Kashagan’s sunk cost of $ 39 bn is just the tip of the $ 20 tn iceberg

Nov 30, 2011 12:00 AM

A Bloomberg story recently appeared entitled, "Biggest Find in Decades Becomes $ 39 Billion Cautionary Tale," by Nariman Gizitdinov.
The core of the article is that after 11 years, the biggest anticipated oil discovery, located on a manmade island, Kashagan, 44 miles off the Kazakhstan coast, ever has yet to produce oil. The sunk cost to date in Phase I: $ 39 bn.

But it is just the tip of the iceberg as Kashagan represents the beginning of a $ 20 tn journey through 2035 for oil companies to search for oil in ever more difficult places.
The story really centres on the government pressure to invest more and push the project to a Phase II because the government is relying on the oil for 18 % of its GDP. Yet, there are five main egalitarian partners in the deal that cannot agree of moving to the next phase -- at least not quite yet.

As noted in the story, "Exxon, Shell, Total, Rome-based ENI and KazMunaiGaz National Co., the state oil company, hold 16.8 % of NCOC each. Houston-based ConocoPhillips has 8.4 % and Japan's Inpex 7.6 %."
But even if this project moves to Phase II, and they do indeed strike oil to eventually reach 1.6 mm barrels-a-day, the article notes, "the same as Libya produced before the revolt against Muammar Gaddafi," it is only the tip of the iceberg on the costs. Why?

The key reason is that our energy needs are in conflict are out of synch with natural systems.
In the case of this $ 39 bn oil-drilling project, here are some facts. The oil is 2.6 miles below the seabed in a highly pressurized reservoir with a high concentration of poisonous, "sour" gas. This area in the Caspian Sea is home to caviar-bearing sturgeon.

It seems in order to prevent a mishap like the BP fiasco in the Gulf of Mexico, it will just cost more -- a lot more -- to drill for deepwater oil and protect the environment.
Further, this project is constantly fighting the natural elements as these waters are frozen 5 months of the year. It seems that in the natural cycle of the earth, it is supposed to be frozen.

But, this project is just an example, because we have many more around the globe. According to a report in the New York Times, citing the United States Geological Survey, "coal-fired plants alone account for 67 % of freshwater withdrawals by the power sector and for 65 % of the water completely consumed by it".
Now let's image the energy needs of China as the world just exceeded 7 bn people. Peter Voser, chief executive officer of Royal Dutch Shell, addressed this is an op-ed in China Daily, where he wrote that we must, "focus on the ways in which water, energy and food are interconnected. Water is used to produce nearly all forms of energy is used to move and treat water, and energy and water are used to produce food. There is a growing awareness that the path to a more sustainable energy future will require society to balance the needs of these systems."

Further, there are continuing reports that the Colorado River is at low levels and Lake Mead continues to become shallower. It is driven by the huge demand for power in the western United States. And, if Lake Mead dries up, the lights will go out in Hollywood.
These examples and the oil drilling in the Caspian Sea, lead me back to $ 39 bn. If we are going to spend $ 39 bn to get to halfway point of possible oil gusher, what else could we do that provided a more stable rate of return?

For $ 39 bn, 10 % of global electricity additions in 2010 could come from renewable energy in the world (on top of the 50 % actually added). Adding next generation renewable jet fuels, you could generate 10 % of global jet fuels or over 7 bn gallons annually -- capturing and converting wasted carbon monoxide from steel plants.
If those investments were concentrated in the western United States, we would lessen our Lake Mead threat as well as our sturgeon-caviar threat. Plus, if we kept scaling solutions that already exist we can build the infrastructure so we won't have to choose between energy and water.

Plus, with Lake Mead intact, our grandchildren will have the promise of seeing movies produced in Hollywood.
So, $ 39 bn wasted in the icy-cold Caspian Sea -- just the tip of the iceberg.

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