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 KAZAKHSTAN International Business Magazine №5, 2011
 Deferred expectations from Kazakhstani shelf

Deferred expectations from Kazakhstani shelf

Recent setbacks in geological exploration in the Caspian Sea and the postponement of the second phase of Kashagan development invalidates Kazakhstan plans to become one of the world's ten largest oil producers, at least until 2019. In this regard, experts are increasingly raising the question of developing a new and effective strategy for offshore projects to replace The State-Run Program of Development of Kazakhstani Sector of the Caspian Sea (KSCS) that lost its relevance.

In world practice, the resources of the continental shelf have become major sources of increase in oil and gas production.The share of hydrocarbons produced offshore is already more than a quarter of world output, and it continues to grow.For Kazakhstan, where most of the oil and gas fields developed onshore are already under the maximum level of annual production, the main prospects for increasing oil and gas production are also connected with the offshore projects. In particular geological and geophysical studies of the shelf of the Kazakh Sector of the Caspian Sea (KSCS) identified over 120 promising structures, the probable reserves of which are estimated at 8 billion tonnes of conventional oil, including 4.5 billion tonnes of oil. According to forecasts such resources allow to increase oil production from offshore fields in Kazakhstan to 100 million tonnes per year and hold it on this level for 25–30 years.

Based on geological and other factors affecting the development of mineral resources of the sea, the area of the KSCS can be divided into three zones. In the first one the subsalt upper-palaeozoic deposit can be the main among blocks with promising reserves. In 2000–2004 here the unique oil and gas fields – Kashagan Aktoty and Kairan have been discovered, now they are being developed in the frame of the North-Caspian Project.In the second zone, consisting of the sectors Kalamkas-sea, Auezov and Khazar, the industrial productivity of Middle Jurassic deposits was confirmed. And in the third one, which includes parts of Rakushechnoye-sea and Nursultan (N.), the Mesozoic complex is promising.

In 2003 the country adopted its – State-Run Program of Development of Kazakhstani Sector of the Caspian Sea (KSCS) till 2015, according to which it was assumed that the Kashagan field alone will give 0.5 million tonnes in 2005, 22 million in tonnes in 2010 and 60 million tonnes – in 2015. And it was expected that production from the other blocks of the first phase will begin in 2009–2010. According to the Program the equipping of the Kashagan field began, as well as exploration at sectors that are parts of Kurmangazy, Tub-Karagan, Atash, Zhemchuzhina, "N", Zhambyl and Zhambai.In addition, "KazMunayGas" started negotiations with investors on such promising objects as Darkhan, Shagala, Issatay, Abay, Zhenis, Bobek, Satpayev, Makhambet and others.

However, following development showed that the reality is much harsher than previously shaped in optimistic plans.Thus, the start of commercial production at Kashagan was postponed four times.As a result, at the end of last year, Kazakhstan produced 79.5 million tons of crude oil and condensate.Moreover, the entire amount has been received from onshore fields, while offshore projects have not given the country a single ton of hydrocarbons.

As for results of geological exploration, the first exploration wells drilled in the Tub-Karagan, Atash, Kurmangazy by Russian companies "LUKOIL" and "Rosneft" showed no accumulation of hydrocarbons.And this is in spite of the fact that geological reserves of the Tub-Karagan and Atash initially were estimated at 150 million and 130 million tonnes, respectively, and for the Kurmangazy field an annual volume of oil production of 64.5 million tonnes was expected (according to the optimistic scenario).

Attracting investors to the shelf also wasn’t an easy process. Only about 10 of the 25 planned subsoil use contracts have been already signed.

Thus, most of the objectives of the State-Run Program of Development of Kazakhstani Sector of the Caspian Sea (KSCS) concerning growth of production, construction of transport infrastructure, increase in the volume of oil refining and development of local content have not been fulfilled, so that the authorities decided to cancel the program.The corresponding decree was signed by the President in November 2010. However, its publication was held without publicity in the media, quietly and almost unnoticed.

The Kashagan epic

The key project of the state program, which, in fact, is to be blamed for its failure is Kashagan.It is believed that after the Prudhoe Bay deposit, discovered in the late 1960s in Alaska, Kashagan is the largest oil field in the world.Its recoverable reserves are estimated at a minimum of 7–9 billion barrels and total geological reserves – at 38 billion barrels (4.8 billion tonnes). Work in this field as part of the North Caspian project has been in process for almost 14 years. Geological exploration carried out on all structures of the Kashagan field in the 1998–2004 period gave positive results.

But production is another matter. In the beginning the first Kashagan oil was expected in 2005.Then that date was moved to 2008, and later to 2010–2012. Finally, the Government of Kazakhstan and the international consortium Agip KCO (who was at that moment the operator of the project) in the summer of 2008 signed a memorandum of agreement stipulating that the deadline for the start of commercial oil production was postponed to 2013.

