Kashagan delays mar outlook for Eni, Total and Shell.

FT: “Three of Europe’s largest oil companies could take a $1.5bn hit to earnings as a result of delays to Kashagan, the $50bn oil project in the Caspian Sea that has been bedevilled by hold-ups and cost over-runs.”
“Morgan Stanley, the banking group, said it had reduced its 2016 net income estimates for EniTotal and Royal Dutch Shell, which each have a 16.8 per cent stake in the project, by $500m for each company.
That represents 6 per cent of Eni’s estimated net income in 2016, 3 per cent of Total’s, and 2 per cent of Shell’s, the bank said.
The delays come at a sensitive time for the European oil majors, which are gearing up to unveil their second-quarter results in the coming days. The companies have recently gone through a period of heavy spending to boost growth and are under pressure from investors to repair their balance sheets.
Last year they did not generate enough cash flow to cover their capital expenditure and dividends, raising shareholder concerns about the sustainability of their payouts.
Nearly all of them have now committed to curbing spending and generating more free cash flow. But the delays to Kashagan undermine this goal.
“We previously assumed Kashagan would add $800m to 2016 cash flow for each of the three European [majors],” said Martijn Rats, Morgan Stanley’s European oil analyst. That figure has now been downgraded to zero.
….Kashagan was the largest oil find in 30 years when it was discovered in the Kazakh section of the Caspian Sea in 2000. The field, the biggest outside the Middle East, was supposed to come into production five years later. But it has been dogged by massive technical problems and is now years behind schedule.
Kashagan briefly started producing oil last September, only to shut down 13 days later due to a leak in a gas pipeline running from the oilfield to the shore.
An investigation revealed problems with the welds on the pipeline, linked to “sulphide stress cracking”, a form of corrosion caused by hydrogen sulphide or H2S. Kashagan’s oil contains high concentrations of the deadly gas.
The gas pipeline, as well as a parallel line carrying oil, will now have to be completely replaced. That will delay the restart of the field by as much as two years.
Other members of the Kashagan consortium are the Kazakh state oil company KazMunayGas and ExxonMobil each with 16.8 per cent, CNPC of China with 8.33 per cent and Inpex with 7.6 per cent.”