After long delays, Kashagan oil to slowly come on stream

In about one month, the long-awaited production at the largest oil field of Kazakhstan – Kashagan – will finally be resumed. Earlier, the Minister of Energy of Kazakhstan Kanat Bozumbaev had announced October 23 of this year as the official start date of the Kashagan project.

Kazakhstan’s largest oil field has proven to be quite difficult. After repeated delays, the production there was stopped because of gas leaks in September 2013, exactly two weeks after its start. Then, two weeks after a restart, another gas leak was found on the pipelines connecting the field with the sulfur and gas removal plant.

After a thorough analysis, the project operator – North Caspian Operating Company (NCOC) – undertook a full replacement of a total of 200 kilometres of the field’s gas and oil pipeline.

All that time, the numerous comments and forecasts of experts and specialists had been skeptical about the future of the Kashagan project. However, in spite of the prevailing skepticism and criticism, the pipeline replacement work continued day and night without a break.

The re-start of Kashagan has been under constant control of the head of state. This summer the Minister of Energy Kanat Bozumbaev personally inspected the progress of work at the field. He was rather pleased with what he saw. That field inspection visit has added some confidence that Kashagan may be worth all the money and effort that has been invested in it.

Following the above field visit, the then Prime Minister Karim Masimov made a statement that Kashagan would re-start in October this year. All of those statements were not unnoticed by the experts and major players in the oil business.

For example, as recently as last week, the General Director of the Caspian Pipeline Consortium (CPC) Nikolai Gorban was quick to say that the pipeline was ready to accept Kashagan oil even though the expansion of the pipeline was not yet completed.

Gorban’s statement was made immediately after a confirmation by Kazakhstan’s President Nursultan Nazarbaev that Kashagan would restart production in October this year.

“The president of Kazakhstan has announced the startup of the Kashagan shareholder, and we, as the main operator, fully confirm that we are ready to receive the Kashagan volumes immediately. By the end of October, we are scheduled to start Refinery 4 in the Atyrau region, which will allow (us) to fully meet the declared demand,” Gorban said.

Kashagan and the World Oil Prices

The Kazakh President’s words about Kashagan have provided assurance to foreign companies that Kazakhstan has overcome the difficulties and challenges of the long awaited government project.

Just one dark cloud: the re-start of Kashagan will happen at a time when the world oil prices have fallen almost by half. What will be the effect of Kashagan’s oil at a price of $50 per barrel? This question is already on the minds of industry experts.

“OPEC’s last month’s report suggests that the start of Kashagan and its reaching the commercial volumes might play a not so good role in the oil pricing process. Supposedly, Kashagan may result in a growing supply in the world, leading to a further decline of the oil price,” Kazakhstan’s Institute of Oil and Gas Deputy General Director Akbar Tukaev said.

In his opinion, however, such concerns are premature. “Kashagan oil will not play any significant role in this year’s balance of supply and demand. Seventy five thousand barrels a day (the production volume at the initial stage) is peanuts by the world standards,” Tukaev added.

According to him, the peak oil at Kashagan will happen after the world market has already restored its supply and demand balance.

“The thing is, the upstream investment has decreased worldwide in the past years. As it happens, by reaching its normal production, Kashagan may play a “stabilizer” role for the oil price,” Tukaev explained.

CPC’s Deputy General Director of Government Relations Kairgeldy Kabyldin shares the same view. “At the stage of pilot commercial development of Kashagan, where the planned volume of oil production is expected to be at the level of about 350,000 barrels a day, it is too early to speak about any influence on the world prices of oil. Just compare the 350,000 barrels a day to the current world production of 90 million barrels a day,” Kabyldin said.

Kazenergy Association General Director Bolat Akchulakov also feels there is no reason for concerns. “We are looking forward to the start of Kashagan. There are a lot of technical and natural challenges there. But the first phase of the project will produce some 12 million tonnes a year. By the world standards, it is not a volume to be concerned about in the context of it effect on the world prices,” Akchulakov said.

A Russian expert on the oil and gas projects of the Caspian region, Igor Ivahnenko, believes that should commercial production at Kashagan start in the coming weeks, then over the next year to year and a half, Kazakhstan may reclaim its global industry positions that have been weakened since the peak oil production in 2013 at the level of 81.8 million tonnes.

“At the same time, the volumes of oil that will start coming from Kashagan to the world market in the nearest future will account for a few million tonnes a year, which is too small a number to create any influence on the global price situation. For now, OPEC and the other major oil exporters have no reason to fear the news from Kazakhstan,” Ivahnenko said.

According to the Russian expert, the level of influence of the Kashagan project on the global and regional processes and plans will strongly depend on the level of success of development of that gigantic but extremely challenging field.

“The Kashagan shareholders think that the field may produce 12.9 million tonnes by year 2021, but they refrain from any forecast of production rate for the next stages of development because of the unpredictability of results,” Ivahnenko concluded.

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