In Kazakhstan, Development Of World’s Largest Oil Field In 35 Years Still Going All Wrong

CREDIT: AP/Marc Roussel

This August 2012 photo provided by North Caspian Operating Company, NCOC, shows Kashagan offshore oilfield in western Kazakhstan.

On Monday, Exxon released a climate report detailing how global climate policies are unlikely to impact their fossil fuel production for the next several decades, even as they acknowledged the threat of climate change as meticulously documented in the new IPCC report released the same day. However, a thorough analysis this week by the Wall Street Journal of the decades-long problems of developing the largest oil field discovered in the last 35 years is a reminder that climate policies are far from the only impediment to fossil fuel production that large oil and gas companies face in the early decades of this century.

Kazakhstan’s Kashagan project, located in Kazakhstan’s zone of the Caspian Sea, is estimated to hold as many as 35 billion barrels of oil with at least a third of those being recoverable. This is equatable to Brazil’s total proven oil reserves of 13 billion — the second-largest in South America after Venezuela. Kazakhstan has the second-largest oil reserves as well as the second-largest oil production among the former Soviet republics after Russia. Once phase two is complete, the Kashagan project is expected to produce oil at a rate of around 1.5 million barrels per day, the equivalent of the average rate of crude oil production by all of Exxon’s subsidiaries in 2013, according to Forbes, or about as much as the U.K. uses in a day.

Those are big numbers, but so are these: the Kashagan project was nearly a decade overdue and $30 billion dollars over budget when it started production last September. Then two weeks later a pipeline leak stalled progress, and then it happened again, and now the project is halted indefinitely with no resolution in sight. Things have gone so bad that Kazakhstan is suing foreign oil companies including Exxon, Royal Dutch Shell, Total, and Eni over delays and contract breaches.

“The project has been plagued by budget blowouts, engineering missteps and management disputes extending from offshore roughnecks to top government and corporate leaders,” reported the Wall Street Journal. “Both sides are straining to understand what went wrong:”

“They complain about an unwieldy management structure. Western oil executives say the Kazakh government has held up decisions and imposed onerous requirements for employing local workers. The Kazakhs say the companies made mistakes that included underestimating the challenge of corrosive gas, making plans that needed frequent revision and not doing the welding right.”

With the current geopolitical crisis in the region revolving around Russia’s annexation of Crimea, the outlook for what will happen to the three percent of the world’s oil reserves in Kazakhstan has fallen even further into flux. With the Eurasian Economic Union (EEU) binding Belarus, Russia and Kazakhstan scheduled to replace the Eurasian Customs Union (ECU) in January 2015, any energy-related sanctions imposed on Russia will lead to collateral damage in Kazakhstan’s energy sector. It is not hard to imagine a rift growing in Kazakhstan between those loyal to Russia and those more angled towards the West, as happened in the lead up to the crisis in Ukraine.

“In the quiescent days before the Crimean debacle, it seemed that Kazakhstan could have it all — a role as east-west interlocutor, future member of the World Trade Organization,” reported Oil and Energy Insider. “Now, the EEU may well prove a millstone around Kazakhstan’s neck.”

Despite all this, the Kashagan project could still someday be profitable, according to the Wall Street Journal, bolstered by the fact that oil prices have also risen substantially in the last decade.

When companies announced that oil was finally flowing from the project last September, executives breathed a sigh of relief and an economic boost was predicted for Kazakhstan. Several weeks later, the entire operation was shut down indefinitely. A decade from now, even if Kashagan is churning out oil at a robust pace, and investors are making good on their mission, the fossil fuel industry will still be perpetuating a dead-end life cycle as natural resources get even more difficult and costly to extract and climate change grows in societal and economic implication.