Will Exxon Mobil Ever See Profits From the $50B Kashagan Oil Project?

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More news on the Kashagan oil project has come out. The project, located in western Kazakhstan, in the Caspian Sea, is being delayed another two years. It’s possible that production will not continue until late 2016.

The oil project, in which Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) hold an almost combined 34 percent stake, has already cost $50 billion. Discovered almost two decades ago, the Kashagan field was meant to be online in 2005 and cost an estimated $10 billion. Setbacks, including the most recent need to replace 200 kilometers of pipeline due to corrosion from hydrogen sulfur gas, has continually delayed the launch. The Kashagan operating company has reported that “both oil and gas lines might have to be fully replaced.” The pipeline connects the offshore field to the processing plant, and a plan is expected to be finalized by mid-year.

Kashagan is the fifth-largest oil field in the world by reserves and the largest outside the Middle East. It is estimated to hold 35 billion barrels of oil, with a third of it recoverable. Once it begins producing, its initial volume is expected to be around 1.5 million barrels per day, putting it on par with all of Exxon’s subsidiaries last year, with hopes that it will eventually produce as much oil as Libya.

Once the project is complete — assuming no further delays — it could take the project five years of continuous production to reach profitability. This, however, appears unlikely, given the current track record and delicate nature of the project. The oil, not just mixed with the deadly hydrogen sulfur gas but under enormous pressures, is also covered in sea ice every winter.

The production-sharing agreement is currently contracted to end in 2041, but with the project a decade behind schedule and the cost of the project five times the original estimate, all major players may have to revisit the agreement. This that would likely only continue to delay the project.

In the meantime, the consortium of companies — which also includes Total, Eni, and CNPC — are blaming the government for delaying decisions and imposing unreasonable requirements to employ local workers. The government, on the other hand, blames the consortium for underestimating the impact of the gas on the pipeline, making constant revisions to the strategy, and, specifically, for poor welding.

News of this delay broke at the beginning of the month. Both Exxon and Shell companies are up just under 3 percent since.

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