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Kazakhstan ministers share fault for defective Kashagan pipes

April 14 2014, 18:05

Kazakhstan ministers also share fault for defective pipes at Kashagan field. At least, two current members of the government, whose companies directly participated in the preparatory operations prior to commencement of commercial oil production, azh.kz reports citing kaztag.kz.

As it was reported by Ak Zhaik newspaper from Atyrau, the operations on laying and welding of pipelines that appeared to be defective, were performed by Saipem company and ERSAI Caspian Contractor LLP - the division of Lancaster Group, founded by Nurlan Kapparov and Erbolat Dosaev. Both are currently the ministers in the government of Kazakhstan. Pipes were delivered by various companies, one of them being the Japanese metallurgical giant Sumitomo.

This is what the source close to this weekly newspaper said about an emergency situation: “The situation is complicated also by that the coastal part of the Caspian Sea where pass strings of the pipeline, represents bogs. The equipment sticks. Currently the activities include the removal of two pipelines -  oil and sulphurous gas. The first version of the incident about low-quality welding of joints has not been confirmed. All removed pipes got burst lengthways, as if they were accurately cut by “Bolgarka” cutting machine. Practically all pipes will require replacement and that is  95 km of pipes from Kashagan to Karabatan.  The situation is complicated also due to coastal part of the Caspian Sea where the pipelines run, are very marshy. The equipment bogs into dirt, only the roof is exposed.  Recently two new Hitachi excavators bogged down – we sent them back to the manufacturer.  The activities could be performed in winter time or in the middle of summer, when the weather is very hot.  I am compelled to disappoint oil minister Uzakbai Karabalin who hopes that Bolashak plant will be re-started this year.  Here the work scope is for another year or two …”. 

Last week Steve Levine, the journalist familiar with the situation, published information that Kazakhstan’s Kashagan - one of the largest supergiant oil finds of the last half-century, might be shut down for at least two years while specialty pipelines are made to resist the unforeseen impact of toxic gas, according to a source close to the project.

He also reported that word has dribbled out that Kashagan may lie dormant through the summer (paywall) and perhaps longer. But the first concrete report that the gravity of the problem means that Kashagan will produce no oil through at least 2016 and possibly 2017.

The costly new lines—probably with a nickel alloy—will replace two 55-mile pipelines, one for oil, one for gas. Already, $50 billion has been spent, and the rework means a delay in billions of dollars in cashflow expected by Kazakhstan itself and major oil companies including ExxonMobil, Shell, Eni, and France’s Total. Kashagan contains an estimated 13 billion barrels of recoverable oil reserves.

New expensive pipes, most likely, from alloys of nickel will replace two pipelines of 55 miles – one gas and one oil. $50 billion were already spent, and the turn of pipes will mean a further delay of milliard cash flows as well as for the Kazakhstan, and for such oil companies – Exxon Mobil and Shell, Eni and the French Total. Kashagan contains 13 billion barrels of extracted oil in the subsoil.

It remains to be seen how oil and stock markets will react to the news, as at least some of the blow is already built in to prices: Kashagan, which was contractually required to begin production in 2005 and rise to about 1.6 million barrels a day, began to produce at a daily rate of 75,000 barrels on Sept. 11. But the companies shut it down a month later when gas began to leak.

“The problem is poisonous and corrosive hydrogen sulfide, or H2S. Some 17% of the natural gas contained within the oilfield is comprised of H2S. That has meant the use of pipelines that resist the H2S corrosion. The Kashagan consortium has said that cracks appeared in the pipeline, a result of the hardness of the steel and the exposure of H2S to water,”- clarifies the publication.

Also it published the opinion of Barry Hindin, a corrosion engineer at Battelle Memorial Institute, that to best resist H2S the pipeline should be made of a nickel-based alloy, but that such steels can cost 10 and even 15 times that of ordinary pipeline.

He said that another crucial issue is properly welding the pipelines together. Welding causes the steel nearest the weld to lose its “ductility,” or toughness against cracking, so that a post-weld heat treatment is necessary. If the steel is too hard, it can become susceptible to embrittlement, he said. “It is a problem welders always encounter,” Hindin said.

