Energy giants look to longer term at Kazakh oilfield

Energy giants look to longer term at Kazakh oilfield, after having spent $46 billion over 12 years to bring Kashagan to the brink of production.

KASHAGAN OILFIELD, KAZAKHSTAN  (REUTERS) -  It has taken $46 billion over 12 years to bring Kashagan, the biggest world oilfield discovery since 1968, to the brink of production.

But some in the seven-member development consortium are wondering whether they will be able to recoup their investment in the western Kazakh oil field before the current Production Sharing Agreement expires in 2041.They hope the departure of one partner, ConocoPhillips, will lead to a reshuffle that will give them greater operating control and extend the PSA beyond 2041, long enough to guarantee returns from the larger second phase of development.

Up to 12 billion barrels of oil, enough to supply the world for four months, lie in wait beneath Kazakhstan's portion of the Caspian Sea, to be extracted by the consortium that includes ExxonMobil, Shell and Eni.

ConocoPhillips, which is disposing of billions of dollars' worth of overseas assets to reduce debt and increase its exploration and dividend budgets, wants to sell its 8.4 percent stake, Kazakhstan's Oil and Gas Minister Sauat Mynbayev said.

The Houston-based company has not confirmed this.

Alain Guenot, planning director for North Caspian Operating Co, or NCOC, the consortium that unites the seven investors, sais that there're many challenges at the Kashagan project and only a small fraction of this huge oilfield has been developed, adding that this is a 'lifetime project'.

"Another challenge is the fact that we are in the Northern part of the Caspian Sea which freezes in the winter. And on the boat trip we had this morning in the winter everything would be completely frozen, and you have conditions, which are very close to Arctic conditions with ice pushing on the island and so on. This is also another challenge,"Alain Guenot said.

"When you know the achievement is to be able to put this field in production, you know, this is one of the... this is the first offshore development for the Republic of Kazakhstan in the Caspian, it's quite an achievement for all the people who have been working here and it's very important for the Republic, it's quite important for us as well," he added.

If ConocoPhillips does sell up the state oil and gas company, KazMunaiGas, would have first refusal on a stake some analysts estimate to be worth more than $5 billion.

Kazakhstan, the largest economy in central Asia, has grown in confidence and is pushing to redraw contracts agreed in the lean years after being cast adrift by the Soviet Union's collapse in 1991.

The state entered the project as a shareholder in 2005, after locking horns with the developers over ballooning costs. KazMunaiGas doubled its stake three years later to its current 16.8 percent.

This is the same as Eni, ExxonMobil, Shell and Total. If peak production of 1.5 million barrels per day is ever achieved, these five partners would each be entitled to 252,000 barrels per day.

Oil minister Mynbayev expects first oil in March 2013. Daily output is forecast to reach 370,000 barrels by 2016. The ultimate Phase One target, requiring the addition of extra gas compressors, is 450,000 barrels per day.

But with up to 12 billion barrels of recoverable reserves within the Kashagan concession area - about the same as OPEC member Algeria's total proven reserves - the real value lies in a second phase that will begin beyond 2020.

Kazakhstan needs the foreign companies to be involved because it does not have the first-hand experience of developing a deep and exceptionally complex offshore field involving a man-made archipelago stretching across the northern Caspian Sea.

The sea is less than five metres deep in places, too shallow for large ships. It freezes for five months a year, heaving ice floes against islands made from local limestone. Once, they even carried a stranded wolf ashore.

And though the water is shallow, the seabed reservoir itself is more than four kilometres deep. It's also high-pressure and rich in combustible hydrogen sulphide. Safety measures, Guenot said, are part of the reason that costs have overshot estimates.

Twenty wells on two islands - there will be 40 by 2016 - will be controlled remotely from D Island, the offshore hub.

From a peak of 6,500 during construction, staff numbers will drop to 240 at a time when production begins. Another 200 per shift will be onshore at the Bolashak plant which lies at the other end of a 130-kilometre pipeline from the sea. Eighty percent will be Kazakh citizens.