Much-Touted North Caspian Field Reportedly Yields Dry Hole in First Well

A Dry Hole or an Empty Promise?

In a news story that is as potentially shocking as it was understated, Russian business daily Vedomosti reported yesterday that Rosneft and Kazmunaigaz, the Russian and Kazakh state oil firms, respectively, had failed to strike oil at their first exploration well at the Kurmangazy field in the Kazakh sector of the north Caspian. Neither Rosneft nor Kazmunaigaz have confirmed the report, but the respected Russian daily is rarely off-base and sometimes seems to specialise in getting the word out on news that the Russian oil companies don't want to be public.

Indeed, after signing a US$23-billion production-sharing agreement (PSA) last July to jointly develop the estimated 7.33-billion-barrel Kurmangazy field, a report of a failed first well at Kurmangazy is hardly what Rosneft or Kazmunaigaz - both of which are looking to conduct initial public offerings (IPOs) later this year - want investors to hear. The two companies each have 50% in the development of the field under a May 2002 bilateral agreement between Russia and Kazakhstan on their maritime border in the north Caspian Sea. Kazmunaigaz had previously reached an agreement with French supermajor Total to take part of the Kazakh company's stake in the project, but that deal never materialised (see "Related Articles" below). Rosneft had said that the field, which is located close to the massive Kashagan field with estimated proven reserves of between 9 and 13 billion barrels of oil, could produce up to 600,000 b/d.

Worrying Trend

The apparent failure of the first Kurmangazy well is worrisome, especially for the Kazakh government, as it follows in the wake of an earlier failed well drilled by LUKoil in Kazakhstan's Tyub-Karagan field. It would indeed be a shocking development if a second well at Kurmangazy were also unsuccessful - and given the emphasis that both Kazmunaigaz and Rosneft have placed on the success of the Kurmangazy project in their overall portfolio, there is little reason to doubt that they will drill a second well. Considering the nearby location of the Kashagan field, it seems unlikely that a second well could possibly fail as the first one did.

Nevertheless, the dry hole at the first Kurmangazy field is sure to sap some of the enthusiasm among foreign energy companies for Kazakhstan's offshore development programme, which has repeatedly been delayed. The government has already acted to defuse some of the international interest in the country's offshore oil potential by pushing through legislation to give Kazmunaigaz a 51% stake in all new projects, refusing to conduct open tenders for acreage, and choosing to negotiate bilateral state-to-state development deals instead. However, until now, the country's massive and largely untapped oil reserves - estimated at perhaps 64 billion barrels by the government - served as a mighty lure, more than offsetting the growing political risk emanating from the nationalistic policies that Kazakhstan has been pursuing in the hydrocarbon sector.

Outlook and Implications

The possibility that the Kazakh sector of the Caspian may not be nearly as resource-rich as it was once thought could serve to alter the relationship between Kazakhstan and the foreign energy companies. After all the drilling failures in the Azeri sector of the Caspian, the failures in the Tyub-Karagan and the Kurmangazy fields are extremely disappointing for the government, which is counting on rising volumes of Caspian oil production to allow the Central Asian country to boost its overall oil production from 1.2 million b/d at present to 3.5 million b/d by 2015. While the Kashagan project alone is expected to produce as much as 1.2 million b/d in the next decade, there is little else in the Kazakh sector of the Caspian that is assured. Joint Russian-Kazakh development of the Tsentralnoye and Khvalynskoye fields in the Russian sector of the north Caspian could be affected by the Kurmangazy failure as well.

In all likelihood, the initial failed well at Kurmangazy will soon be forgotten when a second well proves successful. Yet, the dry hole in and of itself is significant in punching a hole in the belief - both among the IOCs and the government - of Kazakhstan's seemingly boundless oil development potential. Foreign participation and technological expertise in offshore drilling may indeed be necessary to realise the production potential of the Kazakh sector of the north Caspian, with its shallow waters, complex geology, and poisonous gases. After the government's attempts to revise contracts and generally insert itself more prominently in some of the country's major IOC-led oil projects, an initial setback at the Russian-Kazakh development of the Kurmangazy field could serve as a come-uppance for the government and a useful reminder about the positive role that IOCs play in Kazakhstan's economic development.

Related Articles

Russia: 24 March 2006: Rosneft Sees Strong Growth Prospects - With or Without Yukos Assets

Kazakhstan: 4 August 2005: LUKoil Shuts Failed Tyub-Karagan Well Offshore Kazakhstan

Kazakhstan: 7 July 2005: Russia, Kazakhstan Ink US$23-bil. PSA for Kurmangazy Field

CIS: 15 March 2005: LUKoil, Kazmunaigaz Set Up JV to Develop North Caspian Fields

Kazakhstan: 4 February 2005:Rosneft Seeks to Reduce Royalties Payable for Kazakhstan's Kurmangazy Project

Kazakhstan: 2 April 2004: Trouble Brewing over Kurmangazy- Kazakhs Tell Rosneft New Oil Tax Law Will Apply

Kazakhstan: 10 October 2003: Total Wins Closed Tender, Seeks Stake in Kazakhstan's Caspian Kurmangazy Field

CIS: 8 July 2003:LUKoil Estimates North Caspian Tsentralnoye Project Costs at US$10bn-US$12bn

CIS: 2 July 2003: LUKoil, Gazprom Establish JV to Develop Caspian Field with Kazmunaigaz

Kazakhstan: 14 May 2002: North Caspian Fields to Be Shared with Russia