INSIGHT-The sour gas eating Kashagan oil profits

Thu Nov 14, 2013 9:30am EST

Related Topics

* Corrosion likely crippling giant Kazakh field

* Design "should have been fine," expert says

* Big delay would affect Kazakh economic growth

* Oil companies have invested almost $50 billion

* Repairs could take months

By Stephen Jewkes and Dmitry Solovyov

MILAN/ALMATY, Nov 14 (Reuters) - A pipeline inspection robot is set to join efforts to discover why the biggest new oilfield in decades is crippled and whether materials, construction methods, a design fault or all three are at the root of the problem.

Its arrival at the Kashagan project on the Caspian Sea this week comes after the field's trouble-strewn 13-year, journey towards commercial production took another twist in September as it delivered its first oil but began leaking toxic gas from a processing pipeline.

After costing nearly $50 billion, mostly paid by some of the world's top oil companies, Kashagan may now be delayed until 2015, jeopardising a forecast budget boost for Kazakhstan of $28 billion - about a third - between 2014 and 2016.

Even at modest early rates of production, every day it sits idle costs millions of dollars in lost oil revenue. Industry jokers have nicknamed it 'Cash-All-Gone'.

The robot or "intelligent pig" - device was despatched this week, according to an industry source, to take part in an investigation officials said would last into December at the field, named after Kazakh poet-singer Kashagan Kurzhimanuly.

The oil extraction structure has been built on artificial islands about 70 km (40 miles) off the coast in the remote and environmentally hostile northern Caspian Sea, which means fixing the problem may take months.

The Central Asian former Soviet state hopes the field will produce 1.66 million barrels a day at its peak, double the national oil output of 2012, and equivalent to the entire production of resource-rich Angola.

But the location, high reservoir pressure, and other challenges such as high levels of corrosive and poisonous hydrogen sulphide associated with the crude oil have proved to be major difficulties.

The project is years late and billions of dollars over budget already. With output at just 70,000 barrels a day, it sprang leaks in a pipeline carrying the associated gas to an onshore processing plant.

SOUR GAS TO BLAME, PIPES LEFT TO ROT?

According to a senior executive at a large oil company with knowledge of the site, the leaks were most likely caused when the hydrogen sulphide - known in the industry as sour gas - ate through the pipeline.

This could be because the metallurgy of the pipes has turned out to be wrong for the conditions, while welds could also be part of the problem, he said.

"To solve a question like replacing the pipes could take months... the new composition of the tube metals would have to be studied, transported, tested and installed," said another industry source. "It will take several months for activity to restart at Kashagan."

Some in the industry say the pipes might have deteriorated after being left in the open for an extended period during the long delays the project has experienced, making them more vulnerable to attack from the sour gas.

Others rejected this explanation, saying the pipes are designed for just such exposure.

Doubt was also thrown on whether the welds could be the trouble. Unlike the reservoir itself, which is at very high pressure, the gas that comes off the crude as it reaches the surface is carried at low pressure to the processing plant.

Whatever the cause, a shutdown for a leak just two weeks after startup on Sept. 11 was followed by a second leak and interruption in October, backing the view expressed by the head of one project partner Total this week when he said: "It's more than just repairing pipes.".

Corrosion expert Liane Smith said one immediate reaction would be to blame the welds, "but when you get two leaks in two different places as appears to be the case at Kashagan it means there's almost definitely a bigger, more fundamental problem".

Smith, who is managing director of oil services company Wood Group's asset integrity division Wood Group Intetech, also said that from what she knows of the project, it used the right specifications for the job.

"Every corrosion engineer would have looked at that design and, hand on heart, have said it should be fine," she said.

Nippon Steel & Sumitomo Metal Corp, said it was a supplier of pipe to Kashagan but would not comment further. It was not clear whether there were other suppliers, or whether the Japanese group supplied the pipe sections where the leaks occurred.

Saipem, an oil service company part-owned by project partner Eni, was involved in onshore and offshore pipe laying and welding in the project. Saipem also declined to comment.

Total chief executive Christophe De Margerie said at the weekend that there would be no more output this year, and industry sources say a restart is now unlikely before the spring.

CHALLENGING CONDITIONS

The sea over the Kashagan reservoir freezes between November and March, partly because it is shallow and has low salinity due to freshwater that pours in from the Volga river.

The resulting ice drifts can damage equipment and hamper construction and maintenance work. The conditions also restrict the ability to bring in equipment.

Kashagan intends to re-inject some of the gas eventually, but at this early stage this is not an option, industry sources said. This is because of the high pressure in the reservoir.

At Karachaganak, a functioning 400,000 barrels-a-day Kazakh gas condensate field with similar sour gas challenges, a 23-day maintenance shutdown in April and May this year was two and a half years in the planning and involved 3,000 people including almost 2,000 contractors, according to joint operator BG Group Plc.

"Realistically, there could be further delays pushing commercial production at Kashagan closer to 2015. That's a problem for the Kazakh government, they need revenues from this field," said Shamil Yenikeyeff, a research fellow specializing in Central Asian oil and gas at the Oxford Institute for Energy Studies. "This isn't like fixing a pipeline in Texas."

The leaking gas pipeline is one of three main pipes at the site, run by the North Caspian Operating Company (NCOC).

Its offshore section is 44 km long, in the "near shore" zone it is 22 km, and the onshore part where the leaks were discovered leading to the Bolashak processing plant is 29 km long, with all of it buried, an NCOC spokesperson said.

Kashagan is estimated to contain 35 billion barrels of oil, of which 9 billion to 13 billion barrels are recoverable, not far short of major producer Brazil's 15 billion barrel recoverable resource.

At peak production and at a $100 dollar oil price, it would pump over $60 billion dollars worth of oil a year for the Kazakh government and its oil company partners. It could produce for 60 years.

The Central Asian nation of 17 million has pinned its hopes on an early boost for the economy too.

According to political analysts at Eurasia Group, even with a modest 180,000 barrels a day of production planned, the project was being depended upon to lift economic growth to 6 percent in 2014 from 5 percent in 2013.

Repeated delays have infuriated the government, which has threatened to fine the NCOC consortium operating the project.

NCOC includes Kazakh state oil firm KazMunaiGas, Italy's Eni through its Agip unit, U.S.-based Exxon Mobil , Anglo-Dutch group Royal Dutch Shell and Total of France. Each owns 16.81 percent.

Japanese firm Inpex owns 7.56 percent. China National Petroleum Corp (CNPC) acquired an 8.33 percent stake this year as U.S.-based ConocoPhillips exited.

The NCOC, which has run the field since 2009, said the leaky pipe sections that had already been replaced were being examined.

The spokesperson said it would take "a few weeks" to test the pipeline. "Until the investigations are completed it will be too early to discuss any possible remedial actions and time required to implement them".

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