Kazakhstan, consortium agrees to new Kashagan terms

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Oct. 31 -- The government of Kazakhstan has reached a long-awaited agreement with Agip Kazakhstan North Caspian Operating Co.—the Eni-led consortium developing Kashagan oilfield—over control of the project.

"I would not say it's a victory (for Kazakhstan), but it shows respect for the Republic of Kazakhstan and its resources," said Maksat Idenov, Kazakhstan's main Kashagan negotiator.

"The new accord improves the economic conditions for the Republic of Kazakhstan and increases the share of KazMunaiGas' (KMG's) daughter companies to the level of the big participants," the Kazakh energy ministry said.

In terms of percentages, the increase will double KMG's stake to 16.81%, the same as Eni, ExxonMobil, Total, and Royal Dutch Shell, while ConocoPhillips will have 8.40% and Inpex 7.56%.

To accommodate KMG's increase, Eni, Total SA, ExxonMobil, and Shell each saw their respective shares fall to 16.81% from 18.52%, while the stakes of ConocoPhillips and Inpex fell from 9.26% and 8.33% respectively.

Kazakh Energy Minister Sauat Mynbayev said in January that KMG would pay $1.78 billion to compensate its partners for the reduction in their respective shares.

"The accord also puts into place a mechanism for strong control over delays and spending to prevent a repetition of the problems that led to last year's negotiations," the ministry statement said.

The ministry was referring to August 2007 when the Kazakh government accused the consortium partners of allowing costs to soar to $136 billion from $57 billion and of delaying production start-up to the end of 2010 from the originally planned 2005.

From the standpoint of the Kazakh government, the spiraling costs and delayed start-up would have meant further delays in the arrival of revenues much needed for social programs.

To avoid a repetition of that situation, Eni will lose its status as sole operator of the field, and from January 2009 a joint operating company—the North Caspian Operating Co. (NCOC) —will be created, owned on a pro-rata basis by all the consortium members. Consortium partners will assume charge of the company's management in rotation.

The consortium, in a separate statement, described the deal as a "new way forward for the development of the Kashagan project."

Kazakh officials gave no details of the final agreed budget at the time of the agreement's signing on Oct. 31. The government earlier said the final budget was fixed at $136 billion, up from the previous estimate of $57 billion. The consortium has invested $12.3 billion so far.

Contact Eric Watkins at hippalus@yahoo.com.

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