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 KAZAKHSTAN №5, 2014
 Eurasia Project: Science or Business?

Eurasia Project: Science or Business?

The main disappointment in the recent time for Kazakhstan was, probably, the suspended production at Kashagan field, which wasn’t even started. This mega-project has broken the industry’s plans and led to the budget deficits after serving as a key bargaining chip in the game for investment for more than a decade. In this situation, the officials decided to play a new card by initiating the deep exploration project with a very symbolic name: "Eurasia".


Everyone knows that a large part of the onshore Kazakhstan's hydrocarbon fields have already reached the stage of maximum production level. At the same time, the field reserves are decreasing every year.

In this regard, the experts agree that the era of easily recoverable oil is ended and the subsoil users deal only with the fields, having the complex geological conditions, which require the large investments and introduction of innovative technologies. Moreover, the experience shows that the investments in the most prospective fields can be rarely profitable in a short-term period. 

The most dramatic example is the history of Kashagan field development, which reserves exceed 12 billion barrels of oil. We remind that the production was initially scheduled to start in 2005. However, the project participants did not consider a number of issues that emerged in the course of its implementation. The first is the possible pollution of the Caspian Sea due to the errors in production process. The attempts to minimize this risk caused a prolonged work on the project, which, in turn, resulted in a major estimate increase. For example, it was planned that the first phase of the development will require $ 31 billion, but in fact, the figure increased up to $ 38 billion. Reasons for the increase were the high cost of equipment and growth of the project’s ecological component. The overall budget for Kashagan development is also increased from $ 57 billion to $ 136 billion.

Another problem is the transparency and project management.The fact that the National Company KazMunaiGas joined the Consortium and creation of a new joint operator didn’t improve the situation. For example, the agreements with contractors for the purchase of equipment, materials and pipes, which caused the recent technical problems, were concluded with the direct involvement of KMG. In addition, the theft of expensive equipment became an often incident.

All of this has led to another delay in starting the commercial production and generally, it will result in a slower growth of Kazakhstan's economy. Due to Kashagan, the Republic planned to become one of the ten largest oil suppliers in the world. For example, only in the current year, the project would bring an additional 3 million tons of oil, or 180 thousand b/d. In future, the production volume was planned to increase, first, up to 370 thousand, and by 2020- up to 1 million b/d. 

The senior scientist of the Institute of Economics at the Ministry of Education and Science of the RoK, Oleg Egorov evaluates that only in 2014, Kazakhstan missed the revenues in form of project taxes in amount of $ 1.05 billion. Besides, changing the deadlines does not contribute to improvement of the situation with the oil refining: Nowadays, the three existing plants process 14.5 million tons of oil. We need 2.5-3 million tons to use their capacities in full, but we can’t provide them.  And Kashagan could help in this issue”.

In his turn, Nurfatima Zhandarova, Economist of Halyk Finance believes that "suspended" Kashagan will result in decreasing the real economic growth up to 4.5%. According to her calculations, 1% growth/decline of oil production (other conditions being equal), leads to an increase/decrease of real GDP for 0.16%. Due to the lack of Kashagan oil production, the total volume in 2014 will be reduced for 1.2 million tonnes ( -1.3%)- up to 80.6 million tonnes, and in 2015 it will decrease for 6.4 million tonnes (-0.7%)- up to 80.1 million tonnes, as a result, the real economic growth will drop by 0.3 percentage point to 4.5% and it can stay at the same level in 2015.

Talking about the influence of "Kashagan factor" on the volumes of the industry production, the profile Ministry has already to revise the strategic plan, adopted three years ago. In particular, the expectations in terms of the oil production in 2014 had to be adjusted from 85 million to 83 million tonnes, and in 2015-from 95 million to 90 million tonnes.


All Hope at Tengiz and Karachaganak?

The officials are not inclined to dramatize the situation yet. For instance, Yerbolat Dossayev, Minister of National Economy stated that half of Kashagan oil would be recovered by increasing the production at other fields. Therefore, most likely, the focus will be on Tengiz and Karachaganak fields, since all other accumulations already passed the peak of their development.

