* Production halted shortly after start-up by pipeline leaks
* Seven-partner project suffering long delays and costover-runs
* Now run collectively instead of usual single operatormodel
* One source calls it a "nightmare" operating "by committee"
By Andrew Callus and Stephen Jewkes
LONDON/MILAN Jan 2 (Reuters) - Giant Kazakh oilfieldKashagan, which was brought to a halt by leaks shortly afterstart-up last year, is grappling with a bureaucratic "nightmare"on top of its engineering troubles as it strives for commercialproduction in 2014.
The scale and complexity of the world's most expensivestandalone oil project led its seven partners away from thetraditional single operator command-and-control model, where oneof the larger companies takes charge while the others providesupport and share the risks, costs and rewards.
The consortium, which includes ExxonMobil, RoyalDutch Shell, Total and Kazakh state oil firmKazMunaiGas(KMG), first put one of the smallerpartners - Italy's Eni - in charge of construction anddelivery in 2001/02. They retreated from that decision in2008/09 after years of delays and cost escalation, optinginstead for collective responsibility.
This has created problems along the way, and is an extraheadache for engineers and managers as they battle to find outwhy a pipeline started to leak last year, just weeks after oilflowed for the first time, and to fix the problem so that oilcan flow out and revenue in.
"It's a bit of a nightmare to be honest," said one industrysource with knowledge of the project. "The consortium is theoperator until first commercial production, so it's all a bit'by committee' until then."
The Caspian Sea project aims to exploit the biggest oildiscovery in decades, producing a peak of 1.66 million barrels aday - as much oil as OPEC member Angola, from a reserve almostas big as Brazil's. Much of it is built on artificial islands toavoid damage from pack ice in a shallow sea that freezes forfive months a year in temperatures that drop below minus 30degrees Celsius (-22F).
The field extends over 3,375 square kilometres (1,303 sqmiles), and the whole onshore and offshore site is bigger still.The oil is 4,200 metres (4,590 yards) below the seabed, at veryhigh pressure, and the associated gas reaching the surface ismixed with some of the highest concentrations of toxic,metal-eating hydrogen sulphide (H2S) ever encountered.
Kashagan has cost an estimated $50 billion so far, fivetimes early projections, and its 13-year life is a tale mostlyof delay.
In September and October 2013, pipeline leaks thatinvestigators think were caused by H2S-linked stress cracks ledto shutdown.
Commercial production could be many months away as a result,and the engineering difficulties have exposed the shortcomingsof the unwieldy administrative structure, which will stay inplace until the oil is flowing properly.
Agip, Eni's engineering arm, was initially the operator andis still nominally in charge of the construction and deliveryphase, much of it conducted by Eni unit Saipem.
But the operatorship changed in 2009 when a new entity,representing all the partners and called the North CaspianOperating Company (NCOC), took over.
"It gives you a headache just thinking about it," said asecond source.
"There used to be a normal operatorship set-up. Now it'sjust one committee after another. Each company has its owninternal auditing, permitting procedures, personnel management,communication, etc. Every single step has to be seen by everyoneelse. It's as if there was no CEO but the board met every day."
It won't get any simpler when the oil starts flowing.
Shell will then take over management of productionoperations along with KMG, the NCOC website says.
Shell will also take on planning, development andconstruction of phase 2 of the project's offshore facilities,which is designed to bring it up to full production, but Agipwill do the onshore work, and ExxonMobil will do the phase 2development drilling.
Meanwhile, Total, the fourth international oil company (IOC)in the consortium, is conducting the leaks investigation,including use of a "pigging" pipeline investigation robot.
The companies involved in the project have also changed overthe years. BP, BG Group and ConocoPhillips have all sold out.
Sources among the bolters say picking Eni as operator - muchless experienced in giant projects than some of its partners -was the result of unwillingness among the bigger players to seeone of their near rivals operate such a prestigious scheme.
They say that lack of experience might have contributed toKashagan's problems and to the change of approach in 2009. Enideclined to comment on that suggestion, but a spokesman said thecompany "was awarded operatorship of the project as the outcomeof a selection process within the venture group".
PIPE QUALITY
For now, all eyes are on the investigation.
According to a statement by NCOC in December, tests carriedout on parts of the pipe by TWI Laboratories in Cambridge,England, found the cracks were caused by a reaction betweenwater and H2S, which is known in the industry as sour gas.
Why this reaction caused the pipe to crack remains unclear,and one expert said the search for the reason - and a solution -was like "finding a needle in a haystack".
The leaks, in the onshore section of a 95-km pipeline takinggas ashore for processing, have caused some to question thequality specification of the pipes, given the high H2S content.
Reuters has been unable to ascertain the exact type of pipe used, but experts say it was most likely a carbon steel pipe,given the high cost of using alloy for such a length.
A spokesman for NCOC said the pipeline was "aligned with theX60 specification" - a reference to a grade of pipe that tendsto be carbon steel but can also be alloy.
The spokesman said the X60 grade pipes were dealing withassociated gas containing approximately 15 percent of H2S andwere designed to withstand concentrations of 12 to 15 percent.
"The pipeline design basis has very recently been confirmedby experts, and it would have been designed in exactly the sameway if it had been built today," the spokesman said.
A source with secondary knowledge of the investigation saidthe consortium was looking at whether the pipes were up to thejob and whether costlier grades should have been fitted.
The NCOC spokesman declined to answer further questionsabout the pipes.
Sumitomo Metal Industries Ltd, which merged with NipponSteel Corp in 2012 to become Nippon Steel & Sumitomo Metal Corp(NSSM), supplied pipe to Kashagan seven years ago,according to a company official who did not want to be named.
The official said some of the pipes that leaked were amongthose supplied by Sumitomo. He said the company had been askedto look into the past manufacturing record of the pipes suppliedto Kashagan and found they met all requirements.
NSSM also declined further comment on the pipes used.
Another area of investigation is the welding. The consortiumsaid in December that the Cambridge lab was looking at thepipeline joints. The NCOC expects to have the results from therobot "pigging" search in early 2014.
The IOCs - Exxon, Shell, Total and Eni - and KMG each has a16.81 percent stake in Kashagan. Japan's Inpex has 7.56percent, and China National Petroleum Corp (CNPC) acquired 8.33 percent in 2013 as ConocoPhillips exited.
