The Rising Influence of Rising Affluence

[DewDiligence]

(Shell)—WSJ on the incessant delays of the Kashagan Caspian Sea project:

http://online.wsj.com/article/SB10001424127887324050304578412760496098192.html

For more than a decade, the promised bonanza from Kazakhstan's giant offshore Kashagan oil field has been a costly mirage for its developers. And the wait still isn't over.

… Kashagan's potential upside is enormous, said Laurent Ruseckas, a consultant with IHS CERA who advises companies in Kashagan. Oil is now trading at close to $90 a barrel, and the 370,000 barrels a day Kashagan is projected to produce in its first phase is supposed to triple as companies make further investments.

But technical challenges and strained relationships among the operating companies and with the Kazakh government have made the project "a nightmare for almost 10 years," said Fadel Gheit, an oil-company analyst with Oppenheimer & Co. When production does start, it will largely be in Shell's hands, since a joint venture between Shell and KMG [KazMunaiGas, Kazakhstan's national oil company] is operating that phase…

…Kashagan's challenges were evident from the time big oil companies—including Eni, Exxon, Shell, Total SA, Statoil, BP, and BG Group—explored the area after the Soviet Union's breakup. Companies signed a production-sharing agreement with the Kazakh government in 1997 that expires in 2041 and allows companies to recover much of their costs before paying a big portion of oil revenue to the government. Of the initial foreign oil-company players, only Eni, Exxon, Total and Shell remain.

… The reservoir is about 12,000 feet below the northeast Caspian Sea floor and mixed with toxic sulfur gas. The sea freezes for several months a year, requiring companies to build concrete drilling islands since the deep freeze would destroy normal offshore equipment.

This makes Shell’s shallow-water drilling in the Arctic almost seem easy by comparison. In any event, Shell clearly doesn’t shy away from challenging projects.