It should be noted that in the first quarter of 2014, production of JV Tengizchevroil amounted to 6.8 million tonnes of crude oil. While maintaining the production rates, at the end of the year the company might reach 27.2 million tons of oil, which will be an outstanding success. However, TCO can make a quality breakthrough only after implementation of the Future Growth Project- the third after the Second generation Plant and Gas Re-injection Project. The company plans to increase its annual production from 25 million to 36 million tons of oil. The cost of the project to be implemented until 2018, will be $20-23 billion. It is expected that at least half of the costs will be allocated to the formation pressure increase in the field, because this problem is the most important for now. According to some experts, the reason for its creation was the use of the technology, focusing on the production of readily available oil.

Regarding Karachaganak project, about 10-11 million tons of oil and gas condensate is produced here at the moment. However, around 8-9 billion m3 of gas is submitted to the Orenburg Gas Processing Plant, and the remaining part is re-injected into the reservoir. Currently, the operator is considering various options for further project development. The concept should be finally approved in the current year,  with main design planned for 2015-2016 and taking the final investment decision in 2017; construction of the new facilities will start only in 2018. The developers think that the main task of the project is not just increasing, but maintaining the obtained level of the hydrocarbon production and gas sales for a longer period. It is planned to re-inject the remaining gas into the reservoir, which will provide the increase in the recovery of liquid hydrocarbons at the level of 100 million tons.


Eurasia: Just Project or Real Future?

Since Kashagan’s trump card is not yet active, the officials are seriously worried about finding new investment ideas. In October 2013, the project of an international oil consortium "Eurasia" was presented to the investors, which will deal with the exploration of deep horizons of the Pre-Caspian basin.

It should be noted that even last spring, one of the discoverers of Kashagan Yuri Volozh during the AtyrauGeo Conference  made a presentation, which indicated that  six or seven sub-salt structures with recoverable reserves of more than 200 million tons of oil and with the net cost of $ 20 per barrel can be found in the central part of Pre-Caspian basin (between Atyrau and Uralsk). Although Tengiz and Kashagan, being the same fields, are located much closer to the surface, according to Mr.Volozh, there is no point to explore for the large accumulations at the depths of up to 5 thousand meters, since they are already depleted. This means that we should drill deeper, although such work is something new for the Kazakhstani specialists. The situation is complicated by the fact that "big oil" can be concentrated in narrow cones, complicating the researches’ task.

However, currently Kazakhstan has no alternative yet. Therefore, by presenting a new draft, Uzakbay Karabalin noted out that an opinion that it is easy to explore and to produce the hydrocarbons, which is absolutely not true for the Caspian Sea and the North Sea. He also drew attention to the fact that, according to the independent research institutions of Russia, the unexplored subsoil depths can contain up to 40 billion tons of oil.

Many Kazakhstani experts agree with him. If in the middle of the last century, the resources could be found at depths of 1-2 km, then at 1.5-2.5 km, and later at 3-5 km, now the hydrocarbons are extracted at the depths, exceeding 7 km, so that the hypotheses about the occurrence of oil at a depth of 10 km are quite justified.

At the same time, the issue of attracting the large investment is still important. The experts say that this basin shall be studied as an integral, coherent geographical complex, and each oil&gas province shall be deemed as a structural element of the Earth's crust without consideration of the administrative units. Therefore, Kazakhstan intends to establish a consortium with the participation of Russia, which also owns a substantial part of Pre-Caspian basin.

According to the President of the Society of Petroleum Geologists of Kazakhstan, Baltabek Kuandykov, the idea is warmly welcomed even by the private players. "Previously we spoke with representatives of some major oil companies. We asked their opinion about the project, what do they think about such major works, well depth, what is their appraisal. And generally, they supported our idea".

Eurasia Project will be divided into three major stage. At the first stage, the works will be carried out on gathering, treatment and reinterpretation of regional geological exploration and parametric wells, drilled during the Soviet era. The second stage will include a large-scale geophysical research on selected new regional profiles. And only at the third stage, it is planned to ensure the drilling of a new key well. It is expected that this will be possible to get information on the depths up to 20-30 km, i.e. covering the Pre-Caspian basin up to its foundation, with a total length of 3.2 thousand km. The approximate cost of exploration works during all three stages will be around $ 500 million. These costs are associated with the planned use of complex and high-tech methods and software products, as well as the processing and interpretation of geophysical data in the territory of Kazakhstan with attraction of the best international experts. A contemporary geological competence centre for Caspian basin will be created just for this purpose.

