* Kilometres of Kashagan pipelines defective-sources
* Could be cheaper to replace onshore section
* Project costing around $45 mln a day in lost revenues
* Kazakhstan raises pressure with $737 mln fine
By Oleg Vukmanovic and Stephen Jewkes
MILAN, April 2 Western oil majors struggling to
restart production at one of the world's biggest offshore
oilfields in Kazakhstan have found that whole kilometres of
pipeline are defective, two people recently returned from the
$50 billion project say.
Replacing the damaged section altogether may be a better bet
than trying to repair it.
Oil company investigators have yet to announce conclusions
about what went wrong at Kashagan in October, when onshore pipes
carrying corrosive gases sprang leaks and brought offshore
production in the Caspian Sea to a halt a month after start-up.
Yet early accounts of findings collected from engineering,
banking and industry sources, some of whom have just returned
from the site, reveal that the scope of technical faults may
delay oil flows longer than expected.
The project has presented huge engineering challenges
throughout the 13 years since work began. Much of it is built on
artificial islands to avoid damage from pack ice in a shallow
sea that freezes for five months a year.
The oil is 4,200 metres (4,590 yards) below the seabed at
very high pressure, and the associated gas reaching the surface
is mixed with some of the highest concentrations of toxic,
metal-eating hydrogen sulphide (H2S) ever encountered.
It has now emerged that sulphur-laden sour gas burped out
from the oil field during production last year may have weakened
long stretches of processing pipelines, two sources said.
"The problem goes on for kilometre after kilometre, it's a
systemic problem," an industry source briefed by Kashagan
engineers told Reuters.
That defective stretch of pipeline runs mainly through
hard-to-reach swampy terrain, making intervention costly and
A banker briefed by management of one of the companies
involved in engineering work said he was told the best course of
action could instead be to lay a new line alongside the old one.
"It is cheaper to build a new parallel line than to pull up
and repair the old one," the banker said.
A Kashagan consortium spokesman declined to comment beyond
saying that no decision has yet been taken on the pipeline
rehabilitation plan. At the same time it delayed the release of
its final results into the pipeline investigation to the
Problems with an inspection robot designed to help detect
what is wrong were not helping, another source, who makes
frequent trips to Kashagan, said, and compressors designed to
keep the oil flowing were causing extra headaches.
Two compressors are known among the thousands of workers on
Kashagan as "the widow maker" and "the rotating bomb",
nicknames, a consortium spokesman pointed out, which refer not
to unsafe working conditions but to the complexity of the kit.
Output remains stuck at zero despite initial projections of
180,000 barrels per day in the early phase of production
build-up on a field that aims to produce 1.66 million barrels a
day at peak - as much as OPEC member Angola.
According to Reuters calculations, by mid-year, lost revenue
is likely to amount to between $4 billion and $12 billion.
A second engineer associated with the project said the
consortium's decision to keep the pipelines outside in harsh
conditions may have stripped away their corrosion-resistant
coating, rendering them more vulnerable to leaks.
"The storage was the problem, the pipes were left in the
desert for too many months and this altered the coating of the
pipes," the source, a specialist in inner-tube coatings on
The consortium over-estimated the acidity of the sour gas
when they built and treated the pipelines, the source added, "so
it can't have been a problem of estimating the content of acid".
Another source with one of the Kashagan stakeholders also
said that the span of pipeline under scrutiny is kilometres
long, with coatings at the heart of the problem.
The consortium said only that toxic gas lay behind the
problem. "Sulphur stress cracking was identified as the root
cause of the pipeline issues," the spokesman said. "This process
occurs if steel of high hardness is exposed to high
concentrations of H2S (hydrogen sulphide) under high pressure in
the presence of water," the spokesman said.
"This mechanism is not at all related to normal corrosion
(formation of rust) but solely to the hardness of the steel".
Last month, infuriated Kazakh officials slapped a $737
million ecological damage fine on the consortium, which includes
Eni, Exxon Mobil, Royal Dutch Shell,
Total, and Kazakh state-run KazMunaiGas.
The penalty is the strongest signal to date from Kazakhstan
that it is running out of patience, while the consortium's
decision to fight the fine could raise tensions with a
government grown more assertive with foreign investors.
The consortium, which was meant to start its first output 10
years ago, has already seen KazMunaiGas taking a large stake in
the project last decade following previous delays that angered
A repeat of that scenario together with the state's possible
refusal to pay a chunk of development costs are the main threats
to the group just as the restart date remains deeply uncertain.
"The project stopped production as a result of pipeline
issues with the hydrocarbons coming onshore," Shell's chief
financial officer Simon Henry said last month.
"All the partners have contributed their technical expertise
to look at how this challenge of running the pipelines can be
addressed. There is no decision yet about how best to do this or
when production can be restarted," he added.
Kazakh officials have said they have no plans to nationalise
the project so far and say they hope it could restart in the
second half of 2014 and produce 22 million barrels of crude by
the end of the year.
Up to now, Kashagan has missed out on around $2.7 billion in
oil revenue, a fact likely to cast a shadow over state
The contractual terms stipulate the government may refuse to
reimburse the costs, potentially the entire $50 billion bill, if
the consortium misses the final deadline. That was set by the
state as October 2013.
The Kashagan spokesman said that output had in fact briefly
reached commercial levels, as written in the contract, of 75,000
bpd before its shutdown, but not for long enough to count.
A nine-month delay from September 2013 to July 2014 will
cost the consortium at least $12 billion of lost oil revenues
based on full scale output of 450,000 barrels per day.
Even if minimal output levels of 150,000 bpd are taken into
account, lost revenues would still be a hefty $4 billion,
according to Reuters calculations.
For a graphic on Kashagan - link.reuters.com/pen92v
"It's dragging on. Everyone's losing money, big money, and
so they all want to get on with it. But there are technical
problems," said a source just back from Kashagan.
For its part, the central Asian state urgently needs
production revenues to hit its fiscal targets for 2014, based on
projected cash inflows from Kashagan at up to three percent of
gross domestic product.
Past oil project delays have been seized upon by the
government as a chance to levy hefty fines and boost its share
of future production revenues.
Unfortunately for everyone involved, the best way of
defusing rising stakeholder tensions hangs on oil company
contractors getting to grips with the sweep and complexity of
the project's engineering challenges.
But smooth operation at the current juncture looks largely
out of reach.
Efforts to contain equipment breakdowns offshore has given
rise to black humour among the ranks of engineers.
An engineer with one of the western oil companies involved
in Kashagan who recently returned from the site said technical
breakdowns on production-critical equipment keep workers
Particularly singled out for complaint are the platform's
two main compressors, designed to keep oil flowing by
maintaining reservoir pressure and stripping out the gas
component of oil production.
"They're a mess...we call one 'the widow maker' and the
other 'the rotating bomb'," said the engineer. "That's how we
tell them apart when assigning work orders," he said.
Furthermore an inspection robot, called a PIG, sent to scan
the inside of Kashagan's pipelines for data and clues is sending
back patchy data.
"The problem is the PIG has a 60 percent reliability rate."
the first source just back from Kashagan said. "Its not like an
X-ray. It's like a blurred X-ray."
(Additional reporting by Dmitry Solovyov in Almaty and Dmitry
Zhdannikov in London; editing by Philippa Fletcher)