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Kashagan pipes replacement to increase costs eightfold: expert

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Kashagan is one of the largest oil reserves in the world ©REUTERSKashagan is one of the largest oil reserves in the world ©REUTERS700 percent is the estimated increase in the original cost of the Kashagan oil field project after the complete replacement of its pipelines, tengrinews reports citing an analyst of MFX Broker firm Sergei Nekrasov.

Oil production at Kashagan started on September 11, 2013, but was suspended shortly after, when several gas leaks were discovered. It turned out that pipelines failed to withstand the corrosion spurred by toxic hydrogen sulfide (H2S), and the field now needs pipelines made of expensive nickel-containing alloy. 

"After the replacement, the new pipes consisting of a special alloy will be 10 to15 times more expensive than those used previously. The replacement costs may be as high as $250-500 billion," Nekrasov said. According to the expert, the initial cost of the project was $57 billion, but it quickly rose to $136 billion, while the initial cost of the pipes was at $50 billion.

Nekrasov explained that with the average cost of replacing the pipes at $350 billion and their starting price at $50 billion, the percentage change showed an incredible increase of 700 percent.

The situation at the Kashagan field causes serious concerns among experts. A leading expert of Finam Management company Dmitry Baranov believes that what happened at Kashagan is a force majeure. "It is unlikely that the Kazakhstan authorities or the shareholders of the project expected this to happen. Nature has once again proved that it is not to be trifled with. Now, there is nobody doubting that the project needs serious improvement. The proposed measures, including manufacturing of the new pipelines for the field, are absolutely necessary," he said.

According to Baranov, given the complexity of the field and the unusual kind of the pipes that will have to be installed, suspension of production for two years is not actually that long a time. On the contrary, the period of suspension may be even extended.

"It is necessary to not only make and install the new pipes, but also test them to make sure that they can operate in the complex environment of the field, can withstand the exposure to the toxic gases without sustaining much damage. All of this requires not only money but also time. So, suspension of the oil production for a longer period is quite possible. Clearly, this will require additional investment, but it is in the best interests of the country and the shareholders to make them," Baranov said. 

Kashagan is a gigantic offshore oilfield in the K Caspian Sea that holds recoverable reserves of about 13 billion barrels. Due to the high concentration of hydrogen suphide, however, the pipes that were put in place initially did not withstand the corrosion and now require replacement. 

The oil field developed by North Caspian Operating Company (NCOC) will resume the production only after the company replaces all the pipelines. Some experts believe that Kashagan might end up closed until 2016 or even 2017.

"According to the current estimates based on results of inspections, both oil and the gas pipelines require complete replacement. The final estimates will be available after the inspections are fully completed," NCOC said.

July 2 2014, 11:26

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