Kazakhstan Is Prospective Not Only by the Caspian

Oil & Gas of Kazakhstan (Kazakhstan)

The Chairman of the Committee for Geology and Subsoil Protection of the RK Ministry of Energy and Mineral Resources, Bolat Uzhkenov

- Seismic surveys to explore oil and gas deposits were started in the last years at oil prospective areas of the republic, in particular, within the Alakol Lake basin of Almaty and the Eastern Kazakhstan Oblast and in the Karaganda and Akmola Oblasts. How do you assess the prospects of the given operations at the above-mentioned localities?

- All sedimentary basins in the Republic of Kazakhstan are potentially prospective with regard to oil and gas occurrence, including the Zaisan and Alakol sedimentary basins in the Eastern Kazakhstan and Almaty Oblasts and the Tenyz sedimentary basin in Central Kazakhstan. The Zaisan Depression is the far eastern sedimentary basin in Kazakhstan, located between the mountainous formations of Southern Altay and Saur-Tarbagatai.

The greater part of it is located in the Republic of Kazakhstan, while the south-eastern part of it in China. According to geological and geophysical data, the Zaisan Depression has a complicated internal structure, caused by thrust faults and thrusts along the sides of the crystal Paleozoic sediments, and is divided into three structural zones: north-eastern, south-western and central. The Central zone is highly regarded for the discovery of oil- and gas-bearing formations. It is characterized by a deeper bedding of the folded Paleozoic foundation, with a thickness of sedimentary stratum up to 5 kilometers. The systematic exploration of the Zaisan Depression was started in the fifties. At that time, about 40 non-deep wells were drilled along a few anticlinal lines. In 1960, the Dairovskaya key well was drilled to the depth of 1,686 m., where no productive deposits were discovered. In 1982-1988, more than 4,000 kilometers of seismic profiles were traversed. In 1988, the Sarybulak-1 well was drilled, where oil was discovered at the depth of 3,000 m. in the Permian sand rock. In December 1997, Kuat (currently Tarbagatay Munay LLP) entered into a contract with the Kazakhstan government for exploration and production of hydrocarbons on the licensed area within the Zaisan Depression. The subsoil user conducted a 2D seismic survey of 516 linear meters and 3D seismic survey of 474 square kilometers in the eastern part of the Zaisan Depression. The last years’ 2D seismic survey data on 2,245 linear meters were processed and interpreted. In 2002-2003, the Karabulak-1 and Sarybulak-2 wells were drilled at the contracted area. While testing the second of the above-mentioned wells, a commercial flow of dry gas came out from the Lower Palaeogene Era sediments, and highly-viscous heavy resinous crude oil was produced from the Upper Permian Period sediments. The Preliminary estimate of commercial gas reserves, based on data on the first exploratory well, Sarybulak-2, is 27.6 billion cubic meters. Probable recoverable gas reserves are 60-70 billion cubic meters. The Sarybulak-3-G well was drilled in 2005. Gas withdrawal took place with the flow rate of 271.9 thousand to 335.3 thousand cubic meters per day. Exploratory operations will continue in 2007. The following activities are scheduled: 2D seismic survey of 170 linear kilometers, drilling, testing of three wells, and simulation of the geological structure of the Sarybulak geological formation. The Alakol basin area is a geological and geographical extension of the Dzungarian oil-and-gas bearing basin of China in Kazakhstan. The analysis of materials studying the Northern Dzungarian region allow us to consider the Dzungarian and Alakol depressions as two giant reservoirs, linking to each other by a tectonic passage, called the Dzungarian Gates. The most favorable conditions for formation of oil and gas were in the Permian Period, a period when volcanic activity activated in this region. Despite insufficient study of this area, many observations give evidence of the high probability of oil-and-gas occurrence at the Kazakhstan part of the Northern Dzungaria. To the north from the main Dzungarian fracture under supposed thrust, within the Gaity River basin the veins of asphalt types in limestone, abundantly impregnated with bitumen were discovered. On the opinion of the majority of researchers, the most promising area for the initial hydrocarbons exploration stage is the graben of the Dzungarian Gates. Admittedly, the maximum depth of the graben is located within the southern boundaries of the Dzungarian Gates, reaching 3,000 meters. On the opinion of geologists, at this depth there can be discovered hydrocarbon-containing sediments of the Jurassic Period. Geological survey operations within the Alakol depression have only just been started this year. The Remas Company carried out an offshore magnetic survey of 380 linear kilometers in the Alakol Lake basin. A 2D seismic survey was conducted both onshore and offshore. Over 400 linear kilometers onshore and over 55 linear kilometers offshore were drilled. Currently, the filed study material is being simultaneously processed and interpreted. Geochemical sampling was made within the area of occurrence of source rock and in the area of hydro geological wells. In one of the wells a hydrocarbon skim was discovered on the eastern shore of the Alakol Lake. From 1996-2003, Azimut Energy Services OJSC carried out a seismic survey within the eastern and south-eastern parts of the Tenyz Depression with the purpose of accessing the given territory for the prospect of the occurrence of oil and gas. Based on the work results, three promising sites were defined in the south-eastern part of the depression. The most promising of them is Muzbel’. Despite the high expectations of the occurrence of oil and gas in the south-eastern part of the Tenyz Depression, no deep well was drilled in the given area, and thus no sufficient data is available on physical features of potential reservoirs. In 2003, a detailed seismic survey was carried out along seismic profiles at Muzbel’, the frequency of which allowed the fixing of a spot for drilling a deep exploratory parametric well. Drilling of the 1-P well with the target depth of 4,000 meters has been started in 2007 at Muzbel’ in the south-eastern part of the Tenyz Depression, financed from budget funds.

