* Kashagan pumps first oil a decade later at cost of $50 bln
* Oil majors yet to sanction expansion as returns unclear
* Kazakh leader scales back oil ambitions
By Vladimir Soldatkin and Mariya Gordeyeva
ALMATY/MOSCOW, Sept 11 When the first drops of
oil began trickling from the world's most expensive oil field on
Wednesday, investors in the mammoth Kashagan Caspian Sea project
sighed in relief, but they have little chance of earning back
their billions any time soon.
A consortium including Exxon Mobil, Royal Dutch
Shell, Total and ENI once promised
to transform the prospects of the entire country of Kazakhstan
and earn massive profits for their own shareholders.
But those dreams have shrivelled amid cost overruns, delays,
government interference and internal disputes among partners.
Just about all they have to celebrate is that the start of
production before an October deadline means they are spared yet
more billions of dollars in fines which the government of
Kazakhstan would have imposed if the project were any later.
Running a decade behind the initial schedules and with
spending estimated at $50 billion, the project still has no firm
production outlook and therefore no estimates of how and when
global majors will recoup the huge costs and generate profits.
For the government, which is already making cuts to budget
spending due to lower-than-expected revenues, it means it has to
scale back ambitions, which once envisioned Kazakhstan as the
next biggest global oil frontier.
"For our population and the state, it will be enough to
produce 2 million barrels of oil a day. This will really
suffice," Kazakh President Nursultan Nazarbayev told an economic
forum this week.
That contrasts sharply with what Nazarbayev, a 73-year-old
former steelworker and member of the last Soviet Communist party
Politburo, promised to his nation of 17 million when Kashagan
was confirmed as the largest oil discovery in decades.
A decade ago, the government of Nazarbayev, who has ruled
the country since independence from the Soviet Union, saw
Kazakhstan eclipsing Mexico and Norway with output of well above
3 million bpd to become a global top five producer by 2015.
On Tuesday, the government forecast output reaching 1.8
million bpd at best in 2015.
It is not unusual for fast growing oil producers to
overestimate their targets only to discover they lack the right
geology or reserves to sustain growth.
In the case of Kazakhstan, reserves are plentiful. With 30
billion barrels it sits among top 10 global reserves holders.
According to consultancy Wood Mackenzie, it is the
"above-ground risks" that have increased in recent years.
"Fiscal and regulatory instability has been one key issue,"
it says, listing a 2009 tax code that increased the burden on
extracting industries, an unexpected introduction of export
duties in 2010 and multiple renegotiations of oil deals with
Echoing moves by other resource-rich governments, often
described as resource nationalism, Kazakhstan has tightened
control over asset sales, giving itself pre-emption rights in
buying out any assets offered for sale.
It is pressing oil firms to buy as much as possibly locally,
often leading to corruption at various levels.
"Foreign investors report that local government officials
regularly pressure them to provide social investments in order
to achieve local political objectives," the U.S. State
Department said this year.
"Together with vague and contradictory legal provisions that
are often arbitrarily enforced, these negative tendencies
feed a perception that Kazakhstan is a suboptimal investment
environment," it said.
Adding to the risks, the country has seen increased violence
since 2010 after individuals and groups associated with Islamic
extremists launched attacks against government offices.
In December 2011, 16 people were killed when energy sector
workers on strike clashed with police in the town of Zhanaozen,
in the Western Mangistau Region. Nazarbayev declared a state of
emergency and sent troops to the region.
Nazarbayev prides himself on non-stop growth in the
oil-fueled economy since 1996. Per capita gross domestic product
has risen more than twenty-fold to $12,500 from just $600.
Growth is there to stay, say economists, as oil output is set to
continue increasing, although at a smaller scale.
It depends on pipeline expansion from the landlocked region,
some of which is running behind schedule.
It also depends on oil majors Chevron, BG and
ENI expanding Kazakhstan's biggest onshore fields,
Tengiz and Karachaganak, after years of painful tax and
shareholder rights disputes with the government.
But it is Kashagan which remains the biggest question mark.
Its development had been estimated to cost $10 billion a
decade ago but has risen to $50 billion as the consortium had to
build several artificial islands instead of rigs because of the
icy and stormy waters of northern Caspian.
Kazakh state oil firm Kazmunaigas says foreign investors
sought at one point to recoup as much as $136 billion in costs,
which ballooned due to the presence of heavy sour gas and
unwelcome chemicals such as mercaptans, leading to high oil
Wood Mackenzie calls Kashagan simply the world's most
expensive standalone energy project.
In addition to disputes with the government over delays and
cost overruns, the consortium faced several internal battles.
One of those resulted in a publicly-humiliating dethroning
of ENI as the operator of the field as rivals said Kashagan
proved too big to manage for the Italian firm.
Despite the gigantic expense, the field will be pumping a
relatively modest 350,000 bpd during the first phase while its
expansion to the initially targeted 1.5 million bpd is on hold.
In February, analysts at IHS Cera, an energy consultancy,
estimated that it would take long-term oil prices of $150 a
barrel for Kashagan's investors to make a 15 percent internal
rate of return on the expansion.
"Even after the second phase receives the green light,
technical challenges tied to the high sour gas content of the
field make it unlikely we will see any meaningful production
emerge from the second phase by 2020," said Eurasia group.
(Additional reporting by Dmitry Solovyov and Raushan
Nurshayeva; Writing by Dmitry Zhdannikov; Editing by Peter