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The Wall Street Journal: Kazakhs Ratchet Up Pressure On Eni Over Oil Field

Government Wants
Joint Role in Project
On Caspian Sea
By GABRIEL KAHN and LIAM MOLONEY
September 7, 2007; Page A11B

ROME — The demand of the Kazakh government that its state oil company share a leading role in developing the Kashagan oil field in the Caspian Sea suggests that project head Eni SpA of Italy might have to make significant concessions to keep the project on track.

In recent weeks, Kazakh officials have become incensed with delays and cost overruns at Kashagan. They have sent signals that they want to rewrite the agreement under which a group of foreign oil companies, led by Eni, are developing the field.

With an estimated 38 billion barrels of reserves buried deep beneath the Caspian Sea, the Kashagan field is one of the largest and most technically complex oil projects in the world.

The first oil won’t flow from Kashagan until at least the second half of 2010, pushed back from an initial 2005 target. Development costs have more than doubled to $136 billion, according to the Kazakh energy ministry. Eni has declined to comment on that claim.

Kazakhstan’s new prime minister, Karim Masimov, said yesterday that state energy company KazMunaiGaz should become a joint operator of the project with Eni. He also called for face-to-face talks with Eni Chief Executive Paolo Scaroni to resolve the dispute over Kashagan. Mr. Scaroni is expected to travel to Kazakhstan soon, though no date has been set, according to the company.

The prime minister’s comments offer a hint about how the Kazakh government is seeking to renegotiate the terms for Kashagan.

“In the last few days, we have heard the Kazakhs wanted to remove Eni; now they talk of it being a co-operator” with KazMunaiGaz, said David Stedman, a London-based analyst with the Daiwa Institute of Research. The statement is a “step in the right direction” for finding a solution to the Kashagan dispute, Mr. Stedman added.

The two sides have until about Oct. 23 to settle on new terms. Eni, in a statement, said it was encouraged by the “climate of confidence and cooperation” expressed by the Kazakh prime minister. It is unclear how adding KMG as a joint operator could affect the timing or finances of the project, and particularly whether it could lead to further delays.

The Kazakh government has been eager to bolster the technical capabilities of its state oil company, and taking on the role of joint operator would test its mettle. However, it is likely to make other demands and is expected to levy heavy fines on Eni for everything from alleged violations of environmental regulations to tax infringements.

Kazakh officials complain the repeated delays at Kashagan have cost it billions of dollars in lost revenue to state coffers and forced it to make tough budgetary choices.

“What we really need to know is how much does the Kazakh government want as compensation” to end the dispute, said Sanford C. Bernstein & Co. analyst Oswald Clint.

As it seeks to resolve the dispute with the Kazakh government, Eni must shore up its position with the other members of the development consortium. Eni holds an 18.5% stake in the consortium, the same as Exxon Mobil Corp., Royal Dutch Shell PLC and Total SA. ConocoPhillips has 9.3%, while Inpex Holdings Inc. and KMG each own 8.3%.

Eni won the role of lead operator in 2001, besting bigger rivals like Shell and Exxon. The partners also have been frustrated by the delays and cost overruns, which have altered the economic rationale of the project.

According to a person familiar with the negotiations, Mr. Scaroni, the Eni chief, has been in contact with the heads of all the other consortium partners during the past two days, urging them to maintain a united front in negotiations with the Kazakh government. But getting the rest of the consortium to agree unanimously to new terms could prove complicated.

–Kadyr Toktogulov in Astana, Kazakhstan, contributed to this article.

Write to Gabriel Kahn at [email protected] and Liam Moloney at [email protected]

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