Who is Who? --- Sauat Mynbayev - Minister of Energy and Mineral Resources

Sauat Mukhametbaevich Mynbayev, one of the most influential Kazakh politicians, was appointed Minister of Energy and Mineral Resources, where he succeeded Baktykozha Izmukhametov. His appointment was widely considered related to the dispute between AgipKCO, the operator of the Kashagan oil field and the Kazakh government. Mynbayev is seen as a close and important aide to president Nazarbayev, one has a reputation of being able to get the job done. Tthese attributes have helped him attain the highly influential post as Kazakhstan’s Minister of Energy and Mineral Resources, and it is likely that the main goal of his stint in the Ministry of Energy will be to clean up the Kashagan “mess” with a satisfying outcome for the Kazakh government.



Biography:

Mynbayev was born on November 19, 1962. In 1985, he received a degree in economics from the Moscow State University, and in 1988, successfully defended his dissertation in the same subject.

Following his studies, Mynbayev initially taught at the in Alma-Ata Institute of National Economy of Kazakh SSR but left academia in 1991 to head the “Kazakhstan” Construction Exchange. He left this post in 1992 to become the first deputy chairman of the board at Kazkommertsbank, today the largest Kazakh bank.

Mynbayev moved to politics in 1995 when he worked at the Ministry of Finance first in the role of Deputy Minister – Head of the Treasury, and then First Deputy Minister. In 1998, he was appointed Minister of Finance by a presidential decree. In 1999, he was briefly appointed as Deputy Head of Presidential Administration but then became the Minister of Agriculture the same year.

In 2001, he was appointed president of the newly set up Development Bank of Kazakhstan but moved into the private sector in 2002 to head the Caspian Industrial Financial Group, the management consulting venture of the Almex holding group, jointly held by Timur Kulibayev and his wife, president Nazarbayev’s daughter, Dinara Kulibayeva. Among other holdings of the group is the Halyk Savings Bank, the third biggest bank in Kazakhstan.

In June 2003, Mynbayev returned to Kazakhstan’s political life as Deputy Prime Minister, and from 2004, as Deputy Prime Minister and Minister of Industry and Trade. Beginning in February 2006, he became the chairman of the management board of the state holding company Samruk. At Samruk, Mynbayev again worked closely with Timur Kulibayev who acted as a deputy chairman.

