* Kashagan pumps first oil a decade later at cost of $50 bln
* Oil majors yet to sanction expansion as returns unclear
* Kazakh leader scales back oil ambitions
By Vladimir Soldatkin and Mariya Gordeyeva
ALMATY/MOSCOW, Sept 11 (Reuters) - When the first drops of oil began trickling from the world's most expensive oil field on Wednesday, investors in the mammoth Kashagan Caspian Sea project sighed in relief, but they have little chance of earning back their billions any time soon.
A consortium including Exxon Mobil, Royal Dutch Shell, Total and ENI once promised to transform the prospects of the entire country of Kazakhstan and earn massive profits for their own shareholders.
But those dreams have shrivelled amid cost overruns, delays, government interference and internal disputes among partners.
Just about all they have to celebrate is that the start of production before an October deadline means they are spared yet more billions of dollars in fines which the government of Kazakhstan would have imposed if the project were any later.
Running a decade behind the initial schedules and with spending estimated at $50 billion, the project still has no firm production outlook and therefore no estimates of how and when global majors will recoup the huge costs and generate profits.
For the government, which is already making cuts to budget spending due to lower-than-expected revenues, it means it has to scale back ambitions, which once envisioned Kazakhstan as the next biggest global oil frontier.
"For our population and the state, it will be enough to produce 2 million barrels of oil a day. This will really suffice," Kazakh President Nursultan Nazarbayev told an economic forum this week.
That contrasts sharply with what Nazarbayev, a 73-year-old former steelworker and member of the last Soviet Communist party Politburo, promised to his nation of 17 million when Kashagan was confirmed as the largest oil discovery in decades.
A decade ago, the government of Nazarbayev, who has ruled the country since independence from the Soviet Union, saw Kazakhstan eclipsing Mexico and Norway with output of well above 3 million bpd to become a global top five producer by 2015.
On Tuesday, the government forecast output reaching 1.8 million bpd at best in 2015.
It is not unusual for fast growing oil producers to overestimate their targets only to discover they lack the right geology or reserves to sustain growth.
In the case of Kazakhstan, reserves are plentiful. With 30 billion barrels it sits among top 10 global reserves holders.
According to consultancy Wood Mackenzie, it is the "above-ground risks" that have increased in recent years.
"Fiscal and regulatory instability has been one key issue," it says, listing a 2009 tax code that increased the burden on extracting industries, an unexpected introduction of export duties in 2010 and multiple renegotiations of oil deals with foreign investors.
Echoing moves by other resource-rich governments, often described as resource nationalism, Kazakhstan has tightened control over asset sales, giving itself pre-emption rights in buying out any assets offered for sale.
It is pressing oil firms to buy as much as possibly locally, often leading to corruption at various levels.
"Foreign investors report that local government officials regularly pressure them to provide social investments in order to achieve local political objectives," the U.S. State Department said this year.
"Together with vague and contradictory legal provisions that are often arbitrarily enforced, these negative tendencies feed a perception that Kazakhstan is a suboptimal investment environment," it said.
Adding to the risks, the country has seen increased violence since 2010 after individuals and groups associated with Islamic extremists launched attacks against government offices.
In December 2011, 16 people were killed when energy sector workers on strike clashed with police in the town of Zhanaozen, in the Western Mangistau Region. Nazarbayev declared a state of emergency and sent troops to the region.
Nazarbayev prides himself on non-stop growth in the oil-fueled economy since 1996. Per capita gross domestic product has risen more than twenty-fold to $12,500 from just $600. Growth is there to stay, say economists, as oil output is set to continue increasing, although at a smaller scale.
It depends on pipeline expansion from the landlocked region, some of which is running behind schedule.
It also depends on oil majors Chevron, BG and ENI expanding Kazakhstan's biggest onshore fields, Tengiz and Karachaganak, after years of painful tax and shareholder rights disputes with the government.
But it is Kashagan which remains the biggest question mark.
Its development had been estimated to cost $10 billion a decade ago but has risen to $50 billion as the consortium had to build several artificial islands instead of rigs because of the icy and stormy waters of northern Caspian.
Kazakh state oil firm Kazmunaigas says foreign investors sought at one point to recoup as much as $136 billion in costs, which ballooned due to the presence of heavy sour gas and unwelcome chemicals such as mercaptans, leading to high oil viscosity.
Wood Mackenzie calls Kashagan simply the world's most expensive standalone energy project.
In addition to disputes with the government over delays and cost overruns, the consortium faced several internal battles.
One of those resulted in a publicly-humiliating dethroning of ENI as the operator of the field as rivals said Kashagan proved too big to manage for the Italian firm.
Despite the gigantic expense, the field will be pumping a relatively modest 350,000 bpd during the first phase while its expansion to the initially targeted 1.5 million bpd is on hold.
In February, analysts at IHS Cera, an energy consultancy, estimated that it would take long-term oil prices of $150 a barrel for Kashagan's investors to make a 15 percent internal rate of return on the expansion.
"Even after the second phase receives the green light, technical challenges tied to the high sour gas content of the field make it unlikely we will see any meaningful production emerge from the second phase by 2020," said Eurasia group. (Additional reporting by Dmitry Solovyov and Raushan Nurshayeva; Writing by Dmitry Zhdannikov; Editing by Peter Graff)