Kazakhs Study Bid to Boost Kashagan Oil Cost to $46 Billion
January 13, 2012, 8:59 AM ESTBy Nariman Gizitdinov
(Updates with analyst comment in third paragraph.)
Jan. 12 (Bloomberg) -- Kazakhstan’s government is considering a request from Exxon Mobil Corp., Royal Dutch Shell Plc and other partners to raise the budget for the first phase of the Kashagan oil project by 20 percent to $46 billion, according to a person with knowledge of the matter.
The international partners, which include Eni SpA and Total SA, will bear the extra cost themselves, the person said, declining to be identified as the information isn’t public. Kazakhstan’s state energy producer, which also has a stake, will reimburse them with barrels of oil for its share once output starts, the person said.
Kashagan, once touted as the world’s biggest discovery in four decades, has been plagued by cost overruns and delays over the past decade. An early estimate of $24 billion for the first phase was revised up to $38.6 billion.
“It would be difficult for both sides, oil companies and the Kazakh government, to swallow” a potential cost increase, Dominic Lewenz, director of oil and gas research at Visor Capital in Almaty, said. “Both sides have a common interest to make sure the project meets its initial startup deadline of 2012-13, as every delay pushes back the revenue stream.”
Artificial Islands
The venture underestimated the cost of building artificial islands for equipment and to house workers in a region that’s frozen almost half the year, while construction expenses also surged.
Shell, Exxon, Eni and Total each hold a 16.8 percent stake in the field, as does state-owned KazMunaiGaz National Co., according to the website of the North Caspian Operating Co., or NCOC, which manages the project. ConocoPhillips holds 8.4 percent and Japan’s Inpex Corp. has 7.56 percent.
The costs and schedule of the field’s development are “currently being considered” with the government after a review was carried out, NCOC said in an e-mailed statement.
KazMunaiGaz referred questions to Kazakhstan’s Oil and Gas Ministry, which declined to comment on talks. Shell declined to comment, as did Eni and Total. Charlie Engelmann, an Exxon spokesman based in Irving, Texas, directed a request for comments to the project’s joint operator.
The Caspian Sea field will produce 370,000 to 450,000 barrels of oil a day in the first phase, which may double in the second phase in 2018 or 2019, then Deputy Oil and Gas Minister Lyazzat Kiinov said last month. Production is slated to begin in June 2013 “at the latest,” he said at the time.
The Kazakh Oil and Gas Ministry may refuse to reimburse $6 billion to $7 billion of costs claimed by Kashagan partners, said a person with knowledge of the matter on June 10. The ministry oversees Kashagan’s production-sharing agreement, which allows the investors to recoup costs before the government takes its share of oil revenue.
The Kashagan partners have invested $33 billion in the development of the Caspian Sea oil deposit, the state-owned Kazinform news service reported in September.
--Editors: Stephen Cunningham, Torrey Clark.
To contact the reporter on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net
To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net
