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Kazakhstan's credibility (almost) restored

After repeated mishaps, Kashagan's restart could do wonders for the local energy industry's image

The relaunch of Kashagan, the second-largest field in the world with recoverable reserves estimated at 11bn barrels, should help restore some credibility to Kazakhstan's battered oil and gas sector.

Oil from the field is flowing again - it even restarted before a 23 October deadline - three years after production was suspended because of technical problems with the pipelines. Output reached 90,000 barrels a day on 12 October, more than the volume it needs to produce to stay in the black.

The central Asian state, which holds the world's eleventh largest oil reserves, has been whipsawed this year by low oil prices, violent insurgencies and an alleged coup attempt. But investors are returning and Kazakhstan received a vote of confidence in July when Chevron and its partners in the Caspian Tengiz project forked out $36.8bn to add another 260,000 b/d of production to the field's 0.6m by 2022.

"There was political pressure to achieve restart on schedule but that's to be expected, as it's one of the country's flagship projects," says Ashley Sherman, senior Russia and Caspian analyst at Wood Mackenzie. The weak oil price has made things difficult for Kazakhstan this year but, says Sherman, "when we look back and see the major recent events-approval for expansion at Tengiz and Kashagan's restart-2016 will prove to be a pivotal year for the future of the Kazakh oil and gas industry".

For one thing, success - even years late - at a project of Kashagan's size will "undoubtedly" have an impact on how investors perceive the country, he says. New investments won't be on that scale, but Wood Mackenzie still sees "new entrants into the Kazakh oil sector for smaller projects, especially onshore".

Sweet oil

Kashagan's foreign shareholders - Eni, Shell, Total and ExxonMobil - were anxious for a restart, even if the delays have cost the investors years of production when prices were higher.

The project has been plagued by multiple problems and cost overruns, so most of the revenue generated will pay cost recovery for several years. Back in 2008, the project was supposed to cost $38bn. By 2015, it had ballooned to $53bn. Many analysts say the consortium running Kashagan will lose money if oil remains below $100 a barrel.

Most of Kashagan's oil exports will flow via the Caspian Pipeline Consortium (CPC) pipeline, Kazakhstan's premium export route. Tariffs are low for the CPC's shareholders, which include Kashagan partners Kazakh state firm KazMunaiGaz, Exxon, Eni and Shell.

But Sherman expects other routes to be used at a lower level, such as the Atyaru-Samara pipeline and Kazakhstan-China Oil Pipeline. "These routes are useful for diversification and because not all Kashagan partners are members of the CPC consortium and so will not have preferential access," he says.

Kashagan, which has been under development by the international consortium North Caspian Operating Company (NCOC) and its predecessors since 2001, first came on stream in September 2013. That was already years late. A leak on the gas pipes running to the onshore processing facility at Bolashak halted production two weeks later. An attempt to restart operations was abandoned on 9 October, 2013. The consortium has since replaced the pipelines at a cost of $3bn, but the fall in the oil price since then and uncertainty over still-rising production costs make the field's prospects uncertain.

The operating structure was changed in 2015, with the intention of making it more effective for pipeline replacement and production restart. The previous model had specific partners responsible for different elements of the work. For example, one partner-Agip KCO (Eni)-had been responsible for commissioning the first phase. This changed, consolidating all operations into NCOC.

"So far, the impact has been positive and the fact that production has restarted on schedule is clearly a major success for the new structure," reckons Sherman.

Wood MacKenzie expects production will reach 150,000 b/d this year and could top 230,000 b/d in 2018. "Our base outlook is an efficiency level of up to 85%, which is consistent with how other global mega-projects have performed," says Sherman. "But there is definitely upside to this via a very successful commissioning period.

Oil and gas are now flowing through the replacement pipelines that have been being built since 2013. Most of the wells have been drilled for the first phase and are proving to be very productive. Kashagan produces lots of toxic gas with its oil and the next important step will be the re-injection of that gas into the sub-surface over the next six months.

Development is not limited to the large first phase. Oil reserves at Kashagan are estimated at 38bn barrels, with some 10bn of that listed as recoverable. But, after years of struggle, the partners still need to decide if they want to chase further phases.

Sherman thinks Kashagan could still one day produce 0.9m b/d-but only many years hence, and only if investors are ready to stomach another lengthy development period and hefty investment.

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