Dropping oil prices cast a shadow of unprofitability over Kashagan

Kazakhstan's Kashagan may become unprofitable, tengrinews reports citing Sergey Smirnov, an independent expert in oil industry.

The price of Brent crude oil plummeted to its four-year low on Tuesday nearing $82 per barrel. The last time that oil sank lower that this was on 27 October 2010, when it was sold at $81.85 per barrel. Smirnov said that should the oil prices drop to $80 per barrel in 2015, Kashagan would cease being profitable.

The Kashagan field is located in Kazakhstan's sector of the Caspian Sea and extends over a surface area of approximately 75 kilometers by 45 kilometers. Estimates suggest that the oil reserves here are 38 billion barrels, of which 10 billion barrels are recoverable. Moreover, natural gas reserves are estimated at over 1 trillion cubic meters.

But the development of the field is exacerbated by harsh environmental conditions. The reservoir lies some 4,200 meters below the shallow waters of the sea and is highly pressured (770 bar of initial pressure). The crude oil that it contains has high ‘sour gas’ content.

The combined safety, engineering, logistical and environmental challenges make it one of the largest and most complex industrial projects currently being developed anywhere in the world.

“Offshore oil production is always much more expensive than onshore production. Moreover, the Kashagan oil is very sulfurous and requires additional cleaning, so the project could be delayed again," Smirnov said.

Smirnov explained that the cost of oil production at Kashagan would be “much higher” than the average cost of oil production in Kazakhstan, which stood at around $50 per barrel according to Kazakhstan's Vice-Minister of Energy Uzakbai Karabalin.

“And with the cost on Brent crude at $80-$85 I am afraid that production at Kashagan will simply be unprofitable," Smirnov said .

Russian analyst from Alpari Anna Kokoreva agreed with this view. "Kashagan field is very troublesome; the cost of its development is constantly increasing. Consequently, low commodity prices make oil production at the site unprofitable, especially since offshore production is costlier," she said.

The sliding oil prices also significantly reduce the profitability of KazMunaiGas, the leading state-owned oil and gas company of Kazakhstan. If Brent prices remain between $80-$85, then KMG’s profitability may decrease by a third, Smirnov said. With the current average cost of oil production being $50 per barrel, the oil prices remain “just over” the break even.

Kokoreva said that KMG’s export revenues would certainly fall due to the low oil prices if they are not offset by the depreciation of the tenge. According to her, the company exports 75 percent of oil it produces.