Exxon and Royal Dutch Shell Haven’t Sold a Drop of Oil from This $39 Billion Project

Exxon Mobil Corp. (NYSE:XOM)Royal Dutch Shell Plc (NYSE:RDSA) and their partners, after 11 years and $39 billion of investment, have yet to sell a drop of oil from Kazakhstan’s coast, what was touted as the world’s biggest discovery in four decades. As the milestone of first oil nears, the Kazakh government is pressuring the group for a commitment on an even- bigger second phase; a project that may not make money, says one analyst, and could even be lethal.

Expenses mounted as engineers underestimated the complexity of drilling under a region of the Caspian Sea that’s frozen almost half the year. It may be “impossible for investors to earn a return on any investment in a second phase before their contract for the field expires” in 2041. The project is vital to Nazarbayev, Central Asia, with a population four times the size of Texas because the country relies on oil for 18 percent of gross domestic product and is rebuilding the economy after a devastating banking crisis. The crude oil, locked 4,200 meters (2.6 miles) below the seabed in a highly pressurized reservoir, has a high concentration of poisonous “sour gas,” according to North Caspian Operating Co., or NCOC, the venture formed to manage the project.

The project’s structures are wrapped in impermeable membranes in an effort to keep contamination from the Caspian, home to seals and caviar-bearing sturgeon, and surrounded by barriers to fend off ice. Weekly emergency drills are carried out. There are 5,500 people living and working on the biggest of five islands and that number will drop to about 250 when the first phase becomes operational. The geology islands and ice and have inflated costs for the first phase to $39 billion from $24 billion estimated by the government in 2008. Expanding Kashagan makes more sense economically than halting at the first phase, KazMunaiGaz’s former Chief Executive Officer Kairgeldy Kabyldin said on Oct. 4, before he stepped down from the post. There are signs that some partners may be willing to cut their losses.

“Kashagan may initially produce 370,000 barrels a day, which will rise to 450,000 barrels a day by 2016, Kazakhstan’s Mynbayev said Oct. 4. The expansion would more than triple that to 1.5 million barrels a day, according to President Nazarbayev. That’s almost double Kazakhstan’s current production of about 1.6 million barrels a day, about the same as Libya produced before the revolt against Muammar Qaddafi.

Completing the expansion as early as 2017 is only possible if the partners choose a plan by early next year, KazMunaiGaz National CEO Bolat Akchulakov said in an interview in Astana, the capital, on Oct. 25,” according to Bloomberg.