Yet More Problems Hit the World's Largest Oil Project

ExxonMobil, Royal Dutch Shell, Total, and Eni are developing the world's largest oil project, but it's becoming a money pit.

Apr 16, 2014 at 8:57AM

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.

Stop-start
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.

Bigger problems
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.

Foolish summary
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.

Profit from the death of easy oil
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers