Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

First Kashagan Oil Not Seen Until 2007

ALMATY, Kazakhstan -- The first commercial oil from Kashagan, the world's biggest oil field development, will come to market in 2007 -- two years later than planned -- due to a dispute between foreign investors and the Kazakh government, but sources close to the project said Thursday that the situation has been smoothed over and they expect an announcement to that effect next week.

The tension between Kazakh President Nursultan Nazarbayev's government and the Agip consortium of foreign oil companies exploiting the offshore field in the Caspian Sea revolved around delays incurred by the consortium in drilling its first well.

If the standoff is resolved, then contracts can be signed with suppliers for the first phase of the project and $8 billion in spending, planned for the next six years, can begin.

To date, about $3 billion has been spent drilling a half-dozen wells, and the total investment over the next 15 years is expected to exceed $20 billion, analysts and oilmen say.

The consortium of oil companies developing Kashagan includes Agip, the operator; ExxonMobil, Total and Shell, each with just over 20 percent; and ConocoPhilips and Inpex of Japan splitting the rest.

The field, believed to hold the world's fifth-largest deposit of crude, is expected to produce more than 1 million barrels per day at maturity and will help Kazakhstan, whose population is less than 15 million, become one of the world's top five oil exporters.

Kazakh Energy Minister Vladimir Shkolnik declined to discuss the negotiations, saying through a spokesman that "the main issues of the development have been agreed upon and the preparation toward approval of the Kashagan development plan is underway."

The development plan was submitted on Dec. 31 but was held up when the two sides locked horns because the consortium drilled its first exploration well in 2000, two years behind schedule.

The Kazakh side interpreted the production-sharing agreement with the oil majors as providing for a fine in the event of a delay, which the government demanded, sources close to the consortium said.

The Western oil companies refused to pay it, saying the delay was not their fault.

Instead, they argued, it was due to technical reasons and they had met the PSA's requirement to make "all reasonable efforts" to drill the first well, the sources said.

As a result of the dispute, the 2003 construction season has largely been lost because the North Caspian freezes in winter, which will push back oil production yet another season.

Nazarbayev had virtually forced the consortium to pledge to produce commercial oil by 2005, a year before he comes up for re-election.

Now, the first oil will not come to market until 2007 at the earliest, the sources said.

The disagreement over the fine was the second case in a year where infighting between the government and major oil investors threatened to derail foreign investment.

The previous major dispute involved ChevronTexaco and ExxonMobil, the main partners in the joint venture that operates Tengizchevroil, the country's largest oil producer.

Last winter, Tengizchevroil suspended work on a three-year, $3.5 billion development project that would have nearly doubled its production to 400,000 bpd.

The reason: failure to agree with the government on the terms for financing the expansion.

The suspension lasted several months, cost more than $100 million and left a cloud over the country's investment climate.

Kashagan presents a series of unique technical challenges -- the oil is deep, under high pressure and located below a shallow sea -- which is why it was sidestepped by Soviet oilmen in favor of more accessible deposits in Siberia and Azerbaijan.

Laurent Ruseckas, Caspian specialist with Cambridge Energy Research Associates, said in a telephone interview from Paris that the enormous size of Kazakhstan's untapped oil reserves would guarantee strong industry interest regardless of the investment climate.

"The oil will be extracted some day, but the investment climate will determine how fast," he said.

For MT