Cash All Gone (Or Why The Petro's Have Cancelled All Megaprojects)

For all the talk about the US shale fields, their wildcat operators, and their impact on the global oil market, the present and future of oil is the large mega projects. Huge platforms and fields of wells over vast deposits. Where shale wells put out a few hundred barrels per day, the big fields produce hundreds of thousands. The latest one that might coming online is the Kashagan (cash all gone) field in Kazakhstan. However, it is the boogey man that has spooked the big petro’s away from big projects since the price crash.

First discovered in 2000, it sits offshore in the north end of the Caspian sea. But it is a big field, one of the largest ones found in the past decade with an estimate 13 billion barrels of crude. This had people drooling despite its risks. And this field is no walk in the park. It sits in the middle of the Caspian sea where the weather is about as inhospitable as it gets. Highs of 40C in the summer with lows of -40C in the winter. Temperatures so cold in the winter that sea ice becomes an issue that must be accounted for.  And the oil itself is laced with sodium hydroxide. But risks be damned that is a whole lot of oil. Some three hundred billion worth in 2001 oil prices. So in 2001 construction started, and went on, and on with innumerable delays and cost overruns. The companies in charge estimate the total cost of the project is currently just over $50 billion, CNN thinks that it is double that amount. Plus there are the fines. The sodium hydroxide is strong enough that it corroded the pipes planned for transport that lead to leaks and the excess gas being burned. That led to tens of millions in fines. But it appears now that most of the kinks have been worked out and production will start in earnest this fall. They claim that this will be producing 370k barrels per day. A lot of experts doubt that they will be able to hit that number for at least a decade due to ongoing issues. But lets look at what happens if they do. Not in terms of how it will affect the global market, but what it will do to the bottom line of everyone involved. 370K barrels per day at current prices is about $16 million dollars per day, almost six billion dollars per year. A lot of money, but not when it is paying down a fifty or hundred billion dollar investment. Until the price of oil skyrockets this project will run in the red. Even when oil gets back to $100 per barrel it will take decades before it breaks even. And that is why investment dollars have dried up. When a huge field like this one is such a money hole, why take a chance. A lot of the petro’s are barely skating by. The thought of investing so much money in something this risky makes no sense. They will keep biding their time, investing in smaller, sure things and wait until they are flush with cash again before embarking on projects like this.