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ExxonMobil Is Lining Itself up for a Half-Trillion Dollar Payout

Kashagan has become an infamous name in the world of oil and gas. Why? Well Kashagan is the world's largest oil discovery in the past four decades and, as you would expect, oil companies are fighting to get their hands on the discovery.

But Kashagan has not been an easy 'drill and produce' field. The project is huge -- so huge in fact that is taking a consortium of the world's largest oil companies to develop it.

The project is currently being led by Italy's Eni (NYSE: E  ) , France's Total (NYSE: TOT  ) , Anglo-Dutch Royal Dutch Shell  (NYSE: RDS-B  ) , and the world's largest publicly traded oil company, ExxonMobil (NYSE: XOM  ) .

Kashagan's infamy stems from the fact that the field has become one of the most complex oil projects ever undertaken.

In total, the project is expected to cost $136 billion over its lifetime, which is about 140% more than originally planned. And the cost could be about to jump again.

The project commenced production late last year, but a gas leak rapidly shut production down. It is believed that the gas leak was caused by high levels of sulphide, which have caused hairline fractures in the project's pipelines.

Now, it is believed that these pipelines will have to be replaced with a different metal alloy, an alloy that is expected to cost 10 to 15 times more than the current pipeline system.

Losing patience
In an attempt to stop the delays and get the project back on track, ExxonMobil is now in line to take over as the field's operator.

Italy's Eni is currently the project's operator, a job it was given back during 2001. But since taking over, Eni has lost its sole right to run and control the project. Unsurprising, considering the crippling cost overruns and major delays the project has now run into.

Indeed, it is estimated that after the pipeline replacements, the project won't restart until early 2016 -- a far cry from the initial estimates of later this year, which were originally given following the most recent disaster.

Talks are currently ongoing, but Exxon could be appointed as soon as the end of June and hopefully the world's largest oil company will be able to put its skills, experience, and global reputation to work, getting things in place to start up the project as fast as possible while minimizing additional cost overruns.

But even with Exxon running the show it is likely that the project will take up to three years from start-up to reach its targeted plateau output of 370,00 barrels per day.

It will be worth it
If Exxon can sort things out, the start-up of Kashagan will be a boon for the oil and gas industry.

It is expected that 38 billion barrels of oil are contained within the Kashagan field -- in other words, with oil trading at $109 per barrel, the reserves are in theory worth $4.2 trillion. Just to put that into some perspective, Exxon owns around 17% of the project, so its stake is arguably worth around $700 billion over the lifetime of the field, nearly double the company's current market capitalization.

Foolish summary
Overall, Kashagan has been a trouble child for the oil and gas industry, but in the end it should pay off. Eni has been in charge for the past decade and things have not gone to plan. Now, ExxonMobil is in charge; the world's largest oil company will be able to use its size and connections to drive Kashagan forward and ramp up production.

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Read/Post Comments (4) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 14, 2014, at 4:10 PM, luckyagain wrote:

    Oil will be powering the world for many years but the cost per barrel of oil keeps going up. With all of the turmoil in the Middle East, oil will probably be trading in the $100+ range for the foreseeable future. With the ever increasing cost of oil, solar/wind will have their entry into the energy mix. While many dispute that solar/wind can "really" compete, the simple answer is that the huge subsidies going to oil makes a huge difference. The US spend between $200 and $300 billion per year defending the oil producing countries like Saudi Arabia. Without this hidden subsidy, solar/wind would look much better.

  • Report this Comment On June 14, 2014, at 6:55 PM, Freddyfreebe1 wrote:

    Yep just what this country and the world needs, one oil company in control of all the oil. The you would not need speculator, congress or lobbyist. The greedy will own the world.

  • Report this Comment On June 15, 2014, at 12:10 AM, TheAncient wrote:

    With all this money Exxon is tossing around one has to wonder why they, the oil industry, still is on welfare, aka subsidies.

  • Report this Comment On June 15, 2014, at 2:39 AM, PoorPeter1 wrote:

    To place this Kazakhstan field in perspective, it is bigger than the Appalachian basin. The oil is coming from carbonate reefs and fractures in limestone below the salt section - pre-salt. The post salt strata has been in production almost as long as the Appalachian basin has been producing. Some of the largest oil fields in the world have historically come from limestone and dolomite rocks. It is not unusual for oil and gas associated with salt zones to have high levels of sulfur in them because anhydrite and gypsum which are sulfate based minerals commonly layered in salt formations. Now sub salt imagining of strata and geologic structures using reflection seismology presents some challenges because the salt is slower to sound waves than the overlying strata. Prior to Exxon Mobile's entry into this basin the technology used there was 19th century. Exxon and Shell Oil have chosen to place big investments in the 10s of Billions of dollars range there instead of in the shale plays domestically. My opinion, as self serving as it may be, is that their management has not learnt the lessons of the past as far as geo-political risks. Or, perhaps they have weighed the political domestic risks associated with hydraulic fracture treatment sentiment here and are calling a weight in favor of investing in Russia's reserves. In any case if that is the case we only have ourselves to blame. I look at the gibberish told by in sensational videos as presented by the videographer Fox in his Gasland and the folks that govern NY and colleges throughout the U.S. to blame for this. After all with jobs a-plenty and the economy booming what are a few tens of billions in lost domestic investments towards jobs for the graduating students?

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Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

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