The region around the Caspian Sea has emerged as one of the world’s most promising sources of new oil and gas reserves in recent years. There has already been significant investment in exploration, production and pipeline construction to bring these resources to where they are most needed; the fields in Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan, and parts of Russia and Iran, could become important sources of supply, particularly for Europe.
Most of these countries are not, as yet, major players in the global oil and gas markets, but their status will no doubt grow in the years ahead. The US Energy Information Administration estimates that the region could hold up to 49 billion barrels of oil, while its potential as a source of natural gas could be far greater. Proven reserves are estimated at 232 trillion cubic feet, and there is potential for more discoveries to be made.
The Shah Deniz field in Azerbaijan is believed to be the largest natural gas discovery in the world since the late 1970s and is already being developed as a source of gas imports to Turkey. New pipeline projects, such as the Trans Adriatic Pipeline, which could bring 10bcm of gas a year through Albania to southern Italy, are scheduled for development.
Oil pipelines are well-established in the region. In 2005, a 1,600km pipeline opened, starting in Azerbaijan and passing through Georgia to the port of Ceyhan in Turkey. Backed by the likes of BP, SOCAR, Eni and ConocoPhillips, the Baku-Tbilisi- Ceyhan (BTC) pipeline took ten years to develop and since 2006 has moved 950 million barrels of oil. The hot new development is the Kashagan oilfield, operated since 2009 by the North Caspian Operating Company (NCOC) acting on behalf of seven contracting companies, which will evaluate and develop the hydrocarbon assets of 11 offshore blocks. These companies – Eni, ExxonMobil, KazMunaiGaz, Shell, Total, ConocoPhillips and Inpex – will combine their expertise to tackle the sheer size and complexity of the project.
Discovered in 2000, three years after the signing of the North Caspian Sea Project Sharing Agreement (NCPSA), the Kashagan field has been a hotbed of investment. The first production well was commissioned in 2006, with four wells commissioned by the following year. The first oil from phase I is expected in 2012, but there are many obstacles still to overcome.
The NCPSA covers an area of 5.600km2, within which the Kashagan field lies 80km south-east of Atyrau in Kazakhstan. It is the largest discovery of hydrocarbons since 1968 and is expected to peak at up to 1.5 million bpd for up to 40 years. “The phased development plan of the Kashagan field provides for the drilling of about 240 wells and the construction of production plants located on artificial islands, which will collect production from other satellite artificial islands,” said Eni’s 2009 annual report, adding that “in consideration of the magnitude of the reserve base, the results of the well tests conducted and the findings of subsurface studies completed so far support expectations for a full field production plateau of 1.5 million bpd.”
As well as the large area of the field, producers must address the fact that the reserves are greatly overpressured (at 800 bar at 4,000m), which presents many difficulties for drilling operations. Add to that the extreme weather conditions that prevail in the area, with temperatures swinging between -40ºC and +40ºC as the seasons change, ice, shallow water, sea level fluctuations and a high concentration of hydrogen sulphide in the oil, and it becomes clear that offshore operations are by no means simple.
At present, the task of overcoming these many challenges falls to Eni, which is responsible for the phase I experimental programme. Subsequent phases will see Shell manage the offshore development, with Eni handling onshore elements, ExxonMobil the drilling and KMG steadily assuming more responsibility for production. The capital cost is, understandably, high. It is estimated that the budget for the development of the Kashagan field will exceed $136bn before production begins in late 2012. Should overruns continue, the cost could be higher.
“In addition to the expenditures for developing the field, further capital expenditures will be required to build the infrastructure needed for exporting the production to international markets. As of 31 December 2009, the aggregate costs incurred by Eni for the Kashagan project capitalised in the financial statements amounted to $4.5bn,” noted Eni in its annual report.
There is another major challenge to which any large oil or gas project must measure up. Environmental concerns about the impact of drilling in Kashagan have inevitably grown since the Deepwater Horizon oil spill in the Gulf of Mexico. Previous spills into the Caspian Sea have alerted the industry and authorities to the potential dangers of drilling. In 2008, the region saw a 20km2 spill off Azerbaijan, and earlier this year Agip KCO was fined $330,000 for pollution in the Kashagan field. The Government of Kazakhstan is taking a firm hold of the situation, and is creating a new commission to oversee the operations of oil companies and ensure they comply with local environmental legislation.
Projects and pipelines
Alongside the drilling issues that the NCOC partners will have to address, there is much to be done to enable oil from Kashagan to reach its destinations. For KMG, the main export route is expected to be the Kazakhstan Caspian Transportation System (KCTS), which could take 600,000bpd by 2016 from the Kashagan offshore field to Baku, where it will feed into the BTC and Baku-Batumi pipelines. The recent postponement of the KCTS project, which was initially signed off in 2008 by KMG and Azerbaijan’s national oil company, SOCAR, could suggest oil from Kashagan will arrive later than 2012, and possibly later than the furthest deadline of October 2013. Initially, the oil will be taken via the Caspian Pipeline Consortium, which operates a pipeline through Russia, until KCTS is ready.
Of the developments in and around the Caspian Sea, Kashagan is rightly in the spotlight given the scale of its reserves. But the region’s future as an oil exporter is not dependent on that one field. The Isatay and Shagala exploration areas in the Caspian Sea are being studied by Eni and KMG.
Other assets within the NCPSA contract area include the Kalamkas, Aktote and Kairan fields. Exploration and development also continue in areas such as north-west Kazakhstan, where Total has recently acquired a licence from a subsidiary of Poland’s Petrolinvest. “The acquisition of the stake in the concession allows the group to deploy its deep drilling expertise as an operator in Kazakhstan in a region with promising potential,” said Yves- Louis Darricarrère, president of Total Exploration and Production. The value of the region is in no doubt; the hard task is ensuring it lives up to its potential.