Kurmangazy: A Risky Proposition

Kazakhstan has been praised and courted for its unexplored energy resources ever since its independence in December 1991. The hope was that its unexplored fields in and around the Northern Caspian and its welcoming attitude towards foreign investors keen to develop those resources will make it a viable alternative to the Middle East and the OPEC. This attitude has been slowly changing as it became obvious that the friendly relations with Kazakh authorities of the 1990’s did not carry over into the 21st century and doubts started creeping in that Kazakhstan’s oil and gas reserves may not be as enormous as previously thought.

In the early 1990’s, the explorable reserves in the Caspian Sea were estimated at as high as 200 billion barrels (currently assess at 17-49 billion barells). Most of them were thought to be located in Kazakhstan and Azerbaijan, but there was hope that the Caspian waters of Russia, Turkmenistan and Iran would prove prospective as well. At this point, Kazakhstan is the only country with significant undeveloped reserves and the potential to grow it production in the coming years. But its oil is mainly concentrated in two (very) large fields – Kashagan and Tengiz. There is other oil and gas production, most notably at the Karachaganak field in western Kazakhstan, but nothing quite at the level of the two above mentioned fields. Tengiz could be considered a Kazakh success story, had it not be for the constant dispute between Chevron, the operator of the project, and the Kazakh authorities over the environmental consequences of the sulfur that is a by-product of Tengiz’s oil. The Kashagan project is the subject of a major standoff between the Kazakh government and Eni, the operator, over delays and cost overruns of the project. The third field, Kurmangazy, that was said to rival Kashagan in size when it was discovered, could have helped push Kazakhstan into the big league. Recent development, however, has raised more questions than answers, and its potential is less than clear. However, its fate could almost serve as a synopsis of the entire Kazakhstan oil boom of the last 15 years.

Kurmangazy, a large oil field not far from the famous Kashagan potentially holds 7-10 billion barrels of oil. If the potential is realized, it will be the third largest field after Tengiz and Kashagan. The important word in the previous statements is “if”. While Kazakh government officials still expect the field to begin commercial production in 2010, there is a lot of skepticism within the oil industry, even among people directly involved in the project.

Kazakhstan signed a PSC with a joint venture of the Kazakh national oil company, KazMunaiGas, and what is now the Russian national oil company, Rosneft, on June 6, 2005. KazMunaiGas holds 50 percent of the project and Rosneft holds 25 percent with the option on the remaining 25 percent once commercial extraction commences. The signing followed a long conflict about the division of the northern (and potentially oil-rich) part of the Caspian Sea between Russia and Kazakhstan. Upon resolution of this dispute, Kazakhstan received Kurmangazy and Russia obtained two lesser fields, Khvalynskoe and Tsentralnoe. Additionally, both countries agreed to develop the fields in the formerly disputed border areas of the Caspian together.

The PSC was signed with great fanfare and much interest of Western companies that wanted to get a piece of the pie and put their hands on Rosneft’s option. This enthusiasm cooled off significantly, however, when the joint venture announced that it failed to strike oil at their first exploration well. This in itself may not be significant, and in all likelihood, the initial failed well at Kurmangazy will soon be forgotten when a second well proves successful. Yet, the dry hole in and of itself was important in punching a hole in the belief - both among the international oil companies and the Kazakh government - of Kazakhstan’s seemingly boundless oil development potential.

The Kurmangazy field is still an important part of Kazakhstan’s strategy to enter the top ten oil exporters and be able to export 3.5 million bpd by 2015. This hurry, however, according to some familiar with this project, may have been partially responsible for the failure of the first exploration well. According to a source linked to Rosneft, the Kazakh side has insisted on conducting the exploration well despite a lack of reliable data. This rush led to the decision – on which insiders blame the lack of success with the first exploration well – to drill the well based on results of a 2D seismic study conducted back in the days of the Soviet Union.

According to official information from Rosneft, the project is currently in the process collection of new information. As the speaker of the company told the Kazakh weekly “Business and Power”, a 3D seismic study of the field has been completed and currently the companies are interpreting the results and analyzing data. According to a Rosneft source, it is definitely not a given that a new exploration well will be drilled soon, though. The amount of information about the field may not be sufficient, and until the data supports the drilling of the well, it will simply not be drilled.

Geologically, the Kurmangazy field seems to resemble the Buzachi peninsula in western Kazakhstan. In contrary to neighboring Kashagan, however, Kurmangazy is an over-salt field which would, according to experts, significantly simplify the development of the field. It would not be necessary to drill through a layer of thick and variable salts as is the case with Kashagan which makes it such a difficult field to develop. As far as projected reserves of hydrocarbons go, Kashagan and Kurmangazy could be very similar but there is just much less clarity about Kurmangazy. It is not even known what can be found there: oil, gas, oil and associated gas?

The potential of Kurmangazy is tremendous – there is no doubt about that. However, by now it is clear that the risks are just as high. While there was considerable interest among Western oil majors to participate in the project, among others by Norwegian Statoil and French Total, this has decreased substantially following the failure to drill for oil during the first exploratory drilling phase. And whilst Kazakhstan has been regarded as the new source of oil for a number of years, the realities are increasing apparent at this point of time: difficult geological conditions, low quality of crude with a high content of sulfur, unfavorable geographical location, increasingly worsening investment climate. These factors come into play much more often than fifteen or ten years ago when international investors consider investment in Kazakhstan. The silence around Kurmangazy may be one sign that international investors are becoming less willing to invest in large-scale and potentially lucrative, but very risky projects.

News Roundup - October 31, 2007

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