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Argus Media:Astana shows its hand on Kashagan

Kazakhstan is piling pressure on the consortium led by Italy’s Eni developing the 11.3bn bl Kashagan field in the Caspian, threatening to suspend the project completely.

The move appears designed to back up government demands for compensation, following revisions to the timetable and budget for development of the world’s biggest oil find in 30 years. Kazakhstan’s environment ministry has warned that work at Kashagan could be suspended. “We already have grounds to believe that the operator is not observing the requirements of Kazakhstan’s environmental legislation,” says environment minister Nurlan Iskakov.

The ministry has sent documents to the energy minister recommending withdrawal of the project’s environmental permits. Prime minister Karim Masimov backs the ministry’s decision. A consortium representative says the Kashagan project’s vast scale would make shutting down operations extremely difficult.

The comments from government officials coincide with the start of talks about a revised Kashagan development plan between the consortium and the Kazakh government. The government wants Kazakhstan’s share of profit oil under the project’s production-sharing agreement (PSA) to rise to 40pc from 10pc to cover losses to the state budget and the national fund — set up to accumulate profits from energy exports — from expected delays and cost overruns.

Threatening to shut the project down on environmental grounds — a tactic recently used by Russia to secure control of the Sakhalin 2 project for Gazprom — looks like the easiest way of securing a swift deal on increasing Kazakhstan’s share of profit oil from Kashagan. In the longer term, the government is expected to push for scrapping PSAs for future energy projects. And Kazakhstan’s resource nationalism drive is expected to intensify. President Nursultan Nazarbayev’s Nur Otan party won complete control of Kazakhstan’s parliament in recent elections, giving it plenty of leverage over the government on energy policy.

The Kashagan consortium has proposed a new development, which envisages formal postponement of the start of commercial production to 2010 from 2008 and an increase in the total project cost to $136bn from $57bn over 40 years. Eni indicated earlier this year that it expects production to start in 2010, but some sources suggest that start-up could be delayed until as late as 2015.

Negotiating position

The new cost figure includes $70bn of capital expenditure for development of the field, $24bn of operational expenditure, $20bn for services and $22bn in administrative expenditure until 2041. But the revised plan envisages peak output of 1.5mn b/d, up from an earlier target of 1.2mn b/d.

If the negotiations are unsuccessful, Eni could end up selling its 18.52pc stake in Kashagan to a foreign company or to state-owned Kazmunaigaz (KMG). But KMG sources do not expect Eni to lose its operator role. Eni will have to explain the new budget and project delays at a forthcoming steering committee meeting — originally due on 8 August.

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