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The Wall Street Journal: Kazakhstan Presses Case

On Kashagan Oil Project
August 31, 2007 9:23 a.m.

MOSCOW — The government of Kazakhstan expects compensation for what it sees as “tens of billions of dollars” of economic harm due to massive cost overruns and delays at the Kashagan oil project, led by Italy’s Eni SpA, a government official said Friday.

In a telephone interview, Deputy Finance Minister Daulet Ergozhin said Kazakh authorities are looking for more than just financial compensation from Eni and its partners, however. Mr. Ergozhin said Kazakh authorities want to see changes to the structure of the deal that would ensure smooth implementation in the future.

He declined to specify what the Kazakh side is seeking, but said, “the question of changing the operator remains on the agenda” because the government is “not fully satisfied” with the current operator.

Kazakhstan isn’t insisting that state oil company KazMunaiGaz become the operator of Kashagan, he noted, but said the government would “look positively” on a proposal to put a Kazakh company in control or jointly operate the project.

Kashagan, one of the world’s largest oil projects, has been plagued by delays and cost overruns. Earlier this year, Eni and its partners announced production would be delayed to 2010 from 2008; Kazakh officials say costs have risen to $136 billion from $57 billion. Last week, Kazakh officials suspended work at the project, citing a range of environmental and regulatory violations, and gave Eni and its partners until Sept. 5 to come back with detailed proposals on how to proceed.

Mr. Ergozhin denied that the Kazakh government was trying to pressure the investors. “Any government in our position would behave the same way.” He noted that the Kashagan contract sets a 60-day period to resolve differences.

“The question of money is only one of the questions,” Mr. Ergozhin said. “We need to see clarity that this project will work in the future” and won’t be delayed further, he said.

Among the concerns that need to be resolved, he said, are environmental and safety issues, regulatory and tax problems, and the need to use more Kazakh labor and reduce pay inequality with foreign workers.

Mr. Ergozhin noted that the government had been expecting about $1.2 billion-$1.3 billion a year in revenue from the project starting in 2008 and would have to cut spending or find other revenue sources to make up for the delay.

“We’ll have to tighten our belts,” he said.

He declined to discuss any details of possible changes to the terms of the Kashagan deal, which is structured to allow Eni and its partners to recoup most of their costs before sharing oil production with the Kazakh government.

Earlier this summer, a senior Kazakh official suggested the government was seeking to increase its share of that oil, known as “profit oil,” to 40% from the 10% in the current contract. But Mr. Ergozhin noted that official had been replaced and indicated that his proposal no longer reflects the official Kazakh position.

“We created the best possible conditions for them,” he said of the consortium. “But we don’t see any payback.”

The Eni-led consortium includes Total SA, Exxon Mobil Corp., Royal Dutch Shell PLC, ConocoPhillips, Inpex, and state-owned KazMunaiGaz of Kazakhstan.

Write to Gregory L. White at [email protected]

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