Analysis of Possible Outcomes of the Kashagan Dispute

Summary

The dispute over the development of the Kashagan field and the future of Eni as the operator of the field quickly escalated over the last month. Kazakhstan has been expressing its displeasure with Eni’s management of the project and at the same time trying to renegotiate the PSA originally signed in 1997. While some analysts compare the dispute to that over the Sakhalin II project last year when a consortium led by Shell was basically forced to give up control of the natural gas project to Russian Gazprom, I argue that the Kashagan phenomenon has to be examined rather in the context of Kazakhstan itself than in the context of resource nationalism as seen in Russia. There are two main differences between the Sakhalin and the Kashagan situations. First, Kazakhstan, due to its location and relatively small population size, has to balance the interest of its two powerful neighbors—-Russia and China--and of the United States. As it does not have the resources to develop the field on its own through the national oil company KazMunaiGas, removing the current consortium would mean ceding control to either Chinese or Russian companies which would significantly affect the equilibrium that Kazakhstan has been trying to maintain over its strategic resources. Second, it is in Kazakhstan’s best interest to have the project up and running as soon as possible, and presently the best option is to keep the current consortium and the operator in place.

Background

At the end of July, Italian Eni SpA, the operator of the Kashagan project, announced that the cost of the project would more than double, while the projected date of when commercial production was to begin would be delayed for two years until 2010. This is already the second announcement of cost overruns and delays on this notoriously difficult field. As a result, in 2005, Eni was supposedly forced to pay Kazakhstan $150 million in fines.

This time, however, it can be said with certainty that the costs for the consortium will be much higher. Various Kazakh government officials spoke about consequences ranging from fines in excess of $10 billion to an increase of Kazakhstan's share in the PSA from 10 percent to 40 percent to removal of Eni as the operator of the field.

The dispute intensified during the month of August when Kazakhstan's authorities accused the consortium of not following Kazakhstan's environmental laws and fire codes. At the same time they began criminal investigation of a subsidiary of Agip KCO for tax fraud in connection with importing two helicopters. On August 27, Kazakhstan suspended all work on the field, initially for three months, citing environmental and fire safety violations. This escalation occurred just prior to the negotiations between the Agip KCO and the Kazakh government scheduled to begin this week.

Generally, Kazakhstan analysts believe that the above mentioned allegations (while possibly true) and the timing are of political nature and serve the Kazakh authorities to establish a strong negotiating positions prior to talks with the representatives of the consortium.

Allegations of Environmental Violations

As many energy analysts in the former Soviet Union pointed out, (random) enforcement of environmental and tax laws is becoming the favorite weapon to put pressure on international (Shell in Sakhalin) as well as domestic operators (Yukos). Until recently, this approach was to a greater extent limited only to Russia, but it seems that Kazakhstan has decided to use the blueprint as well.

The Kashagan field is extremely complex--it's located several thousand meters deep under the shallow water of the northern Caspian Sea where the volatile temperatures range from -40 degrees Celsius in the winter to +40 degrees Celsius in the summer. In addition to this complexity, it is located in the complicated and endangered ecosystem of the Caspian Sea that was ravaged for years by the Soviets and again in the free-for-all years after the fall of the Soviet Union. The endangered beluga sturgeon and Caspian seal are among the species that have their home on the northern shores of the Caspian Sea.

Consequently, it is virtually guaranteed that some violations of environmental laws will take place regardless of the efforts of the operator. It is the selective application of those laws that raise questions about the intentions of Kazakh authorities. The Ministry of Environmental Protection accused Agip KCO of long-term systematic abuse of environmental codes and blamed the company for a dramatic decline in the number of certain species of fish and birds and Caspian seals. While this “environmental watchdog” did not (yet) make the claim officially, it marks a drastic turnaround from previous treatment of the issue. As late as in April 2007, when hundreds of Caspian seals washed up dead on Kazakhstan's Caspian coast, their deaths were blamed on the unusually warm winter and not on the oil industry. As far as the Kashagan field is concerned, in 2006 the Ministry of Energy and Mineral Resources awarded Agip KCO a prize for its environmental protection program.

