independent assessment of the impacts of the project before operations in Kashagan reopens.”
Galina Chernova, Director of Globus said:
“The potential risk of this project to the local population and environment can not be overseen by the companies in the long term. The needs and concerns of the people living in this region are still to be addressed.”
Manana Kochaldze, Regional Coordinator of the CEE Bankwatch:
“European Bank for Reconstruction and Development (EBRD) financed Bautino Atash marine and support base is more than infrastructural development. Sulphur and mercaptan emissions from oily water processing and treatment of wastes transported here from Kashagan offshore facility may severely impact the thousands of people living in the area. EBRD should stop financing this project until an independent assessment of the health and environmental impact will be undertaken.”
Prior to the mission the NGOs had requested a meeting with the AGIP KCO in its head office in Atyrau in order to acquire updated information on the environmental, social and health impact of their operations. Despite fulfilling the consortium procedures the NGOs request has been denied.
5 Jim Kingsdale // Jun 25, 2008 at 7:02 am
Darek: thanks for posting that information. It puts the project in an even more speculative category in terms of its eventual completion.
My point was that if major oil companies are willing to invest huge sums in a project as difficult and no doubt expensive as Kashagan, that is measure of how scarce and costly future oil supplies have become and a reality check that supports the idea that peak oil is not too far off. The information on the environmental dangers that must be mitigated at further cost, which is certainly not news to the companies involved, just makes that point even more stongly.
6 Jim Kingsdale // Jun 25, 2008 at 1:52 pm
from ispyoil on the SeekingAlpha site:
Kashagan is an extremely difficult project, however it is NOT a deep water project. It is located in relatively shallow water.The drilling is deep however and has very hot temperatures and has sour poisonous gases and very high pressures.The temperatures very from over a 100F in summer to well below zero in the winter.The crude is decent quality but has a high sour(sulfur) content.
7 Richard Brookfield // Jul 15, 2008 at 1:06 pm
Kashagan is in very shallow water in the NE Caspian, (not deep water).
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