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Big Oil's Biggest Project in Decades Is About to Start Paying Off

By Rupert Hargreaves - Mar 11, 2014 at 11:52AM

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The Kashagan oil field is the biggest oil discovery in decades and has been a nightmare to develop but completion is just around the corner.

Big oil companies did not get where they are today by undertaking small projects with short-term payoffs. Oil and gas majors have always sought out the largest projects with the best economies of scale, decade's worth of production, and wide profit margins. This search has turned up some great projects, and right now the biggest project of all is 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 ( XOM -2.84% ), Royal Dutch Shell ( RDS.B -0.94% ), Italy's Eni ( E -1.09% ), and France's Total ( TTE -1.10% ).

Size and complexity
Kashagan is not just one of the world's largest oil fields, it has 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, 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, finally, the project started up -- but then disaster struck, as a gas leak forced production to stop. To all involved, this was a huge surprise as Kashagan, as you can imagine, has been constructed using the most cutting edge technologies throughout. It is believed that this leak was caused by high levels of acidity in the water eating away at the pipeline, although engineers developing the oilfield has said pipes fully meet the requirements of the National Association of Corrosion Engineers.

Still, tests have been 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 recommence production. What's more, precautions have been taken and replacement pipes have been ordered in order to cope with 'various scenarios,' so once engineers know what the problem is, it can be fixed without delay.

The Kashagan project has been a hot topic of discussion at many oil industry forums throughout much of the past few years, and frustration over delays has been obvious. Indeed, when commenting on the Kashagan project, one unnamed oil executive was heard to exclaim: "Kashagan! I don't want to hear this word any more."

Progress within the year
Hopefully, according to the Kazakh government (which has a small stake in the project) and oil industry sources, Kashagan should be up and running again in the second half of this year. Further, the government believes that Kashagan should produce 3 million tonnes of crude before the year is out, around 21 million barrels of oil. What's more, at its peak, Kashagan is expected to produce 1.5 million barrels of oil per day, which would make the field alone one of the world's top 20 oil producers and make Kazakhstan one of the world's top seven producers, above the United Arab Emirates, Norway, and Venezuela.

In the end it should be worth it
All in all, despite these delays and troubles, Kashagan is a project worth chasing, and once online it will add a significant boost to the bottom lines of all those involved. For Exxon, Shell, Eni, and Total this will mean a much needed boost to cash flows which have come under pressure during the past few years. In particular, the Kashagan oil field is expected to contain 38 billion barrels of oil. So, if oil continues to trade around $100 per barrel, the project, over its lifetime, could yield revenues of $3.8 trillion -- need I say more? (Exxon and Shell each have just under a 17% stake in the project, amounting to almost $650 billion in revenues each over the life of the project.)

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$59.84 (-2.84%) $-1.75
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
$42.06 (-0.94%) $0.40
TotalEnergies Stock Quote
TotalEnergies
TTE
$45.99 (-1.10%) $0.51
Eni S.p.A. Stock Quote
Eni S.p.A.
E
$26.39 (-1.09%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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