Kazakhstan produces 1.3 mn bpd of oil, of which some 1.1 mn bpd is exported. There are plans to increase output to more than 3.0, but these depend critically on the development of the Kashagan field and the whole project is mired in a dispute between the government and the oil companies that are proposing to develop the field.

Kashagan was originally due to come into production in 2005. Since then, the start-up date has been postponed a number of times. At the beginning of 2007 the plan was for the commissioning of the field to take place in 2008. In February 2007, Kazakh officials began to refer to a starting date sometime in 2009. The following month, Kashagan’s operator, ENI, said that first oil would not appear until the third quarter of 2010. Since then, dates as late as 2011 and 2012 have been privately mentioned by companies involved in the project.

Kashagan is a major oilfield in world terms, with proven reserves estimated between 13 bn and 15 bn barrels, giving it roughly half Kazakhstan’s total reserves of oil. It is being developed by an international consortium of seven companies, led by ENI, which is the field’s operator.

The field’s development, however, has encountered a number of problems: some geological and some political. The result has been a series of increases in the estimated cost of developing the field. Costs of developing the initial phase of the field were estimated in 2004 at just over $10 bn. By early 2007, that figure had risen to $19 bn. It is probably now nearer $20 bn.

The above costs represent sums required to begin producing oil at around 300,000 bpd. Output is then supposed to increase in stages to 1.5 mn bpd somewhere around 2019. The cost of the additional development stages is put at $11 bn, but some unofficial company estimates exceed $30 bn, putting the total cost of the field as high as $50 bn. Government sources claim the true figure is more than twice this amount.

Kashagan lies offshore in the Caspian Sea at a depth of around 15,000 feet. This makes it one of the world’s deeper reservoirs. It is also structurally complicated and lies in waters that are liable to freeze in winter. There are further problems with high reservoir pressures, which require stringent safety precautions to be taken in drilling and operating oilwells, and with the high sulphur content of the field. All this makes the field costly to develop and every delay to the field means that costs rise further.

The delays have not only been for technical reasons. There have been a number of disputes between the government and members of the development of the consortium. Many of the disputes have been about revenue-sharing from the field. Part of the government’s strategy has been to threaten to increase tax rates on foreign oil investments. Much of the government’s case, however, hinges on the size of its holding in the field-consortium.

State-owned KazMunaiGaz has a 8.33% share. The government has indicated that it wants a 40% share. It has further muddied the waters by suggesting that KazMunaiGaz should take over the operatorship of Kashagan despite the state company’s lack of experience in developing large and difficult offshore fields. There have even been suggestions that the government should receive some revenues from the field before it comes into production.

Negotiations have been further complicated by the raising of a number of environmental issues by the government, which claims that the current development plans contravene environmental legislation, and suggesting that this could form grounds for the removal of ENI as operator of the field. It is claimed in particular that marine life-including the Caspian’s sturgeons-could be poisoned by releases of hydrogen sulphide and other toxic wastes from the field.

Kazakhstan has no direct link to the world’s oceans and is therefore forced to rely on third countries to export its oil. Because of its land-locked situation it has sought to avoid dependence on any single export corridor. Its main export routes go through Russia, but it is now developing routes via China.

The routes through Russia date partly from the days when Kazakhstan was part of the USSR. The main oil route via Russia is the comparatively recent Caspian Pipeline Consortium (CPC) pipeline that was built to take crude oil from Tengiz to the Russian Black Sea port of Novorossiisk. It is owned by a consortium representing the interests of Kazakhstan, Russia and the Tengiz field’s shareholders.

The line was opened in 2001, with a capacity of 560,000 bpd. It can now handle about 700,000 bpd, but the Tengiz partners and Kazakhstan want to increase capacity to 1.3 mn bpd. Russia, however, opposes this for economic and political reasons.

Russia’s opposition to the expansion of CPC is based partly on the cost of doing so when another line exists allowing the export of Kazakh crude and condensate via Russia, using the pipeline from Atyrau to Samara. The Russians have nevertheless indicated that they might drop their objection if the CPC partners were to help finance a 700,000 bpd pipeline from Burgas in Bulgaria to the Greek port of Alexandroupolis. Moscow is promoting this line as a by-pass to the congested Bosphorus, which is approaching saturation in terms of the number of oil tankers it can safely handle. The oil would be shipped from Novorossiisk across the Black Sea to Burgas and thence to the Adriatic. The Russians have proposed an initial capacity for the route of 700,000 bpd.

Kazakhstan has ambitious plans for its oil industry. For some years there has been talk of raising output from the current level of 1.3 mn bpd to more than 3 mn bpd. In 2002, the Ministry of Energy set targets of 2 mn bpd for 2010 and 3 mn bpd for 2015. In the light of the delays at Kashagan this now looks wholly unrealistic.

Kashagan looks unlikely to produce large volumes of oil before late 2010, and may not even exceed 100,000 bpd until some time in 2011. Peak production of 1.5 mn bpd is not expected before 2019, which is probably the earliest date at which Kazakhstan could be producing 3 mn bpd. The government now forecasts 2015’s output at 2.5 mn bpd rather than the earlier target of 3.0 mn bpd.

There may be further new production - mainly of condensate - from gasfields such as Karachaganak. Output from Tengiz is also slated to rise by 150,000 bpd by about 2009. There may even be oil from new fields such as Kurmanagazy and Tub-Karagan, all of which should help Kazakhstan to realise its goal of 3 mn bpd by about 2020. Beyond that, though, there may not be much scope for further additions to output. Kazakhstan’s production, however, will not reach any of its targets unless it is able to agree with its neighbours ways of finding its oil.