"Caspian calamity: Kashagan oilfield risks becoming giant stranded asset."

Mark Lewis of Kepler Cheuvreux (no url): “We published an Alert three weeks ago on the pipeline problems troubling the giant Kashagan oilfield (see our note of 7 April, Caspian Capex Complications: Asset-Stranding Risk Highlighted by Troubles at Kashagan Field), citing a report in Quartz that the super-giant  Kashagan oilfield in the northern Caspian sea “will be out of production for at least two years”. Today the Financial Times has made the same point, saying that “the $50bn Kashagan oil project in Kazakhstan is likely to be delayed by two more years while 200km of pipeline is replaced”.“Significance of today’s FT story is that it has the Kazakh Energy Minister going on the record. Although Quartz broke this story already three weeks ago and the FT story does not add any new details in terms of the substance, the FT article does have public officials in Kazakhstan going on the record and thus puts an official seal on the  latest setback to hit Kashagan. The FT says: “Erbolat Dossayev, Kazakhstan’s minister for economy and budget planning, told the FT that he expected production to start at the end of next year at the earliest – but that it could be delayed until 2016. It is the first public admission by the government that the project will not only fail to produce oil this year but may not resume production until 2016. ‘It will be two years’, added one industry official.”
Kashagan is symptomatic of rising capex for diminishing returns … and hence of asset-stranding risk. As we said in our Alert of 7 April, the Kashagan field is estimated to contain 13bn barrels of recoverable oil — for context, annual global oil demand is  c.30bn barrels of oil — and as such is one of the largest discoveries in the last 30 years. But so far it has cost the consortium behind it $50bn just to develop the first phase of the project, and  it had meant to be producing 370,000 barrels a day by the start of 2015, before rising to 1mbd by the end of the decade. Whether or not the companies in the Kashagan consortium will be willing to  make the further capital outlays necessary to boost production to the 1.5 million barrels a day ultimately envisaged by the end of phase three of the project will now most likely depend on how oil prices develop in the next couple of years.
Capex cutbacks signal insufficient returns at current record-high oil prices. Over the last two months, most of the world’s major international oil companies have announced cutbacks to their capex plans as costs have begun to outstrip prices. This is despite the fact that oil prices have been stable at record-high real levels for the last three years. This indicates to us that the upstream oil  industry is struggling to make the returns that shareholders require for the kind of upstream risks that are now being taken – of which Kashagan is a very good example – and that the risk of under-performing and/or stranded assets is not limited to an environment of falling oil demand and falling oil prices. On the contrary, if oil prices rise further in real terms over the next decade – as we think they are likely to – this could lead to a more rapid take-up of renewable energy (whose costs are falling faster than much of the oil industry is assuming), and hence to an acceleration away from oil in the global energy mix.”