Caspian oilfield is Big Oil's new energy frontier

Face wrapped in a thick scarf against clouds of blinding dust, the electrician gazed at a maze of pipes and pumps teeming with 15,000 workers and said his work was like building the Tower of Babel.




He was speaking casually. But for the oil industry Kashagan, the world's biggest discovery since 1968 with reserves locked amid lethal, high-pressure gases beneath the north Caspian Sea, is a challenge of biblical proportions.


"There are people from 30 different countries working here," said electrician Leonid, asking not to be identified because he was not authorized to speak to the media. "But we do try to find a common language."


Kashagan, developed by oil majors including Eni and Exxon Mobil, represents all the challenges Western countries face to secure energy supplies as Asia becomes more energy-hungry and Russia seeks to dominate resources on its borders.


The field's difficult geology, remote location, harsh climate and environmental challenges make it one of the world's most complex and, at $136 billion so far, expensive energy projects.


As state-owned companies now control most global reserves, Kashagan shows how Western majors, which once dominated the industry, now have to take what chances they can to produce oil.


With an estimated 9 billion barrels of recoverable oil in the Central Asian state of Kazakhstan, Kashagan is, like the tower in the Bible story, an almighty undertaking.


In temperature swings from minus 40 to plus 40 degrees Celsius, the oil in the Kazakh field is heavy in sulphur -- a hazard to health and the environment.


"It's a project of immense difficulty," said Eduard Poletayev, an independent analyst who closely watches Kashagan.


Due onstream in three years, Kashagan is one of a dwindling group of giant oilfields, as cheaper and more accessible ones dry up. Only 11 such giant fields were found in the 1990s, down from 29 in the 1960s, according to investment bank Simmons & Co.


"All the big oilfields have now been gobbled up and Kashagan is the last pearl in the crown of the world oil industry. That's why oil companies are fighting for it so stubbornly," Poletayev said.




Expected to produce the equivalent of 10 percent of Europe's energy needs once at the height of its production, Kashagan can make Kazakhstan a new global source of non-OPEC energy.


It is at the heart of a tussle between Russia, China and Europe, reflecting the challenges faced by the West in maintaining its place as the market of choice for oil producers, and Europe's battle to reduce its reliance on Russia for energy.


The main question is where the oil will go.


One option is to ship it by tanker across the Caspian Sea to the Baku-Tbilisi-Ceyhan oil pipeline that runs to Europe. BP leads that pipeline, but is not a partner in Kashagan.


Such a route is likely to irritate Russia: Moscow wants to boost its role as Europe's leading energy supplier by persuading operators to feed the oil into a separate, Russia-bound line run by the Caspian Pipeline Consortium, for transit to Europe.


But the oil could also flow east to energy-hungry China, or -- a more controversial possibility -- to southern markets via Iran. No single operator holds a deciding majority.


The consortium's media department in Kazakhstan said it could not comment on possible export routes.


"Kashagan isn't producing any oil yet so they are being very careful," said Poletayev. "Because otherwise it's like selling the bear's skin before the bear has been caught."




An hour's helicopter flight over the emerald green waters of the north Caspian reveals a field of magnificent proportion.


Forming the heart of drilling operations is a scattering of artificial islands encircled by huge man-made reefs designed to prevent shifting ice from destroying drilling rigs in winter.


Onshore, an oil processing facility the size of Washington DC is a swarm of construction activity. In stifling summer heat, that is where Leonid and hundreds of others work.


Once at full capacity, Kashagan will produce 1.5 million barrels of oil per day -- enough to power Italy.


Three onshore storage tanks will contain 2 percent of global daily crude consumption. Electricity will be carried to the field via 6,000 km (3,700 miles) of cable -- roughly the distance between London and Kabul.


"This is where the oil will flow from," said one Kashagan official, who, like most, spoke on condition of anonymity. Where it flows is "for the politicians to decide."


Further up the Caspian shore near Kashagan, people in the village of Dossor see no need for anonymity in discussing their experience of oil wealth.


"We have been producing oil for 100 years here," said Bakhyt Smatullin, an official in charge of local oil production in Dossor, which is home to Kazakhstan's oldest deposit.


"This village should be made of gold by now," said Smatullin. Oil was discovered by Swedish investors 100 years ago, but the village is a ramshackle collection of huts around a few creaking oil rigs. Herds of camels graze nearby.


Up to a quarter of the Kazakh population still lives in poverty despite the oil and metals wealth.




Kashagan became a source of particular tension in 2007 when the Kazakh government accused its operators of allowing costs to spiral and missing the original 2005 production start target.


The row unnerved investors and sparked concerns that the government led by President Nursultan Nazarbayev may embark on a course of resource nationalism, potentially denying the multinationals access.


Adding to its complexity, Kashagan lies at the heart of a delicate ecosystem, home to many species unique only to these waters, such as the sturgeon and the rare Caspian seal.


Local campaigners say thousands of dead baby seals have washed ashore since 2000, suggesting the deaths may be linked to oil drilling -- a charge denied by Kashagan operators who say they are strongly committed to protecting the environment.


Sulphur is another point of contention. Yellow piles the size of several soccer fields produced elsewhere in Kazakhstan are a common concern cited by the government.


Ecologists say biodiversity has eroded since the Caspian Sea became subject of mass industrial exploration in Soviet times.


"After the Soviet Union collapsed, all industrial activity stopped and nature became clean," said Fyodor Sarayev, a local photographer who is documenting disappearing wildlife.


"But now the steppe is empty again. The steppe is full of grass but there are no animals to eat it."


(Editing by Tom Bergin and Sara Ledwith)





Experts of the Committee against Torture Commend Kazakhstan for Enhanced Legislation

Experts of the Committee against Torture Commend Kazakhstan for Enhanced Legislation

More details
Kazakh official: Not the time to resolve differences through war

Kazakh official: Not the time to resolve differences through war

More details
Oil majors sued by Kazakh government over billions in revenue

Oil majors sued by Kazakh government over billions in revenue

More details