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News Extra: Problems worsen for Kashagan oil consortium

02 April 2014

The consortium developing Kazakhstan's huge Kashagan oilfield lodged an appeal in March against a 134.2 billion tenge ($737 million) fine by the local regional Kazakh authority for ecological damage at the site in the Caspian Sea. The fine adds to the long list of problems facing the North Caspian Operating Company (NCOC) consortium developing the oilfield.

NCOC, which includes operator ENI, Exxon Mobil, Royal Dutch Shell, Total and Kazakh state oil firm KazMunaiGas, has already spent about $50 billion and seen numerous delays during the 13 year development of the oilfield, said to be the largest in the world. The latest was in October after gas leaks were detected in the field's pipeline network only a month after it finally started operations.

While output was stopped, residual hydrogen sulphide (H2S) was burnt in flares at the project's processing plants, seriously polluting the environment, Kazakhstan's Environment Protection Ministry said this month.

The appeal was filed at the regional environmental department of the Atyrau Region in western Kazakhstan  where Kashagan is located. NCOC said it also might appeal at national level at a later stage.

Checks showed that the volume of gas flared last September and October was 2.8 million cubic metres, exceeding legal limits, the ministry said at the time.

The consortium also faces a risk that Kazakhstan could seize a bigger stake in Kashagan or refuse to reimburse a large portion of the money spent to bring it on stream. Before the gas leaks brought Kashagan output to a halt, the consortium had failed to achieve so-called "commercial output" at the field by October 1, as stipulated in its contract.

Harsh conditions such as sea ice during the winter, temperature variations from -35 to 40°C, a very deep and high pressure reservoir and very high levels of hydrogen sulphide have made Kashagan one of the most challenging oil megaprojects. Many of the consortium members have developed expertise in managing projects in remote and cold areas, but few have managed projects with so many technical challenges.

The oil is 4,200 metres below the seabed at very high pressure, and the associated gas reaching the surface is mixed with some of the highest concentrations of toxic, metal-eating H2S ever encountered.

Pipelines degrade quickly due to the highly acidic nature of the operating environment, and gas leaks caused by cracked pipes are the reason given by ENI for the most recent production start date postponement. Italian sources say the delay will last at least until the spring thaw in 2014, and possibly well into the second quarter of the year.

Last year, Kazakh news website examined some of the safety implications of the field’s development. "The oil extracted from the Kashagan field is potentially a mortal danger to the health of workers: the concentration of hydrogen sulphide in gaseous form (16%) in the oil and gas is very high. Precisely for this reason Kashagan is more like a chemical factory in a borehole, where it is essential to avoid spills and, if they were to occur, it is necessary to locate them quickly and promptly."

A Reuters report in early April quoted engineers working on the project as saying kilometres of  pipeline on the project are defective because of corrosion caused by H2S and will need to be replaced. They were also highly critical of the performance of the platform's two main compressors, designed to keep oil flowing by maintaining reservoir pressure and stripping out the gas.

Oil company investigators have yet to announce conclusions about what went wrong at Kashagan. A report on the project’s problems has been repeatedly delayed, and NCOC now says it will be published in Q2, 2014.

"The project stopped production as a result of pipeline issues with the hydrocarbons coming onshore," Shell's chief financial officer Simon Henry said last month.

"All the partners have contributed their technical expertise to look at how this challenge of running the pipelines can be addressed. There is no decision yet about how best to do this or when production can be restarted," he added.

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