Rising costs test patience levels at Tengiz
Chevron is facing a significant uptick in spending at Kazakhstan’s Tengiz oilfield, challenging its renewed commitment to capital discipline
Chevron—leader of the consortium developing the future growth project and wellhead pressure management project (FGP/WPMP) at the Tengiz field—warned in November that cost overruns would increase capex costs by 25pc to an eye-watering $45.2bn.
The firm cites as costs drivers a one-year delay and higher construction and equipment costs. Higher material requirements than originally envisaged is blamed for more than half of the increase in construction costs.
Having shed a number of high-profile assets in recent months—including selling its minority stake in neighbouring Azerbaijan’s Azeri-Chirag-Gunashli (ACG) oilfield to Hungary’s Mol—the prospect of fresh spending commitments at Tengiz is troubling for shareholders that are on-message with Chevron’s capital discipline approach.
The Tengiz expansion is set to increase the field’s output by 260,000bl/d by 2025-26 from a current 580,000bl/d. The use of state-of-the-art sour gas injection technology to increase crude production reflects the challenging geology at the field, with high pressure levels below the salt layer. Sour gas injection will also help stave off production declines as natural reservoir pressure depletes.
$45bn - the gross cost of the project
Chevron is, admittedly, no stranger to turning Tengiz challenges into successes. "The biggest challenge is the high sulphur content in Tengiz oil. In the early stages of the project, they did not know what to do with the sulphur and just stored it in large open spaces. But then they started selling the sulphur, and those football fields of sulphur have disappeared,” says Edward Dongarov, director of technical research at information provider IHS Markit.
But the sizeable sums the company is being forced to spend on the world’s largest single-trap producing reservoir is, nonetheless, a cause for concern, both for the major and host government. Chevron said in December that it would be spending more than $4bn of its $5bn total 2020 upstream budget on the Tengiz FGP/WPMP.
Kazakhstan’s Energy Minister Kanat Bozumbayev insists that Chevron’s $45.2bn figure is "too high", in an echo of previous disputes between the Kazakhs and IOCs over cost sharing.
Analysts suggest the 25pc cost increase is less an issue of cost inflation and more a reflection that company poorly estimated at the outset what the costs would be. “It is a black eye for Chevron in the sense that many aspects of those initial estimates were way off the mark,” says Lysle Brinker, executive director of equity research–integrated oils and NOCs, at IHS Markit.
The sizeable sums the company is being forced to spend on the world’s largest single-trap producing reservoir are a cause for concern
Other international oil companies (IOCs) have concluded that Kazakhstan is simply too expensive with which to persevere. For example, in October last year, Shell abandoned two oil projects in the Kashagan area, highlighting high costs.
But Chevron is unwavering in its commitment to Tengiz, which remains a strategic project for Kazakhstan. “Regardless of the cost increase, which will be spread over a multi-billion-barrel resource base, Tengiz has been and will continue to be an extremely successful project for the Kazakhstan government, mostly because leading US oil companies are managing it,” says Brinker. “It really wants to have strong US partners involved for many reasons, technical and geopolitical.”
And, despite the $45bn gross cost, FGP/WPMP will still be a highly profitable project for Chevron and its shareholders, in Brinker’s view. One uncertainty, though, is the potential impact of the expiry of the field concession contract in 2033. Any cost increase would have to be recouped over a number of years. This could become part of the negotiation process to extend the contract, says Brinker.
“The probable reserves at Tengiz will come into play if and when the current contract is extended. Under SEC rules, oil companies generally cannot book reserves beyond the contract expiry date, and this field will be producing for another few decades yet,” he says.