Oil lubricates high-level links

When Kazakhstan’s giant Kashagan oil field was found in 2000, it was the biggest in decades. Few thought then that the Caspian field could be the last such discovery.

But even the discovery of large deposits off Brazil, which caused huge excitement in the industry last year, fails to match the oil wealth of Kashagan, the largest oil field outside the Middle East with 13bn barrels of recoverable reserves.

This has led to the belief among oil executives and analysts that there may be no more Kashagans to be found south of the Arctic Circle.

But for all its hydrocarbon riches, Kashagan comes with some serious drawbacks. The field has suffered one delay after another. That has hit Kazakhstan’s relationship with some of the world’s biggest oil companies – including Italy’s Eni, Exxon-Mobil and ConocoPhillips of the US, France’s Total, and Anglo-Dutch Royal Dutch Shell.

Kashagan is not the nation’s only field. The projects of Tengiz, Karachaganak, CNPC-Aktobemunaigas, Uzenmunaigas, Mandistaumunaigas and Kumokol already produce 1m barrels a day of liquids, or 70 per cent of the country’s total, with the rest made up by smaller fields.

Other prospects include Khumangazy, near the Russian border, Zhemchuzina, in which Royal Dutch Shell has a large stake, and Kalamkas, discovered in 2001 by Eni.

Together, they help bring Kazakh-stan’s proven hydrocarbon reserves to as much as 40bn barrels. The Energy Information Administration, the US Department of Energy’s statistical arm, points out that Kazakhstan’s reserves are, in size, between those of Opec’s two North African members, Algeria and Libya.

Kazakhstan’s petroleum industry already accounts for more than half its export revenues and about 30 per cent of gross domestic product, which has averaged an impressive 9 per cent growth since 2002.

But Kashagan is Kazakhstan’s most important project and one that will enhance the position of the country, situated between the huge markets of Europe and Asia, as one of the world’s most important oil exporters.

At its peak, Kashagan is expected to pump 1.5m barrels a day, almost certainly putting it in the world’s top three when it eventually comes onstream. But that date has been pushed further and further into the future, initially from 2005 to 2008, then to 2011 and now possibly as far off as 2013. All that time, costs have been rising.

Early expectations were far too optimistic, but later date changes came as Eni, the field’s operator, had to admit that technical challenges – such as the high pressure and deadly hydrogen sulphide content of the field – were far tougher than it had thought.

Additional reasons for the delays include infighting among the international oil companies and Kazakhstan’s insistence that the group give Kazmunaigas, Kazakhstan’s national oil company, a share of the field.

This led to a nadir last year – Kazakhstan decided to strip Eni of its operatorship once the field moves into production and negotiate a new operating agreement with the consortium.

Kazakhstan has also become tougher elsewhere, tightening its grip on the industry and demanding a higher share of the profit, as benchmark oil prices have risen to a record $140 a barrel, 14 times those of a decade ago and twice as high as last year.

Irene Molodtsov, managing director of Molten, a consulting firm, says: “The biggest need we have found among international joint-ventures with Kazakhstan has been aligning the diverse cultures and processes of the groups involved.” This has been exacerbated by difficulties in obtaining visas, uncertainty surrounding government intentions and the challenge of attracting people to remote locations that are even less developed than, for example, Sakhalin, the oil- and gas-rich island off Russia’s Pacific coast.

Kazakhstan’s decision to change the rules of the game has yet to reach the levels exhibited by its powerful neighbour to the north. In its attempt to take back control of its most precious resources, Russia dismantled Yukos, its most promising independent oil company; played hardball with Royal Dutch Shell in Sakhalin and appears to be making similar moves on TNK-BP.

In so doing, Russia has scared Europe, its biggest customer, into seeking alternative sources of oil, natural gas and the pipelines that carry them. China has also looked for other suppliers.

That has benefited Kazakhstan. The country already exports oil via every compass point. Some goes through the Black Sea, via Russia, some through the Persian Gulf, via swaps with Iran, some to the north via Russia by rail, and some to the east via pipelines to China.

Kazakhstan is already expanding this network, adding capacity, upgrading old pipelines, linking to the Baku-Tbilisi-Ceyhan pipeline, and extending its transport system to China.

This will increase its importance in the region and to the US, Asia and Europe. It will also allow it to maintain a presence on the international stage, despite concerns by governments and human rights groups about its democratic credentials and its leader’s past, which included allegations – denied by President Nursultan Nazarbayev – of misappropriation of oil funds set to be tried in the Southern District of New York.

It is unclear whether the next US president – due to take office on January 20 – will be as welcoming as the Bushes, senior and junior, who both invited Mr Nazarbayev to the White House. But his country’s oil wealth means that whoever takes over the world’s most powerful office will not be able to ignore him.