Eni delays Kashagan oil field production further

Kazakhstan, learning of additional delays in the development of its Kashagan oil field, may impose new fines on the Eni SPA-led consortium in charge of the project.

May 12th, 2008

Eric Watkins
Senior Correspondent

LOS ANGELES, May 12 -- Kazakhstan, learning of additional delays in the development of its Kashagan oil field, may impose new fines on the Eni SPA-led consortium in charge of the project.

Eni notified the government of the delays, and officials are evaluating possible sanctions, but have not made a final decision, according to a senior official of the Kazakh oil ministry.

The consortium proposed postponing the production start to 2012-13 from 2011, according to Kazakh Energy Minister Sauat Mynbayev, who said the two sides were trying to "come to an agreement again."

Industry analysts say the field's development poses unusual challenges, including temperatures that range from 40° C. in the summer to –40° C. in the winter.

Kashagan's crude also has high hydrogen-sulfide content, making it potentially deadly for workers on site and raising unusually difficult environmental problems.

Owing to the challenges, in January Eni set a new date of 2011 for first production of Kashagan oil, following two earlier delays. At the time, the consortium agreed to compensate the Kazakh government for the cost overruns and production delays occasioned by 6 months of talks.

The government claimed that the delays in the Kashagan project were undermining the nation's financial plans and preventing it from implementing other developments in the country.

Under the agreement reached in January, Eni will no longer be sole operator once production begins but will share that role with partners ExxonMobil Corp., Royal Dutch Shell PLC, and Total SA (OGJ Online, Feb. 3, 2008).

Also in January, the partners agreed to sell part of their Kashagan stakes to KazMunaiGas, giving the Kazakh state oil company a 16.81% stake in the project and to make additional payments to the Kazakh government based on the price of oil.

At the end of April, Eni Chief Executive Officer Paolo Scaroni said the consortium was talking with the Kazakh government about an updated plan for Kashagan, and it had hoped to reach an agreement by then. Scarloni said discussion had focused on the need to agree to a date specifying when field production would begin.

Eni expects Kashagan's output to reach 370,000 b/d when it eventually comes online and to reach peak production of 1.5 million b/d by 2019.

Contact Eric Watkins at hippalus@yahoo.com.

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