Kashagan vs Sakhalin

While the use of environmental protection laws as a tool for putting pressure on international oil and gas companies in Russia and Kazakhstan appear nearly identical, I believe that it would be shortsighted to compare the two directly. The method may be the same, but Russia and Kazakhstan find themselves in completely different positions when dealing with foreign investors. There are several reasons for the differences, but the three main factors are technical expertise, location and infrastructure.

When Gazprom took over the Sakhalin II project from a consortium led by Shell, many energy analysts doubted Gazprom’s ability to develop the field. In case of Kashagan, there is a near unanimous consensus that the Kazakh national oil company simply does not have the means and expertise to develop the field alone or as a sole operator of the consortium. The Kashagan project is crucial for Kazakhstan since only the development of thie field will allow the country to reach its economic agenda set by central authorities. This obviously weakens Kazakhstan’s negotiating position significantly.

Second, Kazakhstan is a landlocked country located between energy-rich Russia and energy-starved China. Russia tends to see Kazakhstan as competitor for international markets and as a potential weak point in its natural gas influence over Europe, and subsequently tries to use it for its own geopolitical objectives. China, on the other hand, sees Kazakhstan as the potential source of fuel for its enormous economic engine. So far, Kazakhstan has been very skillful in neutralizing these powers, and the continuous interest and presence of Western countries and oil companies contributed greatly to its ability to maintain its role.

Third, almost all the oil and gas pipelines transporting oil and gas from Kazakhstan to international markets go through Russian territory. In order to bring Kashagan oil to markets, new pipelines will have to be built. The presence of a Western-led consortium developing the field favors the construction of a route that will bypass Russia and will allow Kazakhstan to diversify its export routes.

Possible Outcomes

There are several possible outcomes of the current negotiations between the consortium and the Kazakh government. I would argue that it is a given that the consortium will pay a steep fine – maybe not in excess of $10 billion as suggested by the deputy finance minister Daulet Ergozhin - but significantly more than the $150 million it paid in 2005. And the PSA will be renegotiated to give Kazakhstan a bigger share of the revenues.

The real question is whether Eni will maintain its current position as the operator of the field, and if not, who will replace it. The following are possible scenarios:

1) Eni remains the only operator.
2) Eni remains the operator but KazMunaiGaz joins in at the co-operator of the project.
3) KazMunaiGaz becomes the sole operator.
4) Another member of the consortium becomes the only operator.
5) Another member of the consortium becomes the operator and KazMunaiGaz joins in at the co-operator.
6) A company from outside the consortium becomes the only operator.
7) A company from outside the consortium becomes the operator with KazMunaiGas joining as the co-operator.

While in theory all these outcomes are possible, I believe that the first, second and fifth are probable and the second most likely. The ultimate goal for Kazakhstan is to have Kashagan developed as early as possible. Therefore, I don’t believe that major changes like bringing in an operator from outside the consortium are very likely. On the other hand, Kazakhstan will likely want KazMunaiGas to take a more active role in operation of the field, if only to develop its own technical expertise. These assumptions would favor the scenario in which Eni remains the operator of the field and KazMunaiGas joins as the co-operator.

Conclusion

Throughout the hysteria over resource nationalism and the possibility that a Western company may be removed as operator of the biggest oil field outside the OPEC, it is important to keep in mind all facts:

1. Agip KCO was unable to honor the terms of the PSA – whether through its own fault or just because of the sheer complexity of the project. The fact that Kazakhstan wants to renegotiate the PSA and threatens the removal of Eni as operator may not be within its rights as far as the PSA goes, but from a neutral point of view is certainly understandable.
2. Kazakhstan needs the Kashagan oil field to be developed in order to reach its own economic objectives and to be included in the prestigious club of the top ten oil producing countries in the world.
3. Kazakhstan’s location and existing infrastructure strongly favor Russia to exert her influence. While Kazakhstan cooperates with Russia closely on many levels, it simultaneously works very hard to neutralize the influence and to diversify its oil and gas export routes. The presence of Western oil companies is absolutely necessary to reach this goal.
4. The allegations of violations of environmental, fire safety and customs laws are clearly used selectively in order to improve Kazakhstan’s position prior to negotiation with the consortium.

