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Kazakhstan: Eni loses at Kashagan

THE COUNTRY settled its dispute with the Eni-led consortium developing the huge, offshore Kashagan oilfield last month. Under the new agreement, the Italian company will eventually lose its role as operator of the project and state-owned KazMunaiGaz (KMG) will double its stake in the field.

The saga has dragged on since late summer, when rising costs and project delays at Kashagan prompted the government to demand compensation from the foreign companies developing it. Kashagan, with an estimated 13bn barrels of oil, is Kazakhstan's – and one of the world's – most important oil projects. Eni and its partners originally said first oil would come on stream in 2005. The latest forecast for start-up is now for 2011 at the earliest. Plateau production will be 1.5m barrels a day (b/d). However, the delays at the field have also forced Astana to lower its long-term oil production forecast from 3m b/d to 2.6m b/d by 2015.

The settlement strips Eni of operatorship once the project's first phase is complete. A new operating company representing the partners will then take over that role and report to a KMG management committee. KMG says the deal would give the company parity with the other foreign firms in the consortium and allow it to "prove itself equal to everyone else". President Nursultan Nazarbayev said the settlement was a "restoration of justice". He added: "KMG is doubling its share in the project, which means bigger profits in the future."

ExxonMobil, one of the largest shareholders in the AgipKCO consortium developing Kashagan, was understood to have been reluctant to dilute its share to increase KMG's stake. But reports from Kazakhstan said the company's chief executive, Rex Tillerson, had backed down at a marathon meeting with Kazakhstani officials and representatives from the other companies.

The deal signed last month in Astana will see KMG's stake increase from 8.33% to 16.81%, with each of the other partners ceding a proportionate percentage to increase KMG's holding. KMG will pay them $1.78bn in oil as compensation. The restructured shareholdings are now: 16.81% for Eni, Total, ExxonMobil, Shell and KMG; ConocoPhillips, 8.5%; and Japan's Inpex, 7.4%.

But the companies will also pay compensation of up to $4.8bn to the government for the late start-up of the field and its increased costs (additional royalties of $2.5bn-4.5bn after first oil in 2011 plus a "bonus" of $300m). Kashagan is being developed under a production-sharing contract, in theory meaning the state begins to make money on the field only after the developers have paid off their costs. However, Kazakhstan has also negotiated to keep 10% of the profit oil, the crude produced once costs have been covered.

The project's development is tricky. The reservoir is deep, at 5,000 metres below the surface, is under high pressure, and the crude is high in hydrogen sulphide, which must be stripped out from the oil. The platforms in the Caspian are also surrounded by moving ice-pack flows in winter. And there have been costly blunders, such as the decision to house workers too close to the hydrogen-sulphide plant, on artificial islands.

Last month's deal is humiliating for Eni, whose reputation as a project developer will suffer, and for its outspoken chief executive Paolo Scaroni. Kashagan, Eni hoped, would put it into the top tier of international oil companies. But it seems Kashagan was simply too big and complex for Eni. The company's supporters have attempted to portray the dispute as bullying by Kazakhstan in an effort to gain control of the project and sympathetic analysts likened KMG's and the government's actions to Gazprom's take-over of control of Sakhalin Energy at the end of 2006.

But that is spurious. The deal accepted by the foreign partners on Kashagan gives KMG parity with them – not a controlling stake. It also compensates them for their reduced shareholding – albeit below market rates, say analysts. But the extra $5bn the consortium will pay should be dwarfed by eventual revenues from the field, which could be as high as $30bn a year once oil starts flowing. Given the repeated delays to the project's timing and costs, which have grown from $57bn to more than $136bn, according to local reports, there seems little ground to complain.

At the same time, the government is trying to tighten its grip on the energy sector. Farkhad Sharip, a commentator for the Jamestown Foundation, points out that the rise of Nurlan Balgimbayev, a former prime minister of the country and now Nazarbayev's adviser on energy, has coincided with the steady increase in state control. Balgimbayev, says Sharip, is "an ardent advocate of nationalising Kazakhstan's oil sector". It was he who created KMG in 2002, giving the company a mandate to control no less than 50% of the shares in all future oil projects to be developed with foreign companies.

Whether Eni's Kashagan humiliation will settle the question of foreign investment in Kazakhstan's Caspian or whether the government will turn its attention to the Tengiz and Karachaganak developments, under development by Chevron- and BG-led consortia, remains to be seen. "They are different from Kashagan," Sauat Mynbayev, the country's energy minister, said last month. "We don't have such plans". He added: "There was no way we could accept an unjustified cost increase and delays."

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