The project initiators believe that its implementation will begin in 2015. By the end of this year, the Special Commission will be established for its preparation and implementation, which will be responsible for negotiating with the potential project participants.

According to some data, the preliminary talks are already done with the Russian party, which approved participation in the project and the cooperation will be soon documented. The future participants of the risky project will be attracted by the incentives. For instance, after the project completion, they will have the advantages in tenders, announced by the national companies.

Project management will remain the duty of the Kazakhstani party; processing and interpretation of geophysical data will be ensured in Almaty on the basis of available laboratory facilities and future geological competence center for the Pre-Caspian basin.

At the same time, a number of Kazakhstani experts treat the project with a clear scepticism and compare it with the Soviet slogans about the "bright future". Some of them are wondering: what will interpret the project developers if the Caspian depression has been well studied in 50-70 years of the last century and the data was repeatedly interpreted? Back in 1967-1971, within the Soviet research programmes, the key parametric well was drilled in Biikzhal area to the depth of 6.7 thousand meters.

It should be noted out that the main task of the deep drilling is the regional study of deep structure parametric analysis at the possible zones of oil&gas accumulation and setting the parameters for the seismic exploration. In addition, deep and ultra-deep (parametric) drilling is intended to explore the main features of the deep structure of unexplored large regions to identify the common patterns of stratigraphic and spatial distribution of the mineral resources, favourable for the ore and petroleum accumulations.  

Although the Pre-Caspian depression can be hardly named as unexplored one, within the framework of the Eurasia project, it is planned to drill the key parametric well Caspian-1 just in the middle of the basin. "This well is a purely scientific project. The oil could be discovered at a depth of 3 km, gas is accumulated at the depth of 4 km or deeper, but at the depth over 8 km there should be no hydrocarbons, one can find only the diamonds there,"- says ironically one of the geologists.

From a practical viewpoint, the data received from another interpretation, is hardly able to specify the location of the narrow deep cones with a high content of hydrocarbons, mentioned by Mr. Volozh. In addition, the fact that the drilling of Caspian-1 is not the first, but the final phase of the Eurasia project, it reminds once again about the purely scientific nature of the project, which practical benefits can be perceived only as a remote perspective.

Meanwhile, the potential locations of these deep cones, targeted by this initiative, are already known at a certain degree. In particular, they include Ozinskaya structure in Saratov region of Russia (where it is expected to find the field, comparable to Karachaganak), as well as the structures in Sol-Iletsk, which is located at the junction of the Urals and the Caspian basin. Kazakhstan has 11 elevations between Atyrau and Uralsk, the most promising of which are Kushum, Karabek and Sakhar areas.

Another problem with the new mega project is that its implementation will (to a certain extent) contradict with the interests of KazMunayGas. The matter is that this company deploys its own ambitious programme worth $ 5 billion, which also provides the exploratory drilling in the subsalt formation at a depth of 5-7 thousand meters. Maybe it is a simple coincidence, but the area of Caspian-1 well include Karashungul field- one of ten prospective subsalt structures, listed in the KMG exploration drilling programme. Therefore, having a rival programme might result in multiple questions from the oil companies.

Despite the fact that KazMunayGas intends to primarily focus on the side sections of pre-Caspian basin, and Eurasia project aims to the central part of the basin, it is clear that the possible territorial overlapping can happen in the project course.  As a result, at the first stage KazMunayGas voluntarily withdrew its candidature from the list of candidates for participation in Eurasia project implementation. This is understandable: the scientific character of a new project is very clear, while the practical effect is still uneven.


Askarbek Makhmutov

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Crude Oil into Polymers  Sergey Gakhov 
Oil, Gas and Politics  Sergey Gakhov 
Downtrending   Sergey Zelepukhin 
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