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    The World's Most Toxic Money Pit

    Written by

    Alex Pasternack

    Editor-At-Large,
    Founding Editor

    Image: Total

    The Kashagan oil field, located fifty miles offshore in western Kazakhstan's Caspian Sea, takes its name from a 19th century poet, and from the Kazakh word meaning "skittish" and "elusive." That's one way to describe the oil that some of the world's biggest companies are hoping to suck out of the Earth. In thirteen years, conservative estimates say, they've spent $50 billion, building islands and pipelines and digging deep, some two and a half miles below the surface, to reach a so-called supergiant oil field where sour crude is mixed with toxic gas at ungodly pressures. In industry circles, Kashagan has become a watchword for massive complexity and near impossibility, and adopted an unofficial motto: "cash all gone."

    Since geologists discovered the field in 2000, north of the also-massive Tengiz oil field, Kashagan remains the largest new oil deposit since the Prudhoe Bay field was found off Alaska in 1968. Estimates say that there are between 30 and 50 billion barrels (4.8 and 7.9 billion cubic meters) buried in a reservoir so complicated to plumb that only between four and 13 billion barrels are thought to be recoverable.

    Tapping the largest supply of oil outside of the Middle East may be the most complex industrial undertaking ever mounted on the planet. The frozen winter climate and shallowness in this part of the already sensitive Caspian—only 2 to 6 meters—required new oil rig designs. The resulting archipelago of barges and islands, built of limestone and sand, looks like a Mad Max version of the fake islands in Dubai, a place that Kazakhstan, an outlier on the global energy market, is keen to emulate soon.

    Even if the cost is five times that of a conventional oil development in Saudi Arabia, Kashagan alone could someday deliver as much as 1.2 million barrels per day; the US currently uses about 19 million barrels per day.

    But thirteen years and tens of billions later, the global consortium operating Kashagan has produced almost no oil.

    Already almost a decade behind its original schedule and seven months after the oil was contractually required to start flowing, Kashagan now seems to be years from full operation. Including future repairs for a leaky 90 kilometer pipeline, the final cost could surpass $150 billion. Meanwhile, the pipelines meant to carry the new oil to market in Russia, China, and elsewhere, remain far from ready.

    Neither Kazakhstan nor the project's owners—currently consisting of ExxonMobil, Dutch Shell, Italy's Eni, China's CNPC, Japan's Inpex, and Kazakhstan's KazMuniGaz—seemed to have anticipated the challenges involved.

    "The delay is impacting effectively the GDP growth of the country," Fadi Farra, adviser to the Kazakh prime minister, said in March. Oil production, a bedrock of Kazakhstan's economy, is down by 2%. "We're not talking about small game; we are talking about an impact of two to three points on the GDP of the country. Therefore a failure in pipelines, a technical issue, is impacting the economic development of the country."

    Pipe crack

    The latest problem appeared literally on the horizon, two weeks after Kashagan finally began pumping oil on September 11. Workers spotted a brown haze emanating from the water above one of the pipelines that carries gas to offshore processing and storage facilities.

    This was one of the project's worst fears: a leak of hydrogen sulfide, or H2S, a toxic gas that's often mixed with oil. This sour gas, 4,200 meters below the seabed at extremely high pressure, with around 17% H2S, some of the highest concentrations ever encountered. Hydrogen sulfide doesn't just chew through metal: breathing it can kill a person in less than a minute. (Gas masks are a required accessory for the thousands of workers at Kashagan.)

    The pipeline had been specially designed to be resistant to the gas, but upon inspection, engineers found that poor welding had made part of the pipe brittle. Engineers patched miniscule cracks, but two weeks later, a larger leak of the toxic gas was spotted, and in late October, managers shut the project down.

    Well done: The oil sits 4,200 meters below sea level; the pipeline in pink has sprunk leaks of toxic hydrogen sulfide. Watch a video about the project here. Graphic: NCOC.

    In recent decades, the scramble to get every possible drop of remaining oil out of the ground has reached extraterrestrial proportions. Last year, Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell PLC spent more than $120 billion to boost their oil and gas output, which is about the same cost in today's dollars as sending someone to the moon.

    The result isn't much: after five years of combined expenses of half-a-trillion dollars, every company reports lower oil and gas production. Such high-risk projects in hard-to-reach places—the Arctic, offshore Brazil, Myanmar and Angola, for instance—look increasingly unattractive to investors in light of abundant shale gas reserves. Last year, Shell canceled its plan to convert natural gas to liquid fuel at a facility in Louisiana due to its $40 billion price tag, and in early 2014, it said it would not drill in Alaska this year.

