WHY OIL COSTS MORE: CASE STUDY -- KAZAKHSTAN

Why? Because it’s harder and more dangerous and more expensive to produce. Even in places where it’s abundant and there’s no war.

Don’t miss the last quote, from Kazakh Prime Minister Karim Masimov.

(First in a series of case studies on WHY OIL COSTS MORE)

In Caspian, Big Oil Fights Ice, Fumes, Kazakhs
Guy Chazan, August 28, 2007 (Dow Jones Newswire/Wall Street Journal via RigZone)

WHO
Original consortium members: Italy's Eni SpA, field operator; Statoil ASA of Norway; Exxon Mobil Corp. of US; Royal Dutch Shell; France's Total SA; Britain's BP PLC and BG Group PLC. Added: The Kazakh national oil company.

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WHAT
Kazakhstan, impatient with delays and costs, suspended drilling by an alliance of western oil companies for three months. Some suspect this is like Sakhalin 2, where Russia became impatient with Royal Dutch Shell’s delays and cost increases and used environmental regulations to take control. The Kazakhs contend the western companies do not want to produce oil. Meanwhile: delays and costs.

WHEN
- Original deal: 1997
- Kashagan oil was hit in 2000. It is the thought to be the biggest oil field find in since Prudhoe Bay in 1968.
- Infighting prevented drilling plan until 2004, then 2005.
- Production was originally expected in 2005. Now: 2010.
- By 2019, production is expected to plateau at 1.5 million barrels/day (bpd) and produce until 2039.

WHERE
Kashagan field, 50 miles offshore in the Caspian Sea

WHY
- Initial phase costs were originally estimated at $10 billion. Now: $19 billion (and the current delay will add to that). Initial production costs were $57 billion. Now: $136 billion.
- Drilling Kashagan field oil: 2.5 miles below seabed., 500 times sea level pressure, requiring special pipes. Oil in the Kashagan field has a high concentration of the deadly hydrogen sulfide gas, requiring workers to carry oxygen. Compressors needed to pump the gas away. Pumping from refitted swamp barge towed to site. Fires destroyed equipment, tools stolen. Artificial rock islands built for production phase. Protections for breeding grounds of rare Caspian seals and caviar-yielding sturgeon (especially beluga) arranged. Four Ice-breaking emergency evacuation vessels (IBEEVs) brought in. More special arrangements to deal with the H2Sgas.
- Eni blamed for delays, costs. But consortium hangs together as estimates of reserves are revised up. When they get to them. And when they produce them. And if and when they have a pipeline to ship them to market.
- And if and when they decide they really want to bring the oil to market.

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QUOTES
- Kazakh official: "From today, work on Kashagan will be frozen…"
- Kazakh Prime Minister Karim Masimov: "When costs increase by 5%, by 10%, that's one thing…When they rise by two and a half times, either the planning was wrong, or the execution is wrong, or it was deliberate."
- Paolo Campelli, Eni Kazakh head of operations: "This is not like the Arabian desert, where you just extract the oil and put it in a pipe…"
- Inside source on meetings of the production consortium: "You had to wear a helmet in meetings…It was far from friendly."
- Alex Turkeltaub, Frontier Strategy Group, consultant to Kashagan partners: "There's bitterness about the way Eni has handled this…They've misled the market with remarkable consistency about the production start-up and costs."
- Paolo Scaroni, Eni CEO: "The more we look at Kashagan, the more we realize that this is a super supergiant…This is a field that's going to last until 2039."
- Kazakh Prime Minister Karim Masimov: "Sometimes you wonder whether the investors really want Kashagan to happen at all…International oil companies could profit from high prices on world markets by leaving such a large deposit in the ground….Do they need our oil? Or is it just a game?"