Commercial oil production at Kashagan started on September 11, 2013, but on September 24 its operation was suspended after detection of a gas leak from the ground pipeline stretching from the Island D to the Bolashak onshore plant. According to the operating procedures, the Department on Emergency situations relavant control authorities were immediately informed of the incident. Access to pipeline was ensured and joints in question were rectified.

The production has been re-started, but on October 9, 2013 it was suspended after another leak was detected. After the repair of the faulty joint, the pipeline was hydrotested under the full supervision, yet leaks in other areas had been identified. The production has been suspended and a detailed examination has been launched.

The results of examination are not known, but with a greater likelihood ratio we can state that western managers jointly with local contractors have brought the development of the richest field to a deadlock. For economy of Kazakhstan, whose budget depends on oil revenues, serious trials are starting. The current problems of production are explained by high (up to 19%) content of hydrogen sulfide (H2S), that during contact with water corrodes the pipes. Judging by present reaction of the companies and contractors, it took them 17 years to understand the complexity of development and harm from hydrogen sulfide. There was one more version - low-quality welding works and consequently – microcracks that led to pipeline leakage.

If pipes are the issue, them the project operator – at the beginning of the project it was Italian Agip and then NCOC -  should accept their non-professionalism.  For nearly two decades they put a stake on wrong materials and their parameters. It means, they didn't perform any field tests, they didn't listen to the opinion, and at times, ignored the precautions of chemists and metallurgists.  If the case will go to corporate investigation level, then it would result in billions of fines.

Insurance companies and shareholders of Eni, Total, Exxon Mobil, Inpex, Royal Dutch Shell can easily win the case and demand compensation for short-sighted management.

The commission will determine who should compensate for the loss due to cracked pipelines. According to our data, the commission should finish its work next week. The main contractor who laid and welded pipelines was Saipem - a joint venture between Italian Eni and Kazakhstan ERSAI Caspian Contractor.

It is interesting that ERSAI is owned by Lancaster Group, where a considerable share belongs to the Minister of Environmental Protection N. Kapparov and the Minister of Economics and Budget Planning E. Dosaev. They both are not only colleagues in the government, but also business partners. Lancaster Group had a Lancaster Petroleum subdivision, but businessmen have successfully sold it to Chinese companies. The joint holding has a number other projects - hotel in French Polynesia, Kazinvestbank, Lancaster Invest, IPNet telecommunication, pharmaceutical Abdi Ibrahim Global Pharm, mining Syrymbet, logistic Senko-Lancaster, advertizing RTS-Deko, and two more oilfield service companies Cape Caspian (a joint venture with British Cape) and SITEK Caspian (a joint venture with Italian SITIE).

Nobody has objections – if you have a chance, then develop your  business. But here is the obvious conflict of interests: the situation with Kashagan development in many respects depends on government decisions, and here the personal business of ministers depends on development of Kashagan. Therefore you shouldn't be surprised that death of seals in close proximity to Kashagan to a greater extent will be connected with oil production, and not the ecologists’ version that animals die of an old age.

In its time our colleagues expressed concern over the construction of ERSAI terminal for hovercrafts. To recall, the journalists expressed concern that the route of these ships will lie through a wildlife area of a number of birds from the Red Book and through the areas of seals’ mass reproduction. This is a stone again into ‘the garden of the nature protection authority’.

Therefore, since the members of the government are connected in a private order with the Kashagan project, the trust to the results of examination is doubtful. But one fact is indisputable – it is that pipes laying and welding activities was performed improperly.

When we were preparing this material for publication, Ak Zhaik newspaper published a new information that as of June of this year the Bolashak onshore processing plant, the part of the North Caspian project, will be mothballed for two years. The reason: full replacement of pipelines at Kashagan.

Only a limited number of personnel will be retained, mainly professional unit operators in order to do periodical re-starts of the units and keep them from rusting, - say the sources, working in subcontracting companies of Agip at Karabatan.

Thus, an extended conservation of Bolashak plant is a serious confirmation of informal information about postponement of oil production at Kashagan for at least 2 years. Expats leaving Atyrau for good now say about this openly in their informal conversations.

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