Exxon, Shell Said to Face Delay on Kashagan Output Boost

Exxon Mobil Corp. (XOM), Royal Dutch Shell Plc (RDSA) and their partners in Kazakhstan’s Kashagan oil field face a delay of at least two years on a plan to boost output 20 percent, reducing the time they have to recoup costs in the $46 billion project that’s already running eight years late, according to two people with knowledge of the matter.

Kazakhstan has told the partners to put the $5 billion step-up plan, taking output to as much as 450,000 from 370,000 barrels day, on hold until they study how the start of production next year affects the deposit, the people said, asking not to be identified because the information is private.

After costing almost double early estimates, Kashagan output may start in March. The Caspian Sea field, a high- pressure reservoir with lethal levels of hydrogen sulfide lying 70 kilometers (44 miles) from shore, is one of the world’s biggest finds of the past four decades.

North Caspian Operating Co., Kashagan’s operator, is working on the development of the gas re-injection project, NCOC, as the venture is known, said in an e-mailed response to questions. Exxon, Shell, Eni SpA (ENI) and ConocoPhillips (COP) referred questions to NCOC, while shareholders Total SA (FP) and state-owned KazMunaiGaz National Co. didn’t reply to e-mailed requests.

Force Oil

Exxon and Shell are seeking operational control as the venture weighs an even more expensive second phase to take production to 1 million barrels a day, 54 percent of Kazakhstan’s 2011 crude output.

Work on the interim project, which involves injecting natural gas back into the field to help force out more oil, was due to start this year.

President Nursultan Nazarbayev urged the nation to tap domestic gas output to “walk away from dependence” on imports in a January speech. In September, he called for a review of Kashagan’s further expansion plans.

The partners plan to build a system to pump gas back into the field, pushing oil output to as much as 450,000 barrels a day, according to the website of Eni, the operator until Kazakhstan tightened control over the project in 2008. In October of last year, Oil and Gas Minister Sauat Mynbayev said the field may reach that level of production in 2016.

Gas Demand

Kazakhstan’s demand for gas is set to double by 2030 from 12.1 billion cubic meters this year, according to the Oil and Gas Ministry. KazMunaiGaz National and China National Petroleum Corp. plan to complete the first part of a pipeline in the fourth quarter of next year that may carry as much as 10 billion cubic meters from Kazakhstan’s oil-rich west to its highly populated southern region.

Before the step-up program can begin, the reinjection technology must be tested and the Kashagan partners must determine “how much it will accept, how engineering infrastructure will behave,” KazMunaiGaz Chief Executive Officer Lyazzat Kiinov said on Oct. 2. “All these are big, complex questions.”

Shell and Exxon are negotiating to gain operating control and boost their shares of Kashagan, to ensure it will be profitable before embarking on the second phase, people said in August. The companies have warned they may exit the project unless Kazakhstan extends the venture’s production-sharing agreement, or PSA, by 20 years beyond its 2041 deadline. The accord allows the investors to recoup costs before the government takes its share of oil revenue.

“Discussions are ongoing with the PSA authority,” NCOC said by e-mail. Kazakhstan’s Oil and Gas Ministry oversees the Kashagan agreement.

Fiscal Environment

The second phase was suspended about 18 months ago because the “fiscal environment” didn’t support the investment, Shell Chief Financial Officer Simon Henry said Nov. 1 on a conference call. Shell urged the partners to agree on terms for the second phase, according to statement that day.

Shell, Exxon, Eni, Total and KazMunaigaz each hold 16.8 percent of Kashagan, after the international partners agreed in 2008 to cut their stakes in favor of the state. Japan’s Inpex Corp. (1605) has 7.56 percent.

ConocoPhillips is considering a sale of its 8.4 percent stake in Kashagan, Mynbayev, who is also KazMunaiGaz chairman, said last month. ConocoPhillips declined to comment on a potential sale, John McLemore, a spokesman for the company, said by e-mail.

The budget for the first phase may almost double to $46 billion by the time oil is exported, a person with knowledge of the matter said in January. An early cost estimate put the tab at about $24 billion.

-- Editors: Torrey Clark, Will Kennedy

To contact the reporter on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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