New operating company for Kashagan

Kashagan project may get a new operating company in the nearest future, Tengrinews reports citing the current operator North Caspian Operating Company (NCOC).

Kashagan is a gigantic offshore oilfield in Kazakhstan's section the Caspian Sea. Its has recoverable reserves of about 13 billion barrels, but it is difficult to develop because of high content of hydrogen sulphide, pressure in the layers and shallow Caspian water that freezes up winter damaging the infrastructure. The development has been marred with delays and cost overruns since it started in 2001.

A new company incorporating Agip, NCOC, and NCPOC will be created, a source told Tengrinews. NCOC confirmed the information. However, no official statement about the plans to create the new company has been made so far.

Sergey Smirnov, a Kazakhstani expert in oil and gas industry said that an integrated company is created to attract additional funds for the project. “Time has shown that this structure is damp squib. That is why they decided to reform it. It seems, management and other things are not working out well for them,” Smirnov commented.

A leading expert of Finam Management Dmitry Baranov does not consider creation of the new company an unusual move.

“Similar decisions are often made when it comes to large scale projects all around the world. There are several reasons. First, it may reflect the changes the consortium developing the project. Second, it may reflect changes in the project itself and new goals that require participants of players with relevant competence,” Baranov explained. If all the participants of the project agree with the proposed changes, they will most likely take place relatively fast and without harming the execution of the project, he added.

Anna Kokoreva of Alpari said that the reforms might be called for because the NCOC management of Kashagan was a failure. “First, the cost of the project has been constantly increasing. Second, the commercial production has been postponed on numerous occasions due to mistakes, accidents and operational imperfections. We have to admit, the oil field is very complex, but it does not justify the extremely job done by the Kashagan operating company,” Kokoreva said.

Kokoreva believes that the new integrated company should show consistent work and timely solve problems that hamper the field's development. “However, the three companies that were mentioned are unlikely to guarantee this progress. In addition to technical violations, these companies have had other issues as well,” Kokoreva said.

Oil production at Kashagan started on September 11, 2013. However, it was suspended 2 weeks later due to a gas leakage. The production process was resumed shortly after, but then another leakage was detected in October.

Later, a source close to Kashagan project said that the oilfield would be shut down to replace pipelines that failed to withstand corrosion boosted by presence of toxic hydrogen sulfide (H2S). The oil production at Kashagan would be delayed until the operating company replaces all the pipelines.

Some experts believe that Kashagan might end up closed until 2016 or even 2017.

The Kashagan oil field is developed by North Caspian Operating Company (NCOC). The shareholders are AgipCaspian Sea B.V. (16.81%), KMG Kashagan B.V. (16.81%), ConocoPhillips North Caspian Ltd. (8.4%), ExxonMobil Kazakhstan Inc. (16.81 %), Inpex NorthCaspian Sea Ltd. (7.56 %), Shell Kazakhstan Development B.V. (16.81%) and Total EP Kazakhstan (16.81%). ConocoPhillips has withdrawn from the Kashagan project selling its share to Kazakhstan's KMG. KazMunaiGas is expected to subsequently resell the share to Chinese CNPC.

Reporting by Azhar Ashirova, writing by Gyuzel Kamalova, editing by Tatyana Kuzmina