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. Last Updated: 07/27/2016

Oil Field Promises To Make History

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If an oil field can grow into a legend, like Alaska's Prudhoe Bay, then Kashagan, located in the remote shallows of the Caspian Sea, will surely become one. Christopher Pala reports.

ATYRAU, Kazakhstan — Kashagan could variously go down in history as the field that freed Kazakhstan from Moscow's orbit, or delivered the fatal blow to an ecologically ailing Caspian or showcased Western know-how in the face of a challenging environment. Or it could become one of the most over-hyped fizzles in the history of an industry not known for its restraint.

Though remarkably little is known about the field, oilmen involved in probing it insist there is a high probability that, together with other smaller offshore fields nearby, it will produce 2 million barrels a day within 15 years. By these estimates, Kashagan would generate nearly as much as some members of the Organization of Petroleum Exporting Countries.

Added to a string of onshore fields, Kashagan would be enough to turn Kazakhstan, a sparsely populated Central Asian country of steppes and mountains, into one of the world's major oil exporters. It would rescue 15 million Kazakhs from the post-industrial misery bequeathed by a failed Soviet economy.

But the Caspian Sea (see map), the world's largest closed body of water, is just as environmentally sensitive as Alaska's North Slope — more so, in fact, since it has already suffered considerable pollution. And, unlike Alaska's largely deserted Arctic Ocean coastline, Kazakhstan's Caspian shore is home to a population that is deeply worried that the race for riches will first yield considerable environmental damage.

For Kashagan, named after a turn-of-the-last-century Kazakh poet, is entirely located inside a nature preserve. A local scientist called it a "kindergarten of the sea," where 130 species of fish spawn and where young sturgeon, hatched in the nearby Volga and Ural rivers, spend their adolescence.

In snow-covered Atyrau, just north of the Caspian Sea, residents' hopes and fears swirled through the hall of a public hearing conducted by a consortium of oil companies to explain drilling plans for the next two years.

The Netherlands-based consortium, Offshore Kazakhstan International Operating Co., or OKIOC, was established two years ago to explore and exploit the field. So far, it has spent close to $1 billion doing a seismic survey of the entire Kazakh sector of the Caspian and drilling two exploratory wells at opposite ends of Kashagan's oil-soaked limestone structure.

The consortium's members are Agip of Italy, the project's newly elected operator; ExxonMobil; TotalFinaElf of France; Royal Dutch/Shell and BG International, all with 14.29 percent each, as well as Phillips Petroleum and Inpex of Japan, each with 7.14 percent. Statoil of Norway, with a 4.76 percent holding, and BP Amoco, with 9.52 percent, have agreed to sell their stakes to TotalFinaElf. The French company hopes to eventually wrest the highly prestigious but financially unrewarding operatorship from Agip.

Last July, Kashagan's first oil well yielded high-quality light crude and another half-dozen wells will be drilled near it in the next two years. On March 15, Agip announced it had struck oil at 4,982 meters, just 200 meters higher than the first well located 40 kilometers away. This confirmed initial beliefs that Kashagan is similar in structure, and presumably in yield, to the richly endowed Tengiz field, one of the world's top 10, located onshore about 130 kilometers southeast of Kashagan.

It is that similarity that has fueled the optimism that Kashagan will change, if not the world, at least this part of it.

"But there is still a 1 percent chance that the whole thing could flop and there is no recoverable oil at all," said a senior executive with one of the oil companies involved.

Not an Easy Site

The Soviet government knew about Kashagan, a 350 million-year-old coral atoll 80 kilometers long and up to 25 kilometers wide, since the 1970s. But because it was difficult to exploit, Moscow planners bypassed it in favor of easier fields in Azerbaijan and Western Siberia. In addition, Soviet authorities said the field would be impossible to exploit without causing so much pollution as to seriously damage the production of caviar, that other form of black gold.

Analysts estimate today that Kashagan could hold anywhere from 10 billion to 30 billion barrels of crude. At 20 billion barrels, it would be the world's fifth-largest field and the only one among the top five to lie outside the Middle East region, which begins 1,600 kilometers to the south.

A local scientist called Kashagan a 'kindergarten of the sea' for 130 species of fish.

At the public hearing, a novelty in the former Soviet Union, local residents, many of them retired oil workers with quavering voices, deeply lined faces and long memories of careless Soviet methods, challenged the consortium's ability to live up to its zero-discharge policy.

"You foreigners are not concerned about our tragedies," Iosif Aikulov, 72, told the British operations manager sitting on the stage. "The sea is our life. It fed us when we had a famine in the 1920's. You will leave in a few years, but our children will remain."

"We haven't even lifted a liter of oil and already our seals are dying and our sturgeon are disappearing," lamented retired ichthyologist Abish Bekeshev.

Several thousand dead Caspian seals washed ashore last year, prompting the consortium to hire seal specialist Callan Duck, from the University of St. Andrews, Scotland. His study, part of an international examination of the health of the sea's 400,000 or so seals, found that their deaths were unrelated to oil and were caused by an epidemic of the canine distemper virus. Duck told the audience that the epidemic was probably facilitated by the presence of high levels of DDT in the seals' fat and of mercury in their livers — pollutants from Russia's heartland that have been flowing down the Volga River into the north Caspian for decades.

An additional factor, he said, was that last winter — and unfortunately this winter too — was exceptionally warm. The ice melted away before the seals were able to molt and finish feeding their young. That, he said, contributed additional stress that would have made the seals more vulnerable to the virus, which affects dogs and seals alike.

Duck took pains to explain that he wasn't paid by the consortium, but received a university researcher's salary. However, Bekeshev, the ichthyologist, got officials to admit the consortium was paying St. Andrews for the study.