In October 2008 the second additional agreement to the PSA was signed, according to which in January 2009 the North Caspian Operating Company (NCOC) became the successor of Agip KCO as the operator of the project. The list of the participants in the new consortium was the same, although redistribution of shares took place: Shell, KazMunayGas, Eni, ExxonMobil, Total got 16,81 % each, ConocoPhillips – 8,4 %, and Inpex – 7,56 %. Thus, a series of postponements allowed Kazakhstan to return not only to its share in the North Caspian project (0 % at the beginning of 2005), but to increase it to 16.81 % in 2009.

Seemingly, in the spite of the doubts still expressed by some experts, after two years Kazakhstan will actually get the first Kashagan oil. All the more so that according to the terms of the new agreement, if the commercial production doesn’t begin until October 1, 2013, the expenses of the consortium will not be refunded. It is clear that foreign partners have already invested in the project about $33 billion and they will not allow this scenario to occur.

For example, when the President of Kazakhstan visited the Atyrau region on September 16, 2011, he went to the island "D", where the top-managers of NCOC briefed him on the project implementation. According to them, the works on the first phase had been already completed up to 94 % and at that moment the facilities were being prepared for putting into operation. In total since the beginning of drilling operations on the field 41 wells, including 20 development test wells and 21 production ones were drilled.

At the same time the big question is – when the Kashagan project will reach the top capacity, which is 1.5 million barrels per day.In early 2011, the Minister of Oil and Gas Sauat Mynbayev said that his agency was not going to approve the concept of the second stage of the Kashagan because of its inefficiency. Moreover, because of inconsistencies in the concept concerning the proposed budget the Kazakh side was planning to suspend the works on the main stage of the Kashagan project for three years. 

Let us recall that the second phase implies to increase production from the field to 375 thousand barrels per day during a period of three years.

In June 2011 in Astana at the Caspian Offshore Development Conference NCOC’s Strategy Planning General Manager Dominique Monfrin confirmed that Shell Development Kashagan company and Agip KCO agreed to disband their staff "until there is a complete analysis of the concept of the second stage and the go-ahead to start a basic design is received ". The media relation service of NCOC gave a very evasive answer on the timing of a possible delay: "at the moment the consortium is considering a number of different alternatives aimed at ensuring maximum economic efficiency."

Nursultan Nazarbayev indirectly confirmed, that one should’t count on the Kashagan oil in the near future. During his September visit to Kashagan the President says: "This is the most difficult field among those discovered in the last 40 years. The pressure reaches 850 atmospheres here at the wellhead. The content of sulphur – is of over 20 %. This is – a very complicated field.I, as a former engineer, imagine how difficult it was for the oil companies to equip the field – shallow waters (better, when the sea is deep.)And this is the first in Kazakhstan offshore oil, and is therefore complicated. Thirteen million tons of stone were brought here,130 tons of metal structures.65 000 tons of concrete... "

Meanwhile, sources close to the oil and gas business, explicitly, clearly and simply stated that the second phase of the Kashagan will really take over three years, ie until 2021.

Who will leave?

New delay and increased costs in the implementation of the North-Caspian project disappointed not only the Government of Kazakhstan (counting on large profits at current oil prices), but also the participants of the project. In the spring of 2011 against the background of discussions on the timing of the second stage the rumors about changes in the shareholder's structure of NCOC appeared in the media.

First, there came the information about a possible withdrawal of the American ConocoPhillips from the project.And although there was no official statement from the company, during one of the press conferences, answering the questions of journalists, the general director of JSC "Exploration Production" KazMunayGas" Askar Balzhanov indirectly confirmed it."As far as I know, ConocoPhillips has expressed no desire to sell its stake in the project "N", it was only about the North-Caspian project."(In addition to Kashagan, ConocoPhillips jointly with the Arab "Mubadala" takes part in the long-term development of the block "Nursultan").

And this summer India expressed the wish to participate in the Kashagan development.In this case we are talking about purchasing the shares of another shareholder of the project – ExxonMobil Corp.In particular, in June the Indian title HindustanTimes reported that a consortium of ONGC Videsh Ltd and GAIL India Ltd plans to buy half of ExxonMobils shares, ie 8.4 % for $5 billion. According to the newspaper, the consortium has already submitted an indicative bid, while the parties continue negotiations, but the final decision regarding investment in the project will be accepted by the Government of India.

However, on its own the rotation of shareholders of the Kashagan project is not so decisive.As the phrase goes, a holy place is never empty. Another thing is embarrassing: regular delays in implementation of the main Caspian project directly affect the investment attractiveness of related infrastructure projects. As the mayor of Mangistau Krymbek Kusherbayev said, one can note a trend of outflow of foreign investment.In particular, the company J. Ray McDermott stopped steel plant construction project. By that time its local partner – "TenizService" had expanded more than five billion tenge only to prepare a site for the construction of the plant.Companies Aker and Rossetti could make similar decisions to withdraw from their business in Kazakhstan. Against the backdrop of uncertainty about orders already existing business venture ”Keppel Kazakhstan“ and LLC ”Ersai" also begin to lay off their staff.