    At Kashagan, it's not clear what happens next, or when. "All the partners have contributed their technical expertise to look at how this challenge of running the pipelines can be addressed," Shell's chief financial officer Simon Henry told Reuters in February, when pieces of the pipeline were sent to France and Italy for careful inspection. "There is no decision yet about how best to do this or when production can be restarted."

    By the time the oil stopped flowing, the Kashagan consortium hadn't pumped enough oil to meet a contractually-required deadline, which meant millions of dollars in penalties levied by an increasingly exasperated national government.

    Last month, a regional environmental bureau slapped a $737 million fine on the project for burning off excess H2S into the atmosphere after the pipeline was emptied. The northern Caspian is a major migration route for birds, a habitat for the endangered Caspian seal and a stronghold of the critically endangered beluga sturgeon, a gigantic fish that can measure as much as five meters long and live for 100 years.

    "There are hundreds of kilometers of pipelines, over 200 oil wells in such a fragile part of the sea which fertilizes the entire eco-system of the Caspian," ecologist Galina Chernova told the BBC in 2012.

    Still, the oil companies have begun an appeal as they develop plans to rebuild their broken plumbing from scratch, at a cost that could be ten or even fifteen times that of ordinary pipeline. Last week at Quartz, Steve Levine reported that production could be delayed for another two years or longer.

    It's more complicated

    Since work began at Kashagan in 2000, the project has proved to be an engineering quagmire. Because ice freezes on the shallow Caspian lakebed for five months a year, engineers constructed five artificial islands out of concrete and rubble to house equipment and workers. Construction was set back years when it became clear that designers had placed worker housing perilously close to certain drilling infrastructure. (The gas is enough of a threat that even journalists permitted to visit the project must first recieve proper evacuation training.)

    The biggest mechanical headaches, say people working at the site, have come from the project's compressors, barge-sized machines designed to keep the oil flowing by maintaining reservoir pressure and stripping out gas from production. Two of those systems, built by GE, are known at the site as "the widow maker" and "the rotating bomb," nicknames used at the site to refer to their complexity as much as to their risks. ("They're a mess," a person close to the project told Reuters recently.)

    There are other technical headaches too: an inspection robot designed to scour the pipeline for tiny cracks is struggling with ice, and returning hard-to-see images ("Its not like an X-ray. It's like a blurred X-ray," the source said.)

    Graphic: Reuters

    In July, longtime Kashagan partner ConocoPhillips escaped from the project by selling its stake to Kazakhstan's national oil company, which later resold it to China National Petroleum Corp. "We got our $5.5 billion in the bank and got out of Kashagan," Al Hirshberg, a Conoco executive, said at a conference last fall, according to the Wall Street Journal, in its post-mortem of the latest debacle. "It feels good to be out of it," he added.

    Still, there's no going back. Kashagan looks too big to fail, and not just because of the financial investment. It's a geopolitical project, signifying the ascendance of Kazakhstan as a major non-OPEC force in the global oil market and demonstrating China's growing hold over the oil industry, as Beijing seeks to keep oil prices low and shift its economy away from the US dollar.

    "Kashagan will not be the figurative iceberg that sinks any super-majors," Motley Fool wrote, "but it does symbolize a future with higher costs, greater difficulty, and different players."

    The project also promises to break traditional flows of oil and power across Europe. Besides Russian and Chinese pipelines, some of the oil could also be carried through Turkey, supplying countries that are eager to flee the shadow of Russia's petrochemical influence, much as Azerbaijan's pipeline promised to do in 2006.

    For now, however, the political implications of a delay at Kashagan are thorny. The Kazakh government was expecting to receive $28 billion from Kashagan's oil exports over three years starting in 2014, according to Stratfor sources in Kazakhstan (paywall). Amidst the delay at Kashagan, shrinking global credit supplies and non-performing loans by the country's banks, Kazakhstan's government devalued the country's currency in February. Meanwhile, as Kazakhstan waits for its new oil to come online, Russia is gaining a stronger footing in Asia, which took 4 percent of Russia's oil exports in 2004 but now receives nearly 20 percent of those exports.

    In addition to the $737 million environmental fine ordered by the local government, in March the national government named the oil giants in a lawsuit that could see Kazakhstan seizing a larger stake in the project or refusing to reimburse a large portion of the $50 billion spent so far. Last week, Kazakhstan announced it would supplement lost output at Kashagan by mandating higher production elsewhere in the country.

