Boston Globe: PM: Kazmunaigas should join oil project

September 6, 2007

ASTANA, Kazakhstan –Kazakhstan’s Prime Minister Karim Masimov suggested Thursday that the state-run energy company Kazmunaigas should take a major role in a troubled foreign-led project to develop the massive Kashagan oil field.

Karim Masimov’s remarks were the government’s latest warning to the consortium developing Kashagan. The government is seeking to renegotiate the terms of the development deal after the consortium, led by Italy’s Eni SpA, announced delays.

“In accordance with the orders of our president, we believe Kazmunaigas should become a joint operator of this project,” Dow Jones Newswires quoted Masimov as saying, referring to demands made in the past by Kazakh leader Nursultan Nazarbayev.

Nazarbayev had also required that the Caspian Sea project come online in 2005, but the consortium this year said it would be unable to meet a revised deadline of 2008 and expected production to start in 2010. Kazakh officials also claim Kashagan’s total costs have jumped to $136 billion from $57 billion.

In late August, the Environment Ministry said it had ordered operations at Kashagan suspended for three months due to alleged environmental violations, and the Finance Ministry announced a criminal investigation over delays.

“The delay of commercial production and more than twofold rise in development costs threatens Kazakhstan with serious social and economic consequences and damages its reputation as a reliable international partner that contributes to global energy security,” Masimov told an energy conference Thursday, the government Web site said.

“Actions by consortium participants have led to a postponement of the time when then project will make up for its costs and a meaningful decrease in (Kazakhstan’s) share in division of production,” Masimov said. “That means that schools, hospitals, roads will not be built, and large economic and infrastructure projects will be delayed.”

Masimov has threatened to replace Eni as lead operator in the consortium, which also includes U.S.-based ExxonMobil Corp. and ConocoPhillips, Royal Dutch Shell PLC, France’s Total SA and Japan’s Inpex. Kazmunaigas has a stake of just over 8 percent.

Top Eni officials have been in Kazakhstan in an effort to resolve the conflict over Kashagan, and Masimov on Thursday invited Eni Chief Executive Paolo Scaroni to the capital Astana to join the discussions.

“Friendly talks are being held. If they don’t agree to Kazakhstan’s demands, then we have a plan B, which we’ll tell you about later,” he said.

The circumstances surrounding Kashagan bear echoes of similar projects in Russia, where the government has pressured major foreign energy companies into giving up control or significant stakes in energy developments.

But Masimov insisted the issue did not indicate a deteriorating investment climate in Kazakhstan.

“Resource nationalism is not in our nature,” he said.

Kashagan, one of biggest oil discoveries of the past 30 years, is expected to play a crucial role in filling a pipeline completed in 2005 and designed to carry Kazakh oil to energy-hungry China.

Recoverable oil reserves at Kashagan are estimated at a minimum of 7 billion barrels and the total oil in place at 38 billion barrels.

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