Kazakhstan's Offshore Woes

Output at Kazakhstan's huge Kashagan oilfield may fail to restart this year if test results expected in May show cracks in the offshore part of its pipeline network, Kazakh Oil and Gas Minister Uzakbai Karabalin said on Monday.

An inspection of the pipelines is under way and "suspicions have emerged" of microcracks in those laid in the Caspian Sea, Karabalin told reporters.

Kazakhstan, Central Asia's largest economy and the second-largest post-Soviet oil producer after Russia, is pinning hopes for future prosperity on Kashagan, whose recoverable reserves are estimated at 9 billion to 13 billion barrels of oil.

Production at the offshore deposit, the world's biggest oil find in 35 years, started in September but halted in early October after the detection of gas leaks in the $50 billion project's pipeline network.

Asked when output could be restarted, Karabalin said: "It's impossible to say anything right now ... because suspicions have emerged that there may be microcracks in the offshore stretch of the pipeline as well."

He said closer checks of "possible risks offshore" were hampered by ice melting in the shallow Caspian Sea. These checks must be completed in late May, he said.

"Then it will be clear whether there are cracks in the offshore part of the pipeline network. If they really are there, this would lengthen the duration of previously planned work.

"Contractors have various scenarios - the easiest one is if it's just onshore. In this case, this can be mended and then, probably, it (output) will be this year."

However, if cracks are confirmed in offshore pipelines, "we will have to wait for shipping to resume and lay pipelines then", Karabalin said.

"Of course, this would mean a far longer timespan. Now we await a final decision pending the results of the inspection."

DELAYS TRY GOVERNMENT'S PATIENCE

Delayed output at Kashagan has unsettled Kazakh authorities, which have already sued the consortium operating the oilfield for 134 billion tenge ($737 million) over ecological damage.

"This is a very complex project, which I believe will start working in the end. But the question is: how much it is going to cost and who is going to pay for these flaws and mistakes," said a Kazakh government official who declined to be identified.

The consortium said last month it would challenge the fine, potentially raising tensions with the government, which in recent years has become more assertive in dealing with foreign investors and has used legal action as leverage to increase participation in some energy projects.

The multinational group has identified stress cracking due to sulfur-laden gases as "the root cause of the pipeline issues" at Kashagan.

Much of Kashagan is built on artificial islands to avoid damage from pack ice in the Caspian, which freezes for five months a year in temperatures that drop below minus 30 Celsius (-22F).

The North Caspian Operating Company (NCOC) consortium, led by Exxon Mobil, Royal Dutch Shell, Total , Eni and Kazakh state oil firm KazMunaiGas , had to achieve a "commercial output" level of 75,000 barrels per day in October to meet its contractual obligations.

An NCOC spokesman has said the group was in the "ramp-up phase" and achieved this level, but did not sustain it long enough to count it officially as "commercial output" before production stopped.

NCOC also includes Japan's Inpex with 7.56 percent and China National Petroleum Corp (CNPC) with 8.33 percent, which it bought from ConocoPhillips last year.

During Kashagan's development, NCOC had originally planned to increase output gradually to 370,000 barrels per day in the second stage from 180,000 bpd in the first stage in 2013-14. 

By Raushan Nurshayeva (C) Reuters 2014.