On the eve of a meeting between the world’s biggest state producers of oil to discuss a deal to coordinate production, one of the biggest new oil fields is about to come online in the Caspian Sea. Kashagan, as the project is called, is coming in at more than $30 billion over budget and more than a decade late, but the offshore Kazakh facility is finally ready to start producing crude…at a time when the world is fairly awash in oil.The FT reports:
The start-up is significant as the giant field is already leading forecasters to revise their estimates for when the oil market will finally move back towards balance. Opec, the 14-member cartel that controls more than a third of all crude production, on Monday said Kashagan’s ramp up is one reason it now thinks supplies outside the group will actually grow next year, despite two years of low prices.It is, perhaps, one of the great ironies of the current downturn that a project unlikely to be commissioned in today’s environment should set back the long hoped for rebalancing of the oil market. […][If] it is now gearing up for production, estimates for how much oil will flow still vary. Italy’s Eni, which is the consortium leader in a project that also includes Total, and China’s CNPC, estimates 360,000 barrels per day by the middle of next year.
The Kashagan project has been a nightmare for its investors, which include the oil majors ExxonMobil, Eni, Royal Dutch Shell, Total, and the state-owned Kazakh firm KazMunayGas. It has been dogged by onerous red tape, managerial incompetence, and myriad technical problems, the latter of which stem from challenging environmental conditions that include the fact that the shallow water that lies atop the field completely freezes for much of the year. Production briefly started three years ago before pipeline leaks forced its closure just months afterwards.Engineers think (and investors hope) they’ve ironed out those wrinkles this time around, and next month Kashagan will start plumbing what is estimated to be a 35 billion barrel reserve of oil. The timing couldn’t be worse for petrostates, though: it’s already been a bad summer for producers, coming at the end of a downright awful two year period that has seen oil prices drop from more than $110 per barrel down below $30 before settling at their current level around $45 today.That price collapse was precipitated by a glut that Kashagan threatens to exacerbate, and with an American “fracklog” waiting in the wings and global demand sputtering, oil prices aren’t likely to rally anytime soon. And while shale producers are learning to adapt to this new crude reality, the best countries like Saudi Arabia and Russia can do is grin and bear it.