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Bloomberg: Eni’s Kazakh Project, Cornerstone of Growth, Delayed (Update1)

By Eduard Gismatullin and Nariman Gizitdinov

Oct. 4 (Bloomberg) — Eni SpA and partners in the Kashagan oil field in Kazakhstan, the biggest discovery in three decades, risk years of delays because of design changes and extra costs.

The $29 billion project will miss its target of pumping oil in 2008 and the development will run over budget, the venture partners and Kazakh officials said. Kazakhstan, which is among the top 10 countries in terms of oil reserves, needs to tap the field to meet its goal of almost tripling production by 2015.

“Delays and technological risks may postpone and correct the output target for two to three years,” said Zhakyp Marabaev, a director of the exploration unit of KazMunaiGaz, the state-run Kazakh energy company, at an oil conference in Almaty, Kazakhstan’s financial capital.

Oil companies are having to tackle more complicated and costly projects as older fields are depleted. Royal Dutch Shell Plc last year doubled to more than $20 billion its investment plans for an oil and gas project in Russia’s Far East. BP Plc last month said its Thunder Horse production platform in the Gulf of Mexico won’t start until at least the middle of 2008, more than two years behind schedule.

Companies may spend about $29.3 billion between 2006 and 2015 to tap fields in the Kazakh sector of the Caspian Sea. The nation plans to pump as much as 3.6 million barrels of crude a day in 2015, up from 1.4 million barrels a day pumped on average in the first nine months of this year, according to a Kazakh oil ministry forecast.

Meeting Safety Standards

The Kashagan project’s design will have to be changed because existing plans don’t meet safety standards, said Philippe Rochoux, director general of Total Exploration and Production in Kazakhstan. A decision on new designs and the timetable for starting operations will be made by year’s end.

“The project is now progressing in the stage where we are reconsidering some initial project” parameters, Umberto Carrara, a managing director at Eni’s Agip KCO, which is operating the venture, told the conference in Almaty.

The Kazakh government had planned for Kashagan to start in 2008. The first oil will be pumped beyond 2009, Kazakh Energy Minister Baktykozha Izmukhambetov said today.

Hurting Profit

“It could be delayed by several years: 2008 is not possible,” Rochoux said. “Costs are going to be higher.”

Eni, Europe’s fourth-largest oil and gas company, in March said the first phase of developing the field in Kazakhstan would cost between $4 billion and $5 billion more than forecast due to a weaker U.S. dollar and the higher cost of equipment. The company in 2004 put the total cost at $29 billion over 15 years.

Rome-based Eni leads a group of partners, which include Exxon Mobil Corp., Shell, Total and KazMunaiGaz in developing Kashagan.

Delays could hurt the earnings and share performance of the companies involved in the project, said Franco Pozzoli, who holds Eni stock as part of the $250 million of assets he helps manage at Meliorbanca SpA in Milan.

“This will prolong the time it takes to gain a return on the significant investments the companies have already made,” said Pozzoli. “The oil majors have to make huge investments to find new resources. These are costs that are much higher than we’ve seen in the past and that’s likely to have a negative outlook on the bottom line. The outlook is for a significant drop in net income among the majors over the next three years.”

Export Route

Paris-based Total is developing plans to export crude from Kashagan to the Mediterranean via a BP-led pipeline that links the Azeri capital of Baku to the Turkish port of Ceyhan. A decision on the $4 billion investment to allow oil to be shipped from Kashagan to Baku and onward will be made by the end of 2007, Rochoux said today.

“As Kashagan will be delayed, there is less urgency now,” Rochoux said. Total is interested in expanding in Kazakhstan and is examining everything “on the market,” Rochoux said.

The French company still wants to acquire a stake in the Caspian Sea’s Kurmangazy field, which is being developed by KazMunaiGaz and OAO Rosneft, the Russian state-owned oil company. There are no negotiations at the moment, after the first well drilled at the field came up dry.

“Of course it raises some question marks,” Rochoux said. “We’re trying to understand whether there are still some hopes to find some oil.”

To contact the reporter on this story: Eduard Gismatullin in London at [email protected] Nariman Gizitdinov in Almaty, through the Moscow newsroom at (7) [email protected]

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