Shell, Partners Back out of Kazakh Projects

Kazakhstan’s drive to expand offshore oil and gas production has suffered a serious setback, with investors pulling out of plans to develop two satellites of the giant Kashagan sour oilfield.

Shell told authorities it intended to exit a project to bring on stream the Khazar field, located on a block it operates jointly with Oman Oil, Kazakhstan’s energy ministry said on October 21, according to local media. Shell had already invested $900mn in the scheme, the ministry said.

The Anglo-Dutch major and its partners in the North Caspian Operating Company (NCOC) in control of Kashagan have also given up on developing another field nearby known as Kalamkas-More, according to the ministry.

These decisions were made based on the projects’ low profitability given their high capital costs, it said.

The investors had been working on a plan to develop Khazar and Kalamkas jointly, making use of existing infrastructure at Kashagan. Shell owns a 55% stake in Khazar, with Oman Oil holding 20% and local national company KazMunaiGas (KMG) controlling 25%. Shell’s partners at Kashagan also include KMG, ExxonMobil, China’s CNPC, Italy’s Eni, France’s Total and Japan’s Inpex.

The collapse of the Khazar-Kalamkas project dashes Kazakhstan’s hopes to establishing additional offshore production beyond Kashagan.

“The joint development of the Kalamkas More and Khazar offshore oilfields has been the key greenfield project to watch in Kazakhstan’s oil sector,” Wood Mackenzie analyst Ashley Sherman commented in a research note. “Its timeline may have been long – with production not targeted until the late 2020s – but it would have offered something vital: large-scale future oil production away from the country’s three megaprojects.”

Shell and its partners could have stuck with the project for longer, enabling more studies to take place and a potential reduction in its cost, currently estimated at $5bn.

“But the decision itself highlights the project’s marginal economics in the highly competitive global portfolios of the majors,” Sherman said. “Whether it’s because of tough logistics or complex geology, the shallow waters of Kazakhstan’s offshore face obstacles to full competitiveness against lower-cost deepwater opportunities elsewhere in the world.”