These conclusions point to the outcome outlined above that Kazakhstan is unlikely to make any dramatic changes to the current status quo. Kazakhstan needs Kashagan, and Eni is still the best option as the operator of the field. Kazakhstan will also probably push for KazMunaiGas to take the role of a co-operator in order to increase the share of its revenues and also to gain technical expertise which would allow it to develop other technically challenging fields on its own.

Pipelines as a Foreign Policy Factor: The Americans Turn Their Attention to Pipelines in Central Asia

Rossiiskiye Vesti - Yuri Yeremin

The United States is playing its own energy game in the Central Asia-Caucasus region - and it doesn't Russia to join in. One of the main objectives is to build pipelines that bypass Russian territory. Russia is taking steps to counter this.

Foreign experts in the energy sector suspect that the United States arranged a series of official meetings with leaders of the Central Asian and Caucasus states as a prelude to development of alternative oil and gas shipment routes from Kazakhstan and Turkmenistan to Europe bypassing Russia.

Visiting regional capitals, representatives of the US State Department openly admitted that Washington has long-term interests in the Caspian region and promoted diversification of routes intended to abolish Europe's and America's dependence on Russia in so crucial a sphere.

Daniel S. Sullivan, US Undersecretary for Economic, Energy, and Agricultural Affairs, signed an agreement with the Azeri Foreign Ministry on August 16. Washington will provide $1.7 million for the technical and economic assessment of two trans-Caspian pipelines to bring Kazakh oil to the Baku-Tbilisi-Ceyhan pipeline and take Kazakh and Turkmen gas across the Caspian Sea. The agreement on the US grant is supposed to signalize to would-be investors that Washington is prepared to minimize risks in this project. Winner of the grant will be determined in a tender which will apparently be won US companies. Insiders in the Azeri oil industry imply that the US doesn't want Russian involvement in these future pipelines.

Experts point out that President Ilham Aliyev of Azerbaijan visited Kazakhstan on August 6 and 7 (not that long before the signing of the agreement) where he discussed with the Kazakh leadership all nuances of financial and oil cooperation, including interaction in construction of trans-Caspian pipelines.

Seeing the US go active in the Central Asian region, experts draw the conclusion that the US State Department makes an emphasis in relations with Kazakhstan, Turkmenistan, and Azerbaijan on its national interests in the energy and military spheres and that observation of human rights and freedoms has definitely faded into the background. When the 10th annual US-Azeri security conference in Washington on July 9 culminated in the traditional press conference, journalists asked spokesmen for the US State Department what they thought about the state of affairs with human rights in Azerbaijan. Their reply was quite simple: the US State Department acknowledges existence of problems in Azerbaijan in this sphere, but the need to solidify positions in this country and secure better opportunities for American companies was taking precedence.

All these grandiose plans charted by the United States and its allies generate justified fears that this exceptionally expensive colossal transport infrastructure may be rendered obsolete by shortage of hydrocarbons in the region and made a vast heap of scrap metal and an unbearable burden for Central Asian countries. Specialists maintain that neither Turkmenistan nor Azerbaijan have sufficient explored reserves to fill all these pipelines.

The Saga of Kashagan

This article was published in Kazakhstan's monthly Exclusive this May. The original article was written in Russian and this translation is not great but it gives a hint of the emotions (and perhaps confusion) the Kashagan project evokes within Kazakhstan. I listed a few excerpts below and the original article can be found here.

...

