Kazakh Kashagan as unfulfilled dream

Kazakh Kashagan as unfulfilled dream

Baku, Azerbaijan, May 7

By Elena Kosolapova - Trend: Kashagan oil and gas project which was expected to become Kazakhstan's glory and pride seems to convert into its great disappointment.

Kazakhstan hoped to get huge revenues from this field which is one of the world's largest oil discoveries of the last 40 years. Moreover the country planned to enter the top ten oil producers thanks to production from this field. However these hopes now face long-term delay.

Kashagan's launch which oil reserves amounts to about 38 billion barrels, including 10 billion of recoverable reserves experienced several delays since 2005. Eventually oil production at the field was launched on September 11, 2013, but was suspended two weeks later following detection of two gas leaks in the onshore section of the gas pipeline running from D Island to the onshore processing facility Bolashak.

Last week North Caspian Operating Company (NCOC) developing the field and Kazakh officials stated that oil production at Kashagan will be resumed the earliest in 2015. Meanwhile the exact date was not specified and some experts believe that the field is closed for al least two-to-three years.

The immediate cause of the pipeline failures was traced by material experts to be sulphide stress cracking due to unexpected locally elevated hardness of the steel, NCOC said. Meanwhile the consortium and the pipelines suppliers assure that the defected pipes met all the requirements of the field and were approved by the State as suitable.

"The specifications meet the requirements of the NACE standards (National Association of Corrosion Engineers), respective ISO standards, and best practices in international oil and gas field development. The sour gas line was designed to withstand the expected H2S content and the presence of water," NCOC said.

However the developer announced that, both oil and gas lines at the field might have to be fully replaced based on investigation results to date, is that, to be confirmed once the ongoing investigation is completed. Thus, Kashagan's current problem consists in oil and gas pipelines running from the field to Bolashak facility each of which is approximately 90 kilometers long. The question is why the pipelined especially designed for Kashagan turned out inappropriate and what alloy of the pipelines will sustain the aggressive environment of the field in future. There were no official statements on this issue yet.

Meanwhile, in early April, a corrosion engineer at Battelle Memorial Institute Barry Hindin told American portal Quartz that to best resist H2S the pipeline should be made of a nickel-based alloy, but that such steels can cost 10 and even 15 times that of ordinary pipeline.

Thus the replacement of the pipelines at Kashagan will not be cheap and entail further increase in the cost of this energy project which is the most expensive in the world even now, according to the ratings of CNN Money.

Kashagan developers will also have to pay 134.3 billion tenge ($737 million) fine imposed by Kazakh ecologists due to environment affect caused by gas leaks. NCOC and its agent Agip KCO appealed this decision but the appellation was declined.

Moreover every day of Kashagan's standstill result in losses for its developers. NCOC planed to produce from 75,000 barrels up to 370,000 barrels of oil per day at Kashagan within the first phase of its development. While oil price remains at about $100 per barrel, oil production at the field would give up to $37 million revenue per day. Kazakh KazMunaiGas' share in this sum is about 16.88 percent.

Meanwhile expert of Kazakhstan's Almaty Institute for Political Solutions Sergei Smirnov does not believe that another delay in Kashagan oil production will affect Kazakh economy.

"Kashagan is being developed under the Production Sharing Agreement. This agreement means that Kazakhstan will receive oil from the field only when investors have offset all its costs. Thus Kazakh budget will not receive huge revenues from this oil in the first years of production," Smirnov told Trend.

Meanwhile project's problems affect its image and several investors have already leaved it, he said.

Much more important issue for the country is environmental risks posed by Kashagan, according to Smirnov. He noted that the fire that flared up at a well of on-shore Tengiz field in 1985, which geological structure is similar to Kashagan could not be extinguished for a year.

"If such an accident happens in the Caspian Sea, hydrogen sulfide will poison the whole sea and the sea will die," he said.

The expert noted that Kazakhstan does not have its own big oil spills response base in the Caspian Sea.

"If a big spill happen at Kashagan we expect that special group will come from the North Sea and will fight its consequences. But how long will it take?" he said.

Smirnov believes that pipelines replacement at the field will take about one year and then NCOC will need some additional period to check other equipment before relaunch of oil production.

"They will have to check the equipment which was installed at about 2005. Some equipment may require replacement too. This will lead to another delay in oil production," he said.

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