The Wall Street Journal: Kazakhstan Wants Payment for Oil-Project Delays

By GREGORY L. WHITE
September 4, 2007; Page A8

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.

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

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, he noted, but he said the government would “look positively” on a proposal to put a Kazakh company in control or jointly operating 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 tomorrow to come back with detailed proposals on how to proceed.

The company declined to comment on the deputy finance minister’s comments. Eni Chief Executive Paolo Scaroni is expected to travel to Kazakhstan as early as today to meet directly with Kazakh officials to discuss the terms of the project.

The Eni-led consortium includes Total SA, Exxon Mobil Corp., Royal Dutch Shell PLC, ConocoPhillips, Inpex Holdings Inc. and KazMunaiGaz.

Mr. Ergozhin denied that the Kazakh government was trying to pressure the investors. 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 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.

Write to Gregory L. White at [email protected]

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