With a degree of exaggeration, we can say that “Kashagan is our everything!” The exaggeration wouldn’t be very big. The significant role of the oil sector in the economy of our country is known even to schoolchildren; it is also known that during recent decades, there hasn’t been any discoveries of large new oil or gas fields, and the majority of the fields exploited now are old and used up very much. Thus, the resource base of the most important industry of our economy is not in its best form. New technologies that increase the share of oil extracted from a field, more precise exploration of old fields, and the development of such projects as Tengiz and Karachaganak help, but they don’t change the situation fundamentally. Moreover, their peak extraction periods are expected at different times. As reflected in the main development programs of our country, the oil industry is the locomotive of our economy. The resources of the shore look like a salvation, like a chance for a better future. Kashagan is the biggest pearl among the resources. This has become especially true in recent years, as the shine of others, such as Tyub-Karagan, significantly reduced after unsuccessful oil exploration works. That’s why the endless delays in the commencement of development of Kashagan and full-scale oil extraction on the field are serious problems. Under some unfavourable conditions, it could influence the overall economy of the country. Let’s imagine that oil prices decreased. It will decrease the profitability of many of Kazakhstan’s old oil fields and the revenues from exports are also decreasing. Then it would be possible to compensate the price reduction with an increase in sales of oil, even at lower prices (not the best way, but it may be the only way to do under some circumstances). And the increased production could come from the shore; but then we’d have to finally start the extraction.

...

Discovering oil in Eastern Kazakhstan, of course, is an important event. However, I’d like to warn the government and the people against a premature and groundless euphoria… One shouldn’t forget, first of all, about the risk of a “commercial bluff”, when very optimistic forecasts regarding the newly opened oil fields sharply increase the stock prices of the companies involved in the consortium, hence bringing large profits to the shareholders. Let’s remember that this happened with respect to many oil structures in the shallow waters of Azerbaijan (For example, Karabakh). But all of it finished sadly.

...

Tankers Set to Roam the Caspian

An interesting article discussing the oil traffic accross the Caspian published by the CACI Analyst on May 15.

"The Caspian is the birthplace of tankers; in 1877 the first tanker Zoroaster, built at Sweden’s Motala shipyard, began operating in Baku. Tankers now appear to be returning to the economics and politics of the Caspian. As international attention increasingly focuses on the vast energy reserves of the Caspian, a small but growing fleet of tankers is plying its waters in the absence of a definition division of its seabed, which precludes for the present the construction of proposed undersea pipelines..."

Kashagan and the New Great Game

The decision of the government of Kazakhstan to seek more favorable terms of the production sharing agreement to develop the Kashagan oil field seems to be the latest instance of resource nationalism in oil-producing countries. However, unlike Russia or Venezuela, Kazakhstan is unlikely to push for increased influence over the operational role in the project. Kazakhstan and the state-owned oil company KazMunaiGas have suggested that they may want to seek an increase in their share of profits from the field but they badly need the expertise of the foreign oil companies to extract oil from the notoriously difficult Kashagan field.

Background

First discovered by the Soviets more than 30 years ago, the Kashagan oilfield, named after a Kazakh poet, is a giant geological structure consisting of a huge limestone reef around 75 kilometers (km) in length and 35km wide nearly 5,000 meters (m) below the seabed in the shallows of the Kazakhstan sector of the north Caspian Sea. Temperatures in this region can fall to below minus 30°C in winter and the sea is frozen to a depth of several meters for many months each year. The whole of the landlocked Caspian Sea itself lies some 28m below sea level and although the average water depth is measured at 208m, the sea bed rises towards the north east. The Kashagan field is located 75km from Atyrau in a total water depth of just 3.7m.

Kashagan is claimed to be the largest and most challenging oilfield development project of the decade. Possibly the fifth largest in the world and the largest outside the Middle East, the Kashagan field is the most important discovery since the North Slope in Alaska and the North Sea. The vast new Caspian field has estimated reserves ranging up to 38 billion barrels with up to 50 per cent recoverable and a potential production rate of around 1.5 billion barrels per year.

The production sharing agreement between the government of Kazakhstan and the Offshore Kazakhstan International Operating Company (OKIOC) - now known as Agip KCO - has been signed in 1997 for forty years. Besides the Kashagan project, the contract encompasses three other exploration projects in the North Caspian: Kalamkas, Aktoty, and Kairan. Overall, the contract covers a territory of 5.6 thousand square meters. The consortium is made up of seven companies consisting of Eni (18.52%), Shell (18.52%) , Total (18.52%), ExxonMobil (18.52%), ConocoPhillips (9.26%), KazMunayGas (8.33%), Inpex (8.33%). The original group included BG Group instead of KazMunayGas; however BG sold its stake to the partners in 2004.

