Last updated: September 11, 2013 5:19 pm

Kashagan: there will be oil

Saga highlights a risk/reward imbalance in big projects

From “cash all gone” to “cash all here”? The Kashagan oilfield in the Caspian Sea has been so beset by delays and cost overruns that it was becoming a byword for money down the drain. Oil started to flow on Wednesday; the field, discovered 13 years ago and developed at a cost so far of nearly $50bn, may finally start to pay its way. The unwieldy consortium that owns and operates it can breathe a sigh of relief. But the returns on this giant investment will probably be small.

The consortium includes ExxonMobil, Shell, Total, Eni, Inpex and KazMunaiGaz; PetroChina bought in last week. The multiple membership may be one reason for the delay. More important, though, were the technical difficulties, which required huge spending on infrastructure, and the fact that the consortium had to renegotiate the contract several times with the Kazakh government. That is what happens when geology, politics and corporate bureaucracies collide.

The consortium’s largest members have each invested about $8bn in Kashagan. Making a return on that will depend, above all, on the oil price – perhaps more than 10 per cent with oil at $85 a barrel. That almost certainly falls short of what each might have expected – oil was initially expected to flow in the mid-2000s. Some have more financial heft than others to handle this, of course. But Kashagan highlights the increasingly skewed risk/reward imbalance inherent in megaprojects of this sort.

True, only the world’s biggest oil companies could have pulled off Kashagan. But it is hard for projects of even that scale to lift underlying performance at the supermajors, beyond bulking up reserves. The reason Big Oil is losing operational and financial momentum has much to do with the low returns from megaprojects. Kashagan is in many ways a cutting-edge project; it is also a classic of its type.

Email the Lex team in confidence at lex@ft.com

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