Kashagan Costs Rise 33 Percent on Metals, Labor, Mynbayev Says

By Anthony DiPaola

Sept. 5 (Bloomberg) -- The Eni SpA-led group developing Kazakhstan's Kashagan oil field has seen costs surge by a third in the past year as raw material and labor prices in the industry gained, Energy Minister Sauat Mynbayev said.

The budget for Kashagan's experimental phase has risen to $36 billion from the Kazakh government's estimate a year ago that starting production at the world's largest discovery in three decades would cost $27 billion, Mynbayev said in a telephone interview.

At that time, the government forecast the overall cost of starting and running the field through the 2040s would be $136 billion. The experimental period covers exploration and development at the field through the start of production, which Mynbayev said is on target to meet an October 2013 deadline.

``We've agreed to cost increases when they're based on market conditions,'' Mynbayev said today. ``We didn't agree when it was based on mistakes or reconfigurations. We can change the budget in the future if market conditions change''

Eni and partners, including Exxon Mobil Corp., Royal Dutch Shell Plc and Total SA, have pushed back the start date of the field four times due to cost overruns and delays. The 2013 target date is eight years behind the original schedule.

Paolo Scaroni, Eni's chief executive officer, and Christophe de Margerie, his counterpart at Total, both said in July they hoped to have first oil flowing before Oct. 2013. Eni declined to comment on the budget or timeline for the field.

Sulfur Gas

Technical issues like the presence of dangerous sulfur gases caused some delays as Eni had to reconfigure the field's layout to house workers on artificial islands in the Caspian Sea away from the wells.

Eni's initial budget projected capital expenditure at $10 billion for the experimental phase. It raised that to $19 billion in February 2007, in part because of the need to redesign the field.

Kazakhstan's national oil company is a partner in the project and will pay its share of the group's costs, Mynbayev said. Other partners are ConocoPhillips and Japan's Inpex Holdings Inc.

Eni is currently sole operator of the Kashagan development. The Rome-based company will jointly run the field with some of the partners after production starts, according to a revised production accord agreed to in January.

To contact the reporter on this story: Anthony DiPaola in Rome at adipaola@bloomberg.net.