Development of Kashagan

Due to its geographical location, the Kashagan field poses enormous logistical, technical and environmental challenges for the operators. Eni faces cold winter weather, shallow waters, ice and sea-level fluctuations that require use of new technologies specifically designed for the conditions in the northern part of the Caspian Sea. The Kashagan field is the first to be developed with wells drilled offshore from artificial islands. Due to the shallow water depths, Eni has opted to site the central production complex on two man-made islands, rather than using conventional platforms. Linked by bridges, the islands not only house drilling facilities and risers, but will also be used to locate a significant proportion of the oil and gas processing facilities. While the wells are drilled in waters of 1.5-10ms (average depth of the North Caspian is 3.3ms), the drilling can reach up to 6,000ms below the seabed (average drilling depth is 4,300ms) and through a salt layer.

The high hydrogen-sulphide content of the Caspian oil and management of byproducts, such as sulphur, is another challenge not only for Eni but also for other operators of Northern Caspian oil fields. The storage of these byproducts has been a contentious issue for years, and the government of Kazakhstan and local officials have been trying to leverage the environmental concerns to put pressure on the oil field operators.

However, the main issue that indirectly caused the delays and cost overruns is the very uniqueness of the project. To industry analysts, these problems came as no surprise as the initial projected date of 2005 and estimated price of $29 billion were considered overly optimistic form the start. As a greenfield project, the time and costs needed for its development proved to be very difficult to assess, and the difficult conditions and the relative inexperience of Eni in similar types of projects further contributed to the delays.

This is also already the second announced delay in the project. In 2004, the consortium signed a deal with the Kazakh government agreeing to delay the production until 2008. At that time, this deal concluded months of uncertainty after the initial announcement when the consortium allegedly agreed to pay hundreds of millions of dollars in compensation of the delay.

Analysis

Despite the rhetoric, the government of Kazakhstan is unlikely to resort to any sort of drastic actions. Kashagan is the only giant oil field discovered in the last 30 years and as such every major oil company want a piece of action. However, they will only stay as long as the development of the field is profitable. For Kazakhstan the development of the field is much more important than for the oil companies. Kashagan is not only a source of future revenues but it is also an important political tool in the so-called New Great Game. And for that Kazakhstan desperately needs Western oil companies and their expertise.

The fears that the latest statements by Kazakhstan's government officials imply that KazMunaiGas, the Kazakh state oil company, has been tapped to take over the project are exaggerated. KazMunaiGas simply does not have the necessary expertise to develop the field on its own. Kazakhstan will probably seek financial compensation for the delays, and may even renegotiate the terms of the contract to make it more favorable to Kazakhstan. But there is no doubt that both sides will tread very carefully as to not endanger the agreement that is already in place.

The presence of western oil companies gives President Nazerbayev the opportunity to court and play against each other the three powers struggling for influence over access to Caspian oil - the US, Russia and China. Should he overplay his hand and cause the Western oil companies to leave Kashagan and Kazakhstan, he would loose a significant bargaining chip. With Russia on the one side and China on the other, Kazakhstan would be stuck between a rock and a hard place. However, judging by Nazerbayev's past prowess in the Caspian political game, this is unlikely to happen.

An additional problem that Kazakhstan has been facing is its reliance on Russia in bringing its oil on the world market. Kazakhstan is connected to the Russian pipeline system and besides the CTC (which also goes through Russia) it is completely dependent on the Russian pipeline operator Transneft (and subsequently on Kremlin). It has been Nazerbayev's goal throughout his tenure as a president to change this dependency and develop new pipeline links to China and to Europe avoiding the Russian territory. However, it is extremely unlikely that additional pipelines would be built, should the Kashagan project be aborted.

Conclusion

While Kazakhstan is obviously not happy about the delay in and the rising costs of the Kashagan project, it does not have the luxury to force the consortium out of the project. The Kashagan field is simply too challenging to have KazMunaiGas develop it on its own, and at the same time too important for Kazakhstan's economic and political stability. The government could find itself loose not only its future revenues but also any leverage among the major oil players interested in its vast untapped reserves.