Lukoil, KMG well in Kazakh Caspian Sea turns up dry, project disbanded

Russia’s Lukoil and Kazakhstan’s Kazmunaygas (KMG) have disbanded a joint venture to explore the Zhenis block in the Kazakh Caspian Sea, in a further disappointment for Astana’s efforts to spur offshore hydrocarbon development.

The joint venture between Lukoil Kazakhstan Upstream and KMG found no commercial reserves after drilling at Zhenis, KMG told Russia’s Interfax news agency on July 11. The block had been tipped to contain an estimated 70-100mn tonnes (513-733mn barrels) in potential oil reserves. But the well was dry and the project has ended. The licence to explore the site has been returned to the state.

Lukoil and KMG signed a contract to explore and potentially produce oil from Zhenis in April 2019, with each partner receiving a 50% equity share in the project. The contract had a 34-year duration, allowing for a nine-year exploration period and a 25-year production period. The expected investment in these two phases was expected to amount to $60mn and $210mn respectively.

Lukoil bore the entire cost of exploration work, with the hope of receiving compensation during the production phase. But even at the project’s onset, the probability of striking oil was estimated at only 20%. Lukoil will be reimbursed by Kazakhstan to cover its expenses.

“Unfortunately, the drilling of an exploration well at the Zhenis structure confirmed that the trap was not filled with hydrocarbons, while the results of geological drilling helped clarify information about the structure of the subsoil necessary to adjust the strategy for other projects” KMG added.

Besides Zhenis, Lukoil and KMG have a number of joint exploration projects in the Kazakh sector of the Caspian Sea such as Al-Farabi and Kalamkas-Sea, with Lukoil being present with a 49.99% share in Al-Farabi Operating and a 50% stake in Kalamkas-Khazar Operating. In the coming years the partners are going to conduct exploration at the latter site.

While Kazakhstan is restoring its investment attractiveness after the changes in tax policy, Russia in its current situation continues to take part in available promising oil and gas projects, even though the risks of these projects are high. Russia’s oil companies have fewer opportunities to produce oil and gas in foreign markets following the country’s international isolation by the West in response to Moscow’s invasion of Ukraine.