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Exxon, Shell Said Seeking Control of $46 Billion Kashagan Field

By Nariman Gizitdinov on August 30, 2012

Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) are seeking bigger stakes in the Kashagan oil field and operating control before starting to expand the $46 billion project, according to two people with knowledge of the matter.

Exxon and Shell also want Kazakhstan’s government to extend the production-sharing agreement for 20 years before investing more in the Caspian Sea field, touted as the world’s biggest discovery in four decades when found, the people said, declining to be identified as the talks are confidential.

The Kashagan project, centered on a man-made island 70 kilometers (44 miles) from Kazakhstan’s coast, is slated to produce its first oil by the end of this year. It may reach commercial output by June next year, said Lyazzat Kiinov, head of state-run KazMunaiGaz National Co., said in December 2011 when he was deputy oil minister.

Exxon and Shell may seek to increase their stakes by buying out ConocoPhillips (COP)’s 8.4 percent stake in Kashagan, the two people said. ConocoPhillips plans to sell $8 billion to $10 billion of assets by the middle of 2013 and has said Kashagan may not offer a long-term, strategic opportunity.

The partners, which also include Eni SpA (ENI) and Total SA (FP), are looking for the second phase to widen the project’s profit margin. The budget for the first phase is set to reach $46 billion by the time the first oil is exported, according to a person with knowledge of the matter said in January. An early cost estimate put the tab at about $24 billion.

‘Long-Term Investor’

Exxon and Shell will consider leaving the project if they don’t reach an agreement on prolonging the Kashagan contract and on operatorship, the two people said.

Ross Whittam, a London-based spokesman for Shell, declined to comment, as did an Eni press officer who declined to be identified, citing company policy.

“Exxon Mobil is a long-term investor in Kazakhstan and plans to remain a major investor in the country,” Charlie Engelmann, a spokesman for the Irving, Texas-based oil company, said by e-mail, declining to comment further.

With cost overruns and multiple delays over the past decade, the international partners agreed in 2008 to cut their stakes in Kashagan, boosting KazMunaiGaz’s interest to 16.8 percent. That is equal to the holdings of Exxon, Shell, Total and Eni. Japan’s Inpex Corp. (1605) is also a partner with 7.56 percent.

Kashagan Operator

At the time, Eni ceded operatorship of Kashagan to North Caspian Operating Co., an umbrella for the partners, each of which is responsible for specific tasks while jointly making decisions on the development. NCOC put Eni in charge of delivery of Kashagan’s first phase, with Shell responsible for developing offshore facilities in the second phase, and Exxon overseeing drilling, according to venture’s website.

Kazakhstan’s biggest oilfield will produce 370,000 to 450,000 barrels of oil a day in the first phase, an amount that may double in the second phase in 2018 or 2019, the government said last year. The Oil Ministry oversees the Kashagan production-sharing agreement, which allows the investors to recoup costs before the government takes its share of oil revenue. The agreement runs to 2041, according Eni’s website.

– With assistance by Eduard Gismatullin in London and Edward Klump in Houston. Editors: Torrey Clark, John Buckley

To contact the reporter on this story: Nariman Gizitdinov in Almaty at [email protected]

To contact the editor responsible for this story: Stephen Voss at [email protected]

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