Kashagan - a study in a struggle for oil Flying over the Caspian Sea, an exotic sight comes into view - an archipelago of islands rising up out of a shallow lagoon, protected by a series of curved, elongated atolls. But as you get closer, the islands and reefs turn out to be man-made. They are in fact a series of state-of-the-art industrial facilities built to extract crude from Kashagan, one of the world's largest - and most challenging - oilfields. Kashagan is a supergiant. When it was discovered in 2000, in Kazakhstan's sector of the Caspian, it was the world's largest oil find in 30 years. When it finally comes into production later this year, it will catapult Kazakhstan into Big Oil's premier league. "By the 2020s, we will be one of the top five global oil exporters," says Daniyar Berlibayev, deputy chairman of Kazmunaygas (KMG), the Kazakh state oil company. With 40bn barrels of reserves, the Caspian state of Kazakhstan is one of the world's rising oil powers. Thanks largely to Kashagan, its oil production is set to increase by 1m barrels a day over the next decade, rising from 1.6m b/d to 2.7m b/d in 2025 That puts Kazakhstan in the elite group of non-Opec countries - the others are Brazil, Canada and the US - that will account for much of the increase in global production over the next 20 years. But Kazakhstan's rise up the rankings has been bought at a heavy price. Kashagan, in particular, has proved mind-numbingly complicated. Its oil is in an extremely high pressure reservoir, mixed with levels of hydrogen sulphide that are so high they can kill a man in 30 seconds. The northern part of the Caspian, where it is located, is like a shallow paddling pool which the winter wind can whip up into ice drifts thick enough to crush an oil rig. Normal offshore platforms are of no use in such an environment - hence the artificial islands, made of millions of tons of rock pile-driven into the seabed. The Kashagan developers have plenty of experience of "sour" oil, high-pressure reservoirs and icy conditions. They have worked in extreme places such as the north Caspian that are as cold as the Arctic in winter and as hot as the Sahara in summer, and in other remote locations with little or no infrastructure. But rarely have they faced all these difficulties in one project. "It's complexity cubed," says one senior western oil executive involved in Kashagan. Another complication is the unwieldy nature of the consortium developing the field, a roll-call of supermajors that includes ExxonMobil, Royal Dutch Shell, Eni, Total and KMG - each with 16.81 per cent: ConocoPhillips with 8.4 per cent; and Inpex with 7.56 per cent. No one company has a big enough stake to fully take charge, which has slowed decision making. It is challenges such as these that have turned Kashagan into the world's most expensive oil development. The first phase alone, which will bring production to 300,000 barrels a day, has cost $40.6bn. It is not surprising that at one point, the project's nickname in the industry was "cash all gone." Indeed, Kashagan has become a byword for the kind of cost overruns and delays that have plagued big developments across the oil and gas industry - from liquefied natural gas plants in Australia and Russia to tar sands projects in Canada. It was originally due to come on stream in 2005: first oil is now expected no earlier than the last quarter of this year. Developing Kashagan has pushed the oil majors to the limits of their capacity. The consortium has had to procure compressors capable of injecting sour gas back into the reservoir at 980 bars - equivalent to the pressure 10,000m below the surface of the sea. They have had to equip the artificial islands with ice-breaking emergency evacuation vessels - waterborne getaway cars capable of whisking workers out of harm's way in the event of a deadly release of hydrogen sulphide. "Kashagan is a prototype - nothing like this has ever been done before," says one executive on the project. And even with everything so carefully calibrated, things can go wrong. Last December, the Caspian's water depth inexplicably dropped to 2m, and even the shallow-draft barges used by the consortium could not reach Kashagan's offshore facilities. With supplies running low, waste building up and the toilets out of action, 1,700 staff had to be evacuated to shore. Such unique problems have contributed to Kashagan's rising costs. The International Energy Agency says the field's capital cost per barrel of capacity is as much as $80,000 - more than five times that of a conventional oil development in Saudi Arabia. However, it is not only the technical issues that play havoc with the project. Rising resource nationalism in Kazakhstan, which coincided with the ramp-up in the oil price in the last decade, has not helped. Angered by escalating costs the Kazakh government launched a major renegotiation of the Kashagan contract in 2007 that took months and ended with KMG expanding its stake in the project. The authorities have often slapped other ventures with huge environmental penalties and tax claims. "Kazakhstan has always had this problem that once investors do a deal with the government, it always turns round and changes the terms," says one western lawyer in the commercial capital, Almaty. They say they want to increase oil production to drive their economic development. But they keep putting up hurdles to slow it down A senior engineer in the consortium Investors also complain of strict local content rules and restrictions on work permits that have prevented them bringing in skilled workers from abroad. Kazakhstan defends the rules. "We want to make sure the needs of each project are met, but we also want our own needs to be met in terms of developing local capacity," says Erlan Idrissov, the foreign minister. Analysts say most of the responsibility for Kashagan's problems lies with the majors themselves. "Thy simply underestimated the field's challenges," says Dosym Satpayev, head of Risk Assessment Group, a think-tank in Almaty. Meanwhile, the Kashagan partners are again waiting - this time to learn the fate of a $6bn expansion plan that would see gas reinjected back into the Kashagan reservoir to improve oil recovery and boost output. The government has yet to approve the budget for the project. Until that happens, average production will only be about 300,000 b/d. It is pretty small beer compared with other supergiant fields around the world: Rumaila in southern Iraq, for example, pumps about 1.4m bpd. "It's a paradox," says one senior engineer in the consortium. But they keep putting up hurdles to slow it down. In theory, Kashagan could reach a plateau of 1.5m b/d some time next decade. But it will only become clear when the taps are finally turned on later this year whether that target is achievable. One big constraint on any ramp-up: landlocked Kazakhstan's chronic lack of export capacity. Despite the mutual mistrust, Kazakhstan and the group of western oil companies developing Kashagan are effectively stuck with each other. "The government is hostage to the majors, because it knows it can't develop the field on its own," says Mr Satpayev. And the companies are stuck too, because they wrote a contract for 40 years and they can't just walk away.