Financial Times: Pressure builds on Kashagan oilfield investors

By Isabel Gorst in Moscow and Javier Blas in London
Published: August 9 2007 03:00 | Last updated: August 9 2007 03:00

Kazakhstan turned up the heat this week on a consortium developing the giant Kashagan oilfield in the Caspian Sea, as investors opened talks with the government about possible changes to contract terms because of technical challenges.

The field, discovered in 2000, is the largest found in more than 30 years and could be critical for global supplies. Only three of the world’s 4,000 oilfields now exceed the 1.5m barrels-a- day production Kashagan is expected to achieve by 2019.

But Kashagan is also one of the world’s most difficult oilfields to develop, according to industry executives. Problems faced during development have pushed the cost of the first phase of the project to about $19bn (€14bn, £9.5bn) from an initial $10bn and the date of first production to 2010 from 2008.

Italy’s Eni leads a consortium that includes Total, Shell, ExxonMobil, ConocoPhillips and Inpex.

“We are already in contact with the Kazakh authorities and we are confident that the issue will be resolved for all parties,” Eni said yesterday.

Baktykozha Izmukhambetov, Kazakh energy minister, told a government meeting last week that Eni had lifted its estimate of the cost of developing Kashagan to $137bn from $57bn after encountering technical difficulties. Eni would not confirm those figures.

Karim Massimov, Kazakhstan’s prime minister, said last week the country regarded the delay at Kashagan as “a change to the contract itself”, implying the government felt entitled to demand more favourable terms from investors.

Kazakhstan proposes to raise its share of production from Kashagan to 40 per cent from an earlier contracted 10 per cent. Other concessions are also being demanded.

Mr Massimov said this week that the government might consider asking Eni to step down as project operator. Kazakh officials refused to comment on the remark, which contradicted recent statements by energy officials that the company’s role was secure.

Analysts said a change in operator at such an advanced stage would bring little benefit to Kashagan.

Julia Nanay, a senior director at PFC Energy, a Washington-based consultancy, said: “Whoever became operator at Kashagan would face the same formidable technical challenges as Eni.”

In the 1990s Kazakhstan handed out its biggest oilfields to western majors. But as oil prices rose the government moved to ensure a greater role for the state in exploiting the huge wealth.

Kazakh legislation now guarantees KazMunaigas, the state oil company, which holds an 8.33 per cent stake in Kashagan, a majority interest in all future Caspian Sea projects.

Analysts say that Kazakhstan’s strategy is to use foreign oil companies as scapegoats for social ills that the government has not addressed.

Copyright The Financial Times Limited 2007

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