KAZAKHSTAN - Focus On The Caspian.

The Kazakh sector of the Caspian Sea, now the main focus, consists of 50 to 100 oil-bearing structures which are believed to contain up to 100 billion barrels of oil and 2 TCM of gas, in an area of 102,000 sq km. KazakhOil's offshore unit KazakhstanCaspiShelf (KCS) is the state company in charge of the Caspian marine ventures.

The consortium Offshore Kazakhstan International Operating Co. (OKIOC) has 12 offshore exploration blocks, the most important in the northern Caspian. This is where the drilling of each well costs over $100m - the most expensive in the petroleum industry - because the sea there is covered with ice in winter. Usually the ice only begins to break up in April or May. The Kazakh sector of the sea lies in shallow waters.

The drilling of the first of six wells began in August 1999, following delays from 1998 and after the expensive drilling barge Sunkar and rig were put into place. It was completed in May 2000 at the target depth of 4,500 metres below the seabed.

With Shell being technical leader during the exploration phase, the well reached the eastern tip of the rich 300-year old formation Kashagan in a Pre-Caspian subsalt carbonate similar to the geology of Tengiz. Shell asked its partners not to reveal any details until it makes an announcement based on all tests. Drilling then began for a further 500 metres for Shell to gather more data on the structure. At the same time it was decided that, after logging the well, it will be clear which strata need to be tested. Dresser and Kellogg did the drilling.

In June Shell began a series of tests - which were to end with a formal statement, promised to be made sometime in August. But the Kazakh leaders had said since May that Kashagan East contained a huge oil reserve of up to 51 barrels, suggesting that the whole Kashagan structure could hold up to 90 bn barrels and a huge gas reserve.

Two more Kashagan wells will be drilled this year. The second will be on Kashagan West, where a drilling site has been selected some 40 km from the first well. An underwater base for Sunkar has already been prepared for further drilling.

As in the case of the first well, the drilling will be the most widely watched in the world, given Kashagan's huge potential. The three other wells are to be drilled in 2001/02.

The uncertainty surrounding the start of the ice in the northern Caspian complicates planning, as OKIOC intends to get the wells spudded and continue to drill. The ice could make that very dangerous.

OKIOC's 12 blocks cover 6,000 sq km. The remaining area has been divided into blocks. Some of them have been taken by companies like Inpex of Japan which signed its PSA in 1998. Of the rest on offer, KazakhOil (KCS) has two blocks reserved to itself and wants OKIOC to be included in its exploration effort.

OKIOC is owned about 14.286% by each of Shell, ExxonMobil, a BP Amoco/Statoil partnership, Agip, TotalFinaElf and BG, and about 7.143% by each of Phillips Petroleum of the US and Inpex of Japan. According to a schedule imposed by Astana, OKIOC should produce 100,000 b/d by 2004 and raise this to 1.2m b/d by 2013. By 2020, it is projected by the Kazakh side, the country's total oil production should exceed 3.4m b/d.

OKIOC's 20-year PSA (renewable for another 20 years) was signed on Nov.18, 1997 during President Nazarbayev's visit to the US. The initial E&P deal was signed in June 1993. Each of the foreign partners paid $5m on signing the documents. Later the companies formed their consortium. Each of the foreign companies was to pay another $7.5m before end-October 1995.

The E&P deal called for geological, geophysical and environmental studies of the whole Kazakh part of the Caspian. The studies were to be followed by the issuance of licences for the blocks other than OKIOC's 12. Seismic surveys were done in 1995 and 1996.

Phillips and Inpex bought the 14.286% equity of KazakhstanCaspiShelf (KCS) in Sept. 1998. Together, it is said, they paid as much as $500m for this.

Apart from joining OKIOC, Phillips was to study the development, gathering and processing of natural gas, and the extraction, fractionation and transport/marketing of gas liquids in Kazakhstan.

Separately, a Japanese consortium of Inpex North Caspian, Mitsubishi, Mitsui and JNOC signed four oil/gas exploration and investment contracts with KCS worth $2 bn, involving offshore blocks other than OKIOC's.

In 1996 KCS tightened the exploration schedule to cover 40% of the northern sector and 100% of the southern sector in 4-km x 4-km blocks. The northern section was shot during a six-month summer window, with that part of the Caspian freezing during the winter. Work was done in the northern part by Western Geophysical, which operated in some places in waters as shallow as three metres. All the required studies were completed in mid-1997. A survey of 25,000 sq km of the deepwater southern section was also done. The efforts amounted to the largest seismic survey in history.

Blocks were shot in the northern waters alongside the blocks in the deeper waters of the southern zone. Most structures proved to be somewhat similar to that of Tengiz which, because of flooding, now can be regarded as being "partly an offshore field" (see Part 2).

By mid-1999 OKIOC had paid $600m on seismic studies and other expenses. The six exploration wells will cost another $600m. OKIOC has compliantly taken out a $1 bn ecological insurance policy to cover drilling of the six wells. First phase development by 2004 would have cost another $1 bn. Total investments up to the targeted 1.2m b/d production capacity would come to $20 bn. KCS and McDermott in 1996 completed a feasibility study on offshore and onshore infrastructure facilities, with the initial phase to cost almost $15 bn. Hence the joke about Kashagan, "Cash is gone".

Each of the foreign partners will also bid for its own E&P block - or blocks - in the sea, apart from OKIOC's 12 blocks.

Getting Yeltsin to sign the July 6, 1998 agreement had taken a great deal of effort on the Kazakh side. Nazarbayev had to offer Russia's biggest oil company, LUKoil, enough incentives for it to lobby Moscow in his favour. In return for what LUKoil President Vakit Alekperov did in Moscow, Nazarbayev gave the Russian company a 25% stake in the rich offshore Blocks 13, 14, 17 and 18. These will be in a JV led by BP Amoco (50%), with KCS to hold the remaining 25%. BP Amoco is to become a big player in the Caspian, as in the case of Shell, Chevron, Mobil, Texaco, BG and Agip.

In 1997, LUKoil had won a Russian tender for oil-rich Severny blocks in the northern Caspian and some of them were in the Kazakh sector. After a strong Kazakh protest, the Russian government revised the tender and LUKoil had to relinquish the areas claimed by Astana. In March 2000 LUKoil announced that it had found 300m tons of oil at Severny.