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Financial Times: Kazakhstan seeks $10bn Eni damages

By Isabel Gorst in Moscow
Published: September 4 2007 19:12 | Last updated: September 4 2007 19:12

Kazakhstan said on Tuesday it would seek $10bn of compensation for econ­omic damage from escalating cost and late development of the Kashag­an oilfield, led by Italy’s Eni .

Eni opened talks last week with Kazakhstan about the dispute, which erupted after Eni presented the government with a revised development plan for Kashagan delaying first production until 2010 and doubling the cost of the first, 300,000 barrels a day, phase to $19bn.

Kashagan, one of the biggest untapped oilfields in the world, is crucial to Kazakh­stan’s plan to triple oil production and emerge as a big presence on world energy markets within the decade.

Daulet Yergozhin, Kazakh­stan’s deputy finance minister, said, “Certainly it will be more than $10bn”, Reuters reported. Kazakhstan had unanswered questions about tax payments by the Eni group, he said.

Eni declined to comment on Kazakhstan’s request.

Mr Yergozhin was speaking on the eve of a deadline set by the government for Eni to come up with detailed proposals on how to resolve the Kashagan problem.

But Eni’s head of exploration and production division, Stefano Cao, told Dow Jones that talks under way be­tween the consortium and the Kazakh authorities were “open and constructive” and all efforts were being made to resolve the dispute. Mr Cao is leading Eni’s Kashagan talks delegation.

“We are confident all matters will be addressed in accordance with existing PSA terms,” Mr Cao added, referring to the consortium’s current production-sharing agreement with the Kazakh government.

Kazakhstan has demanded more favourable terms at Kashagan, where under the production-sharing contract, investors can delay payment of royalties until development costs are recovered.

Oil officials are concerned Kazakhstan may attempt to wrest shares in Kashagan from the group as part of a strategy to bolster state control over the industry.

Richard Gordon, president of Gordon Energy Solutions, said Kazakhstan’s demand for improved terms at Kashagan were understandable because production sharing contracts were unfavourable to host governments in times of cost inflation.

The Kashagan contract was negotiated when oil prices were moderate and costs stable, the opposite of conditions today, he said.

Eni and its partners Shell, ExxonMobil, ConocoPhillips, Total and Inpex of Japan could not expect “stellar returns” from the Kashagan project, he said.

Copyright The Financial Times Limited 2007

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