In the world of oil and gas, big projects mean big profits, and there is no bigger project under development right now than the Kashagan oil field, the largest oil discovery in 40 years.
Indeed, the project is so large that it is taking a consortium of oil majors to develop it, including ExxonMobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS-B), Italy's Eni (NYSE:E), and France's Total (NYSE:TOT).
However, the project is so big that it's been a nightmare to develop, and multiple problems have sent costs skyrocketing. Unfortunately, the most recent of these problems has turned out to be more serious than first expected.
Size and complexity
Kashagan is not just one of the world's largest oil fields, it has also turned into one of the most complex and expensive oil projects ever.
From an initial cost estimate of $57 billion for the life of the project, the Kashagan development is now expected to cost a staggering $136 billion over its lifetime -- that's 138% more than originally planned. But when we take the size of the project into consideration, the reason for this price tag becomes apparent.
Kashagan is no simple find-drill-and-produce well. No, the Kashagan field is located within Kazakhstan's zone of the Caspian Sea, meaning that to avoid damage from pack ice in a shallow sea, which freezes for five months of the year, much of the project's infrastructure had to be built on artificial islands.
As a result, the project required the construction of a landmass to ensure its long-term survival.
Things were progressing to plan (albeit slightly behind schedule and over-budget) as of last September when the project finally started up, but then a gas leak forced production to stop.
To all involved, this was a huge surprise since Kashagan, as you can imagine, has been constructed using the most cutting edge technologies throughout.
Tests were made on the pipeline and surrounding environment and results are expected during the next month or so, which should give engineers the data they require to fix the problem and allow then to recommence production within the year-or that's what the consortium of oil partners developing the field thought anyway.
Now things have changed.
It would appear that the gas leak is more serious than thought, as engineers suspect that it is, in fact, the gas being produced from the field that is causing the problem. Specifically, the gas from the Kashagan field contains high levels of toxic hydrogen sulfide, or H2S for short.
Simply put, H2S is eating away at the undersea pipelines, causing cracks and fractures. Gas needs to travel through these lines for the project to start production, and engineers can't just patch the system up; the whole pipeline network may need to be replaced.
To prevent corrosion of the pipelines as gas travels through, the existing pipelines will have to be replaced with more expensive nickel-based alloys. According to specialists, these new pipes will cost 10 to 15 times more than the current system, implying that yet more money needs to be thrown at the project.
How much more money will be needed? Well, as of yet no one is sure, but it is estimated that the whole Kashagan project could need up to 55 miles of new pipeline. This is a project of epic proportion, and some engineers are now openly admitting that it is possible the field will not be able to produce any oil or gas for at least two more years.
One of the project's partners, Total, has already stated that it does not believe the project will produce any significant amount of hydrocarbons this year.
So the huge Kashagan project has run into yet more problems, and this could spell trouble for the consortium developing the field.
Not only are ExxonMobil, Shell, Total, and Eni going to have to fork out more cash to get the project into production, but the Kazakhstan government is now starting to lose patience and has threatened to impose financial penalties on the companies if production does not commence soon.
This is certainly a project to watch over the next few quarters.
Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.