mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Too Big to Fail
Kazakhstan's Massive Oil Morass

The world’s largest and most expensive oil project is a mess. The Kashagan oil field began pumping its first barrels of oil in September after a decade of delays, but production stopped soon thereafter due to leaks in key pipelines.

The Kazakh field, located in the north Caspian Sea, could contain as much as 35 billion barrels of oil, but like many projects of its size and scope, has been plagued by cost overruns and bureaucratic bungling. No single oil major was willing to take on the risk of developing Kashagan alone—more than $50 billion dollars has been sunk in already—but the lack of leadership in the seven party consortium that split the bill might be as much to blame as the field’s technical problems, Reuters reports:

The consortium, which includes ExxonMobil, Royal Dutch Shell, Total and Kazakh state oil firm KazMunaiGas(KMG), first put one of the smaller partners – Italy’s Eni – in charge of construction and delivery in 2001/02. They retreated from that decision in 2008/09 after years of delays and cost escalation, opting instead for collective responsibility.

This has created problems along the way, and is an extra headache for engineers and managers as they battle to find out why a pipeline started to leak last year, just weeks after oil flowed for the first time, and to fix the problem so that oil can flow out and revenue in.

“It’s a bit of a nightmare to be honest,” said one industry source with knowledge of the project. “The consortium is the operator until first commercial production, so it’s all a bit ‘by committee’ until then.”

If the engineers can fix the leak and the consortium can figure out how to make things work with so many cooks in the kitchen, Kashagan could shake things up in the global energy market. Energy-hungry China has already moved to secure Kashagan oil, but an extensive pipeline network could send crude north to Russia or west through the Caucasus towards Europe, not to mention Kazakhstan’s significant stake in the project, which could help it decrease its dependence on Russian hydrocarbons.

But a China-Russia tug of war or a pipeline security question in the Caucasus only happens if the oil starts flowing. So far, Kashagan has been a nightmare for its investors, but given the staggering amount of time and money already sunk in and the massive potential upside, it’s not unreasonable to think that these bureaucratic and technical wrinkles are going to be ironed out. We’ll be watching.

Features Icon
show comments
© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service