"He who pays the musician calls the tune," he said triumphantly, suggesting that Duck's explanation was simply propaganda for the oil companies.

Bekeshev was not alone in his cynicism; the expression was uttered several times that day. Nor was it entirely unjustified: The oilmen brushed away questions about their long-term plans, saying that in the next two years, only five more wells will be drilled, all for the purpose of appraising the deposit's potential. Only after that, the program would begin to develop the field, a process that will require the investment of tens of billions of dollars.

As for the sturgeon, Kazakh ichthyologists took the stage to blame the catastrophic reduction in their population on a steep rise in poaching — unheard of in Soviet times — during the past decade and on the closing of most of the big hatcheries that had helped replenish stocks.

The Only Hope

But the concerns expressed at the public hearings — another was held in Aktau, on the Caspian's northeastern shore — were tempered by the understanding that Caspian oil represented the region's sole hope of reversing its decline.

"I'm not against this project, I just hope they will be careful," said Anar Sadikhov, 20, who is studying oil engineering in the hope of being part of the coming oil boom. Many others said they were worried but wished the foreign oilmen success.

Kashagan and its neighboring fields present technical difficulties that are not unique, but that have never been found concentrated in one deposit.

"We know we are dealing with a large volume of oil," said Keith Dallard, the outgoing general manager of the consortium working on Kashagan. "To translate this into a commercial way forward will require a great deal of creativity."

The sea bottom throughout the field is between 4 meters and 10 meters deep and will require that artificial islands be built out of rocks brought from shore at each drilling site. About 30 to 50 such islands will probably be required over the life of the field, oilmen say.

Then the oil deposit is particularly deep — about five kilometers — and the oil contains high amounts of gas and sulfur. The sulfur will have to be processed and stored ashore, and the gas will have to be either refined and sold to Russia, whose pipelines pass nearby, or reinjected into the ground. Reinjection makes it possible to lift a greater proportion of the oil deposit, about 30 percent to 40 percent instead of 15 percent to 20 percent.

The winter ice cover restricts the time available for building new drilling stations and moving barges. It also requires the building of a pipeline network to bring the oil to Aktau, Kazakhstan's northernmost ice-free port.

Finally, the environmental restraints will be heightened because the sea is landlocked and because much of the southern Caspian has already been polluted by the slovenly drilling methods that prevailed off the Azeri coast — the cradle of the Russian oil industry — for over a century.

"All of our drilling waste is barged ashore and processed," said Graham Johnson, the consortium's head of safety, environment and security. "Only the liquid waste from our accommodation is released, and this is treated to probably the highest standard of any rig in the world."

Regional Players

Environmentalists are not the only ones scrutinizing the consortium's plans. Politicians are, too.

The president of Kazakhstan, Nursultan Nazarbayev, an amiable autocrat who manages to have excellent relations with both Moscow and Washington, has been among the most vocal and optimistic proponents of exploiting the Caspian's huge potential. He once predicted that within 15 years, when Kashagan, Tengiz and a number of lesser fields all reach maturity, Kazakhstan would be producing 8 million barrels a day, up from 615,000 barrels today and on the level of the world's leading producer, Saudi Arabia.

Nazarbayev is "too optimistic by half," said Robert Ebel, director of energy and national security at the Center for Strategic and International Studies in Washington. Ebel, along with other analysts and oil industry executives, predicts Kazakhstan's overall production in 15 years will be 4 million barrels a day.

"I understand he [Nazarbayev] wants the income," Ebel said in a telephone interview from Washington. "But I wouldn't anticipate any significant production before 2008. And I know the companies are in no great hurry."

How to move the oil to market has been the focus of intense diplomatic activity for the past few years.

The administration of former U.S. President Bill Clinton lobbied hard to have the oil flow through a pipeline to be built from Baku, Azerbaijan's capital, to Ceyhan, on Turkey's Mediterranean coast. Turkey has committed itself to delivering its portion of the pipeline for $1.4 billion. Ankara stands to gain lucrative transit fees, but mostly, the Turks fear that vastly increased tanker traffic carrying Caspian-region oil through the Bosporus, which bisects Istanbul, could cause an oil spill there of catastrophic proportions.

Russia is hoping that another pipeline, which runs from the onshore Tengiz field, about 150 kilometers east of Kashagan, along the northern shore to the Russian Black Sea port of Novorossisk, will carry Kashagan's oil as well as Tengiz's. Moscow would gain both transit fees and political influence with Kazakhstan.

Iran sees in Kashagan a long-lasting solution to an old problem: Its population centers are in the north and its oil is in the south. Tehran has proposed to have the consortium build a pipeline running south along the Caspian's eastern shore and link it with an Iranian pipeline at Neka, a port near the border with Turkmenistan. From there, the crude would travel to refineries in the Tehran region.

Iran would swap that oil with Kazakhstan for an identical amount of Iranian oil delivered to the Persian Gulf, close to the growing energy markets in Asia.

As Kashagan's production increases, Iran could also retrofit its pipelines flowing north to reverse their flow, delivering Kashagan's crude directly to the Gulf, the route most favored by the consortium's oil companies.

Nazarbayev, for his part, recently told Kazakh television: "From the strategic point of view, our countries need many oil pipelines, so we are not ruling out any of these routes. This is not a political issue, this is a purely pragmatic approach."

"In the end," said a key oil executive involved in the project who asked not to be identified, "it's not going to be this route or that route, but a combination of all of them."

In the present shareholder structure, in which U.S. companies hold 21.43 percent of the consortium's shares, U.S. economic sanctions against Iran, which President George W. Bush renewed on March 14, mean that at least that proportion of Kashagan's oil must flow through a non-Iranian route.