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News Extra: Kazakh minister says new pipelines for Kashagan to cost more than $3bln

01 December 2014

In early November, Kazakh First Deputy Energy Minister Uzakbai Karabalin said the cost of replacing corroded pipelines at Kashagan, already the world's most expensive oil project, would be more than $3 billion. Production at the field, which lies in the Caspian Sea off Kazakhstan, started in September last year but was halted a few weeks later after the discovery of gas leaks in the $50 billion project's pipeline network. 

Kashagan - Image: ENI
Kashagan - Image: ENI

The Kashagan field is located in Kazakhstan's sector of the Caspian Sea and extends over a surface area of approximately 75 by 45 kilometres. Estimates suggest that it contains oil reserves of 38 billion barrels, of which 10 billion barrels are recoverable. Natural gas reserves are estimated at over one trillion cubic metres.

But the field's oil is 4,200 metres below the seabed at very high pressure, and associated gas reaching the surface is mixed with some of the highest concentrations of toxic, metal-eating hydrogen sulphide (H2S) ever encountered.

The multinational consortium developing Kashagan has identified stress cracking due to sulphur-laden gases as the cause of the pipeline issues at the oilfield. It will have to buy up to 200 km of new corrosion-resistant pipes to replace the entire network of the field's oil and gas pipelines, the Kazakh Energy Ministry said earlier.

Karabalin said the contractors had already purchased 45 km of the pipelines to speed up work when replacement activities start in spring. He said the pipes would be bought from Japanese and German companies.

Italian oil service group Saipem has been coordinating the replacement of oil and gas pipelines at the oilfield, and has been collaborating closely with the consortium on the issue.
In October, the Financial Times quoted sources familiar with the project as saying that the likely final cost of replacing the pipelines would be more than $3.6bn.

A delay in testing steel and welding could also postpone the consortium's plans to restart output at the field in the second half of 2016, it said, although Karabalin said the period before end-2016 was still the target for resumption of production at Kashagan as far as the Kazakh government was concerned.

Another looming issue is the declining price of oil. Kazakh news site Tengrinews quoted local oil industry analysts as saying that production costs at Kashagan would be “much higher” than the average cost of oil production in Kazakhstan, which currently stands at around $50 per barrel. With the price of Brent crude at the current level of $80-$85, the analysts claim, production at Kashagan will be unprofitable.

The Kashagan consortium includes Eni, Exxon Mobil , Royal Dutch Shell, Total, China's CNPC, Japan's Inpex and Kazakh state-run company KazMunaiGas.

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