Shell Exits Two Caspian Sea Projects Due to High Costs
Royal Dutch Shell abandoned two oil projects off Kazakhstan after stubbornly high costs made them uneconomic.
Shell has exited the Khazar field, while North Caspian Operating Co. — a joint venture including Shell — has quit the Kalamkas-Sea project, according to TOO PSA, an entity run by the Kazakh Energy Ministry. The retreat from the fields in the Kashagan area reflects an industry-wide push to cut break-even costs as megaprojects give way to smaller endeavors with quicker returns.
Shell confirmed its withdrawal, saying the projects were “not competitive enough versus other opportunities.”
The Caspian Sea fields had seemed like an obvious fit for Shell, which is among companies already pumping oil from the giant Kashagan complex. But that project proved challenging to get going, costing Shell and its partners upwards of $50 billion as they struggled with extremes of hot and cold, as well as toxic hydrogen-sulfide gas. This time around, the steep expense couldn’t be justified.
“The decision itself highlights the project’s marginal economics in the highly competitive global portfolios of the majors,” Ashley Sherman, principal analyst at Wood Mackenzie Ltd., said in a note. “This is another reality check for the Caspian region’s oil and gas industry.”
Kazakhstan may seek new investors to develop the Kalamkas-Sea site, the Energy Ministry said in a statement. If the remaining partners in the Khazar field also decide to exit, Kazakhstan may seek other investors there too.
Khazar is part of the Zhemchuzhiny offshore development, where state-owned KazMunayGas National Co. and Oman Oil Co. work with Shell. The Anglo-Dutch oil major has already invested $900 million in the field, the ministry said.
No one at Oman Oil could be reached for comment.
North Caspian Operating Co. runs both the Kashagan and Kalamkas-Sea projects. Other partners in NCOC include Italy’s Eni SpA, KazMunayGas, Exxon Mobil Corp., Total SA and China National Petroleum Corp. The companies have worked to reduce costs at Kalamkas-Sea but have found it hard to make the development affordable, people familiar with the matter said in September.
Kazakhstan has said it expects international oil companies to invest more than $5 billion by 2025 in new developments, mostly in Kalamkas-Sea and Khazar. Yet the government has a history of disputes with foreign investors over revenue, taxes and cost-sharing at the country’s energy projects.