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Bloomberg: Kazakhstan Orders Eni to Halt Work on Biggest Field (Update4)

By Nariman Gizitdinov and Greg Walters

Aug. 27 (Bloomberg) — Kazakhstan ordered Eni SpA to halt work at the world’s biggest oil discovery in 30 years as the Central Asian country follows Russia’s lead in seeking greater control over its natural resources.

The Eni-led Kashagan development was suspended for at least three months because of “environmental violations,” Environment Minister Nurlan Iskakov said on state television today. Kazakh officials also told Eni to halt construction of a refinery for allegedly violating safety rules and opened a criminal probe into alleged customs violations by an Eni unit.

“This is an attempt to replicate Russia’s success with Sakhalin-2,” said Dmitry Loukashov, an oil and gas analyst at Alfa Bank in Moscow. Russia’s environmental watchdog threatened to derail Royal Dutch Shell Plc’s $22 billion Sakhalin-2 venture before the Hague-based company agreed to cede control to state- run gas exporter OAO Gazprom in December.

Kashagan holds 12 billion barrels of recoverable crude, enough to supply the U.S. for 19 months, according to the Kazakh Energy Ministry. Setbacks have pushed the total cost of the project to $136 billion, more than double earlier estimates, according to the government.

‘Friendly Talks’

Eni officials will hold “friendly” talks with Kazakh authorities today, a Rome-based spokeswoman for the company said by phone, declining to comment on the suspension or alleged violations. Chief Executive Officer Paolo Scaroni said last week that he would fly to Kazakhstan for talks in September, followed by Italian Prime Minister Romano Prodi in October.

International oil companies including Shell and Eni are being forced to renegotiate exploration contracts with resource- rich countries that demand larger profits from surging oil prices. Kazakh officials last week demanded that Eni, Europe’s fourth-biggest oil producer, give the country a greater share of the profit from Kashagan or risk losing control of the field.

Eni and bigger rivals Exxon Mobil Corp., Total SA and Shell all hold 18.5 percent of Kashagan, while ConocoPhillips has 9.3 percent. Kazakhstan’s national oil company, KazMunaiGaz, and Japan’s Inpex Corp. each own 8.3 percent.

Alfa Bank’s Loukashov said Eni had created an opening for the government to raise pressure on the “extraordinarily difficult” project by accepting contract terms that were tough to fulfill. “I think the operator should take part of the blame,” Loukashov said.

Two-Year Delay

Eni said in February that production at the field would start two years behind schedule and that costs for the first phase would almost double to $19 billion. The company attributed the delay and higher cost in part to the need to meet environmental standards. Eni had planned to start commercial production at Kashagan in the third quarter of 2010, with output eventually reaching 1.5 million barrels a day.

Kazakh officials said last month the government wants to amend the exploration contract with Eni and its partners to increase its share of profit to 40 percent from 10 percent.

“Eni will probably have to give up some of its expected earnings from the project,” said Patrizio Pazzaglia, who helps manage $400 million at Bank Insinger de Beaufort NV in Rome.

‘Gross Violations’

The government also halted construction of a refinery that Eni’s Agip KCO unit is building to process Kashagan oil. “Gross violations” of the fire code were uncovered at the construction site today, the Emergency Ministry said in a statement. The ministry asked a court to uphold its ruling within three days.

In addition, Kazakh customs officials said in a statement that an Eni unit, TOO Atyrau-Bristou Aue Zholy Servis, failed to pay duties and value added tax on two imported helicopters. A criminal case was opened Aug. 24, according to the statement.

“Actions by officials of this Agip KCO branch included crimes” that cost the state budget $2.5 million, the customs department of the Finance Ministry said in the statement.

Separately, the government said Energy Minister Baktykozha Izmukhambetov resigned and “will transfer to another job.”

Prime Minister Karim Masimov named Sauat Mynbayev, the former head of state holding company Samruk, as Izmukhambetov’s replacement, the government said on its Web site, without elaborating on the shuffle.

To contact the reporter on this story: Nariman Gizitdinov in Almaty, through the Moscow newsroom at Greg Walters in Moscow at [email protected]

Last Updated: August 27, 2007 09:53 EDT 

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