Oil Plans Hit Snag

The announcement of a delayed start to commercial extraction at the giant Kashagan oilfield could cool investor interest in projects in Kazakstan, say experts. It could even undermine the country’s internal stability.



The minister of energy and mineral resources, Bakhtykozha Izmukhambetov, announced last week that commercial production at Kazakstan’s largest oil field would be delayed until the end of 2009, for technical reasons. The government had previously announced that extraction would begin in 2005, a date later put back to 2007.



But experts say there is no guarantee that work will begin even in 2009. Everything will depend on world oil prices, and the technical ability of the consortium to overcome the difficulties of offshore drilling on the Caspian shelf.



This third postponement is being ascribed to a number of unique technical problems. The oil contains a large percentage of sulphur, a problem that has also caused difficulties at Kazakstan’s Tengiz oil deposits and which has not yet been resolved. Additional obstacles have been created by the seasonal freezing of the north Caspian Sea.



According to Yaroslav Razumov, a Kazakstan-based analyst, the uncertainty surrounding the project, even given today’s inflated oil prices, could frighten off investors, especially given the lavish hype that has accompanied it. The Kazak government was also relying on the foreign participants in the project for political support.



It will also harm Kazakstan’s image as regional oil giant and guarantor of energy security for a number of other countries. The failure in 2005-06 of once-promising oil exploration projects in Tyub-Karagan and Kurmangazy in the north Caspian region could also dim the investment outlook.



According to open sources, Kashagan has minimum reserves of seven to nine billion barrels of oil. The Kashagan project is being run by the Agip KCO consortium, set up in 1997 by major western oil companies and the national oil and gas company KazMunaiGaz.



Following the official announcement of the postponement, analysts have become convinced that Kazakstan will be unable to fulfill its strategy of increasing energy production to 110-120 million tons of oil a year (2.6-2.8 million barrels a day) by 2015. Some insist that oil production estimates were artificially inflated from the start for political purposes.



Yet the “time-out” out Kashagan has been welcomed by economists, who foresee big problems in the country’s growing dependence on petrodollars. In their opinion, the delay could help Kazakstan avoid a steep rise in inflation and an economic imbalance in favour of raw material production.



(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)