Kashagan production delayed until 2013

energy

By SRI ⋅ June 30, 2008 ⋅

Production at Kashagan, the giant Caspian field developed by a consortium of oil companies, will begin in October 2013. The Kazakh government and AgipKCO, the Eni-led consortium, signed a memorandum of understanding to this effect on Friday, announced KazMunaiGas, the Kazakh national oil company and a shareholder in the project.

The project was embroiled in controversy since last August when Eni SpA, the operator of the project, announced that production would be delayed and the total cost of development would exceed the original estimates more than twofold, from $57 billion to $136 billion.

Friday’s agreement concluded months of negotiations over the new structure of the project, everything from timeline to costs to revenue sharing. It built upon a framework agreement signed in January which promised to compensate Kazakhstan for production delays and rising costs at Kashagan and give the national oil company a greater share in the project.

As KazMunaiGas said in a statement Saturday, “the Kashagan consortium has reached agreement with the Government of the Republic of Kazakhstan on a detailed Memorandum of Understanding which expands considerably the agreements reached last December and January and paves the way for proceeding with the development project.”

The Caspian giant

The Kashagan oil field holds an estimated 38 billion barrels of oil with recoverable reserves of 9 to 16 billion barrels and is considered the largest oil field discovered in the last 30 years. The production is expected to start with 75,000 barrels per day (bpd), and peak at 1.5 billion bpd at the turn of next decade.

AgipKCO, the consortium tasked with developing the field, consists of Eni, Royal Dutch Shell, ExxonMobil, Total and KazMunaiGas (all of which have a 16.81 percent share in the project), ConocoPhillips (9.26 percent), and Inpex (8.33 percent). Eni has been the operator of the project since 2002 but a new operating structure has been formed as part of the January agreement with Kazakh government. The new operating entity will be formed by the five companies with the largest share in the project with each company responsible for a different part of the project.

New agreement

The announced production deadline is already the fourth since the beginning of the project. Initially, production was expected to begin in 2005, then in 2008, and the most recent date of 2011 was set just six months ago.

“I think this time it will be the last delay,” Sauat Mynbayev, Kazakhstan’s Minister of Energy and Mineral Resources told reporters at a news conference on Saturday.

According to the newest agreement, the consortium will not be able to compensate its development costs at Kashagan past October 1, 2013. This move is designed to prevent further cost rises and delays. According to the original agreement, Kazakhstan would only receive its share of revenues from the project when the shareholders recovered their costs.

Furthermore, the memorandum stipulated a new structure of royalties based on the price of oil. The consortium will be required to pay 3.5 percent of output to the government at global prices above $45 a barrel, 7.5-8 percent at $130, and 12.5 percent at $195.

The consortium also sought to maintain the stable tax regime stipulated in the original Production Sharing Agreement (PSA) and be exempted from the planned taxes and duties on natural resources.

“They’ve agreed to all these changes provided their tax stability is preserved,” Mynbayev said, adding it was up to parliament and the presidential administration to decide whether to exempt Kashagan from the new tax code.

However, according to his words, uncertainty in tax and export regimes could create economic difficulties for the project, and the compensation for the delays that the consortium paid to date was already sufficient.

Another demand of the consortium, to extend the PSA beyond the originally agreed upon 2041 was categorically rejected. “The final year, 2041, will stay intact,” Mynbayev said.