    "We are hugely disappointed by the way the project is progressing," the country's oil and gas minister Uzakbai Karabalin told representatives from the consortium on Wednesday.

    The “intelligent pig” robot, meant to inspect a flawed pipeline at the massive Kashagan project, is itself not functioning correctly. Photo: NCOC

    'Until now, the high technological readiness and responsibility of the company is nothing more than words. Reality shows a different picture. The development of Kashagan could become a great ecological and economic disaster for the country.'

    Natural resources and national resources

    Since Kazakhstan began courting foreign oil companies in the 1990s, the government has become stricter about the way it allocates resource contracts, enforces environmental laws, and negotiates its foreign-invested projects. A 2007 law gives the government the right to alter or cancel contracts with foreign oil companies if their activities are determined to be threatening the national interest.

    In Kazakhstan, which has long helped Russia's hunger for materials—and for years played host to many of the Soviet Union's nuclear tests—resource extraction, especially by outsiders, can bear a whiff of abuse.

    At the Tengiz oil field to the south of Kashagan, the country's largest existing oil field, environmentalists have accused a subsidiary of Texas-based Chevron of excessive pollution, safety hazards and labor abuse over two decades of construction and management. (Chevron is the largest oil extractor in the country, with twenty percent of its oil supplies in Kazakhstan.) In December 2011, a protest of separate oil workers over wages in the nearby town of Zhanozhen resulted in a police massacre in which 17 people were killed.

    "One of the reasons not often cited in Zhanozhen is that the local elite wasn't happy about the distribution of oil proceeds," Sergey Solyanik, a longtime environmental activist, said in August. As Kazakhstan's economy continues to develop, at a rate much faster than that of its former Soviet neighbors, Solyanik said that citizens are slowly gaining confidence in fighting injustices, despite continued harassment of activists and journalists under the government of Nursultan Nazerbayev, a former Soviet apparatchik who has essentially named himself president for life.

    "Government officials have outsized power in deciding big resource decisions, without any participation of local populations," said Solyanik. (In 2010, some of the backroom power and money struggles over control of the country's oil sector were chronicled in cables released by WikiLeaks.) "The unchecked personal power over natural resources results in many violations of human rights, especially the rights of private property."

    Near Kashagan, there are obvious fears of a possible accident at sea or on land, like the disasterous blowout at the Deepwater Horizon rig in the Gulf of Mexico in 2010.

    "Until now, the high technological readiness and responsibility of the company is nothing more than words," said Solyanik. "Reality shows a different picture. The development of Kashagan could become a great ecological and economic disaster for the country." (A search on the project's website turns up a page devoted to "Oil Spill Response," with dummy lorem ipsum text, presumably ready to be replaced in case of crisis.)

    Kazakhstan's sizable natural resource wealth has brought with it more carbon too. Since 2006, Kazakhstan’s greenhouse gas emissions have climbed 40 percent, according to a November analysis by Germanwatch. In 2013, Kazakhstan generated over 270 million tons of greenhouse gases, making it one of the world’s largest emitters per unit of GDP.

    For years, the Intergovernmental Panel on Climate Change has vociferously advocated shifting away from fossil fuels in order to stave off rising carbon levels. Anything less—like converting coal to gas, developing renewable energy or levying a carbon tax—wouldn't be enough, it said.

    But in a new report out this week, the panel has relented: to prevent further significant rises in greenhouse gases, it says any investments in reducing greenhouse gases are now needed. (It noted that, largely due to growth in developing nations, greenhouse gas “emissions grew more quickly between 2000 and 2010 than in each of the three previous decades.") With heavy investment, some researchers insist that renewables can be the world's biggest source of power by 2050. Even Shell has recently determined that solar will win out over oil—but not until sometime around 2100.

    The lessons of Kashagan aren't just about the extreme costs of digging up and burning carbon when energy alternatives are waiting to be developed. They're about the increasing difficulty of extracting oil, and the technological complexity that comes along with it. As systems become larger, even the smallest, dumbest error can have widespread effects. (Consider the recent widespread problem with GM's ignition switches, which resulted in thirteen deaths, even if it involved an error of only 1.1 millimeters.) People familiar with Kashagan have expressed amazement that a project so complex could be derailed by a simple matter of plumbing.

    And the complexity involved in operations like Kashagan can be so astronomical that when something goes wrong, we can do little but scramble to stop it, before puzzling over a solution that often comes with even more astronomical costs.

    The official website warns, “The Kashagan project is one of the most challenging projects ever undertaken.”

    This story was reported in part with help from the International Reporting Project.