Production start at Kashagan oil field hits delay

Eric Watkins
Senior Correspondent

LOS ANGELES, June 30 -- The Kazakh government, winning important new economic concessions, agreed to a further delay in the start of production at the offshore Kashagan oil field after meeting with Agip Kazakhstan North Caspian Operating Co., the Eni SPA-led consortium developing the field.

"A memorandum was signed [June 27], according to which, we have agreed to postpone the date to start commercial extraction to 2013," said Energy and Mineral Resources Minister Sauat Mynbayev.

The government gave no reasons for the latest delay. However, Italy's daily newspaper Il Sole 24 Ore said the Kazakh government—eyeing increased royalties—asked for changes to the earlier memorandum of understanding with the Eni-led consortium. Oil prices have increased sharply since the MOU was signed Jan. 14.

According to the paper, the consortium was forced to accept changes in the MOU because of earlier delays and cost increases.

Meanwhile at the World Petroleum Congress in Madrid, Rex Tillerson, chief executive of ExxonMobil, told reporters that Kazakh officials are holding up development through disputes with western companies active in that field. He said it is time for Kazakstan to proceed with bringing production on stream.

Kazakhstan's state-owned KazMunaiGas, which holds a 16.81% share in the project, said, "The Kashagan consortium has reached agreement with the government of the Republic of Kazakhstan on a detailed memorandum of understanding which expands considerably the agreements reached last December and January and paves the way for proceeding with the development project.

"In addition to the important adjustments to the economic terms, the new agreement also provides the Republic of Kazakhstan with substantial assurances that the project will be implemented in accordance with the approved schedule," KazMunaiGas said.

The current agreement—less than 6 months after a decision to delay production until 2011—is the fourth postponement of production from Kashagan, which originally was to come on stream in 2005.

According to Eni Chief Executive Paolo Scaroni, changes are possible until the January agreement is officially incorporated into the production-sharing agreement between the sides. The Kazakh government had set a June deadline for talks with the consortium.

Mynbayev said the consortium and government agreed on royalties that would be linked to the price of oil. At more than $130/bbl, he said the royalty would be around 7.5-8%. At $195/bbl, the royalty would rise to 12.5%

In January, the consortium agreed, among other things, to make an additional payment to Kazakhstan of $2.5-4.5 billion, depending on the price of oil. Crude prices have escalated sharply to record-high levels.

New tax proposed
Analyst Global Insight said the Kazakh government forced the hand of the consortium with new tax proposals. "Not coincidentally," the analyst said, "Kazakh officials have recently suggested that a new oil export duty, which went into effect in May and for which only companies operating under flexible tax schemes are liable, could be expanded to all oil producers from next January."

It said Agip KCO, which is operating Kashagan under a production-sharing agreement with a fixed-tax regime, could be subject to the export duty if Kazakhstan has its way.

"Kazakh authorities have released a new draft tax code that would fundamentally alter the country's tax structure, with the hydrocarbon sector shouldering more of the burden to offset tax breaks for the non-oil sector, but the threat to subject all oil producers to the export duty appears to have been a bluff geared to push Agip KCO into an agreement on the Kashagan project," Global Insight said.

Possible changes of taxes for the consortium should be considered by parliament and President Nursultan Nazarbayev's office, said Mynbayev, who added that the consortium sought assurances of stability of tax and export regimes for the project.

"In our view, [tax changes] would create economic difficulties for the project," said Mynbayev, who explained that Kazakhstan has already earned enough compensation for the project's delays. "Two memorandums that have been signed can serve as foundation for long-term and constructive work by both sides," he said.

Mynbayev said the consortium's request to extend the contract on Kashagan beyond 2041 was "categorically" rejected, and that Kazakhstan would not compensate the consortium's costs if production started later than Oct. 1, 2013.

Agip KCO stakeholders include Eni, operator, 16.81%; ExxonMobil 16.81%; Total 16.81%; Royal Dutch Shell 16.81%; Kazmunaigaz 16.81%; ConocoPhillips 8.40%; and Inpex 7.55%.

Contact Eric Watkins at hippalus@yahoo.com.

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