And if we talk about other offshore projects in Kazakhstan, the recent decision of "LUKOIL" to close exploration projects at the Atash and Tub-Karagan was not a surprise.Another offshore project with participation of this Russian company is under the threat of failure – "Zhambay South – South Zaburunye." "Zhambai" LLP is its operator, of which 50 % is owned by JSC Offshore "KazMunayTeniz", 25 % – by REPSOL EXPLORACION KAZAKHSTAN S.A. and another 25 % – by Caspian Investments (a joint venture between "LUKOIL" and Chinese "Sinopec"). Project output in these prospective areas should reach 20–40 million tonnes of oil and 20–50 billion m3 of gas per year. The total geological oil reserves are estimated at 6.5 billion tonnes, of which 1–1.5 billion tonnes of recoverable.

Zhambay South and South Zaburunye are located in the northern part of the KSCS on a 941 km2 area with a sea depth of up to 5 m. The project partners are faced with technical difficulties – they can not find a rig adapted for drilling at such shallow depths.But if they do not start drilling in time, there is a risk that the government of Kazakhstan will take away their license. Especially because they have delayed the implementation of their obligations under the contract twice in a 2 years time.

How to drill?

In general, the absence of necessary process equipment in the region seriously effects many offshore projects. The market of mobile jack-up floating drilling rigs in the Caspian Sea is narrow, and so oil and gas companies often have to join a queue to get them.

Thus, in August this year the operating company Caspi Meruerty Operating Company BV (JSC OOC "KazMunayTeniz" – 40 %, Shell Kazakhstan Development BV – 40 %, Oman Pearls Company Ltd – 20 %) announced that the it will not drill the first exploration well on the structure Naryn within the offshore area Zhemchuzhina in 2011. The reason is that the drilling rigs "Trident 20" and "Astra" are engaged in other projects.It should be noted that the project of the Zhemchuzina development has been one of the most successful during recent years. This sector includes four structures – Khazar, Auezov, Naryn and Tulpar, located in the northern part of Caspian Sea south from the oil and gas deposit Kalamkas with an area of 895 km2. According to some estimates, its expected recoverable hydrocarbon resources could be of about 100 million tonnes. In 2007–2010 five exploratory wells have been drilled here, and there were shows of oil. Now, the operator of the project will have to take a break.

However, in the near future this problem may be solved. As is well known in late July, NC "KazMunayGas" and Korean consortium KC Kazakh BV in order not to depend on the queue for available units, started construction of its drilling rig for exploration in the area Zhambyl. The head of the NC "KazMunayGas" Kairgeldy Kabyldin noted that the emergence of such specialized rig will help to speed up the work on other shallow-water blocks.

In addition, on March 30, 2011 "KazMunayGas" and Norway's Statoil signed an agreement, according to which in exchange for participation in the development of the Abay area Statoil would help with the construction of jack-up rig, which in future could also be used for exploration of blocks of the Caspian Sea.

Good news

One of the few positive news from the Caspian Sea was the January statement of Kairgeldy Kabyldin that in the course of drilling the first exploration well on the "Rakushechnoye-sea", one of the structures of the contract area "N", at a depth of 2 600 m evidence of oil were found.

Let us recall that, in accordance to an agreement signed two years ago, this block is developed by "KazMunayGas" (51 %), the Arab "Mubadala" (24.5 %) and the already mentioned ConocoPhillips (24,5%). The reserves of the block are estimated at 630 million tons, of which 270 million tonnes are recoverable. The final results of exploration will be announced after the completion of the entire cycle of exploration drilling. And in the case of a final confirmation of forecasts the commercial oil production (at least, according to participants of the project) can start as early as 2016.

It is noteworthy that detailed works on the structure "Rakushechnoye-Sea" have been held since 1962. In 1973–1974 even three stratigraphic test wells were drilled there. But in the process of drilling the fourth one open gas flowing took place, followed by ignition. The fire and the formation of a crater destroyed the jack-up drilling.

In the near future another long-awaited exploration project can come into active phase. On April 16, 2011 in Astana "KazMunayGas" signed a suite of documents on the project of development of the oil zone "Satpayev" with the Indian company ONGC Videsh Limited, which has claimed it since 2005. A subscription bonus on the agreement amounted to $80 million. The field exploration program is fully funded by the Indian side, which takes 25 % of the project.Satpayev“ area is located in the northern part of KSCS. There are three promising structures on it: Satpayev, Satpayev East and Karina. Probable recoverable reserves are 253 million tonnes of conventional oil. According to the Chairman and CEO of NC "KazMunayGas" Kairgeldy Kabyldin, the total capital cost of this oil sector amount to about $9 billion.

Lots can happen?

Summing up the successes and failures, it should be noted that back in 2002, developers of the first program of KSCS development were too "romantic", clearly underestimating the high geological and technical risks. However, there is no need to sprinkle ashes upon a head because of the dry holes, especially since, as evidenced by international practice, only one of three to five exploration wells drilled is successful. The Head of the "Samruk-Kazyna" fund Timur Kulibayev also said that there is nothing dramatic here, and that a negative result is a result too, because now "we will have a more accurate picture of the oil-bearing structures."

As is usual to say, no comment ...

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More Oil Soon  Editorial 
Kazakhstani Сontent in Procurement of Subsoil Users  Yerbolat Yerkebulanov, Dariya Saginova 
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