Kazakhstan’s government predicts sixfold growth in oil output at Kashagan amid tensions with investors

Kashagan, a massive oil field at the Caspian Sea shelf, is capable of increasing oil output to 75 million tons a year, a significant increase over 12.7 million tons produced in 2022, according to the press service of Prime Minister Alikhan Smailov.

«North Caspian Operating Company (NCOC), the operator of the North Caspian Project, has a task of further increasing output at the expense of full-scale exploration of the field. According to experts, Kashagan has a production potential of 1.6 million barrels a day, which is roughly 75 million tons a year,» the press service said after the ceremony celebrating the 30th anniversary of Caspian shelf exploration in Kazakhstan.

In 2022, Kazakhstan produced 84.2 million tons of oil and condensate, including 29.2 million tons produced at the Tengiz field, 11.3 million tons at Karachaganak and 12.7 million tons at Kashagan. Currently, the country’s government estimates the output of Kashagan might be increased by 5.9 times. Since 1993, the oil industry has done colossal research work that allowed it to identify dozens of perspective structures, Smailov noted.

«The main result of that exploratory drilling was the start of commercial exploitation of the Kashagan oil field. This field is unique because on the one hand, it possesses huge amounts of oil and gas, but, on the other hand, it is very complicated in terms of oil production,» he said.

According to the prime minister, in order to start operations at Kashagan, the consortium’s participants were forced to invest loads of workforce and resources to produce equipment specifically designed for the unique field. As a result, they managed to produce about 90 million tons of oil and 55 cubic meters of gas, while total investments into the project and local content amounted to $60 billion and more than $17 billion, respectively.

«Another important issue is the development of gas processing capabilities near the field. As you know, we have been instructed to do so by the president and we have to execute this task in full within the deadline. I have no doubts that the NCOC team has a great potential to achieve these goals,» Smailov underlined.

He also noted that the country’s authorities are also open to meaningful dialog when it comes to the implementation of common plans and are ready to further expand the long-term cooperation. In turn, Managing Director of NCOC Olivier Lazar said that the consortium is looking forward to developing the project in conjunction with the government of Kazakhstan.

«I am very proud of our current achievements and I hope that together with the government of Kazakhstan we will achieve even bigger success. As the project’s operator, NCOC wants to contribute to Kazakhstan’s economy and facilitate the dynamic development of the country,» he said.

The two sides have exchanged compliments amid the ongoing conflict between them. In July 2023, the Ministry of Energy of Kazakhstan informed its partners from NCOC, which is responsible for exploration at Kashagan, that it would bring the $13 billion dispute with NCOC to the arbitrator. This decision shocked big international companies which hoped for a settlement.

A little bit later, Kazakhstan’s government hinted that it could drop the idea of appealing to the arbitration, according to Bloomberg, citing undisclosed people familiar with the matter. At the same time, the Ministry of Energy said that it has never dropped its claims in return for investments, a speculation circulated in the media.

The government is bringing a case against Eni SpA, Shell Plc, Exxon Mobil Corp. and TotalEnergies SE, which have invested about $55 billion in Kashagan, due to accusations of unauthorized expenditures related to project exploration. According to Kazakhstan’s authorities, the Kashagan partners shouldn’t deduct expenditures of $13 billion. These costs might be covered with oil produced at the field under the product sharing agreement. If the country’s government succeeds, it will obtain a bigger share of the oil revenues.

CEO of Shell Wael Savan said in July that the future expenditure of the company in Kazakhstan will depend on whether the government can guarantee the proper investment climate. North Caspian Operating Co., a joint venture responsible for the project operating, said that the partners denied any wrongdoing as their actions met the product sharing agreement, the country’s legislation, the industry’s standards and best practices. NCOC said that there are several «matters of dispute» but it refused to go into details, citing that this information is confidential.

NCOC partners also may be forced to pay a fee of $5.1 billion for violations of environmental legislation discovered by the Ministry of Ecology. Even though the partners haven’t admitted their fault in both cases, they were seeking a way to make a settlement with the country’s government. One of the suggestions discussed by the two sides was the construction of a gas processing plant to serve the needs of the domestic market of Kazakhstan. However, the government has rejected this offer.

In April 2023, the media reported that PSA, a company representing the interests of Kazakhstan in product sharing agreements, filed a legal case in the international arbitration court against Karachaganak Petroleum Operating (KPO) (operator of the Karachaganak oil field) and NCOC, demanding that they pay $16.5 billion. According to Bloomberg, the government of Kazakhstan believes that both operators violated contract conditions multiple times over the period from 2010 to 2019 and shouldn’t deduct their expenditures of $13 billion for Kashagan and $3.5 billion for Karachaganak.

Kashagan is one the biggest oil fields in the world discovered over the past several decades. The commercial production of oil at the project started in 2016. At the stage of implementation, the project’s foreign investors dealt with many obstacles and unexpected costs and even gave Kashagan the nickname Cash-All-Gone. The Karachaganak field is considered one of the 100 biggest oil fields in the world. The project has been under development since the middle of the 1980s.

Among stakeholders of the North Caspian Operating Company are KMG Kashagan B.V. (16.9%), CNPC Kazakhstan B.V. (8.3%), Inpex NorthCaspian Sea (7.6%), Shell Kazakhstan Development B.V. (16.8%), Total EP Kazakhstan (16.8%) and ExxonMobil Kazakhstan (16.8%). The Karachaganak field is operated by KPO, a  consortium of KazMunayGas (10%), Shell (29.25%), Eni (29.25%), Chevron (18%) and Lukoil (13.5%).