Financial Times: Early resolution unlikely in Eni’s Kashagan stand-off

By Isabel Gorst
Published: September 10 2007 03:00 | Last updated: September 10 2007 03:00

Over a month has elapsed since Kazakhstan gave aforeign oil group led by Italy’s Eni 60 days to agree how to compensate the government for damage caused by delays and cost overruns at the giant Kashagan field in the Caspian Sea, one of the biggest and most complex oil developments in the world.

So far there appears to be no agreement about anything – except that the Kashagan dispute is a mess for all involved.

It is also unclear how far Kazakhstan, which is understood to have consulted with US lawyers, is prepared to go to force the Eni group to concede more favourable terms at Kashagan.

Karim Massimov, prime minister of Kazakhstan, told reporters last week that the government had a “Plan B” up its sleeve if the dispute was not soon resolved. “I’ll tell you about it later,” he said.

Kashagan is crucial to Kazakhstan’s ambition to triple oil production and emerge as an important force on world energy markets in the coming decade.

Anvar Saidenov, governor of the national bank of Kazakhstan, said: “Kashagan will determine the macroeconomic landscape and the shape of the economy in the future.”

The project will impact “foreign investment flows, export revenues, the national oil fund, the budget – everything,” he told the Financial Times.

Mr Saidenov did not rule out the possibility of an early resolution of the dispute but added: “We are probably just at the beginning, not even the middle of negotiations.”

Eni and its partners -ExxonMobil, Royal Dutch Shell, Total, ConocoPhillips and Inpex of Japan – also face losses from the late start of the project where much of the $19bn of investment required for the first phase has already been sunk.

The central struggle in talks will be over the division of cash flows from the field where, with the full development now expected to absorb $137bn, returns will be less attractive than oil majors usually expect.

There is concern that Kazakhstan might demand a larger share in Kashagan, one of the only fields in the north Caspian where Kaz-MunaiGas (KMG), the state oil company, does not have a majority interest.

Mr Massimov called last week for the appointment of KMG as a co-operator with the project but said that Kazakhstan was “immune” to resource nationalism.

However, government officials admitted that KMG is being groomed as a “national champion”.

There are also fears that Kazakhstan might offer Kashagan to rival investors. An announcement that President Nursultan Nazarbayev of Kazakhstan would visit Brazil this month aroused speculation that Petrobras, the Brazilian oil company, might be invited into the project.

Analysts said few international oil companies hadthe financial and technical might, or even the desire, to take on a field as complex as Kashagan.

Eni last week thanked Kazakhstan for its “constructive” approach to the dispute.

The government alleges that the Eni group has infringed environmental laws, evaded tax and breached fire regulations.

In response, the Eni group appears to have closed ranks, refusing to reveal details about the talks.

Kazakhstan’s open criticism of Eni’s management of the project may trigger a potentially divisive struggle within the group for the operational control of Kashagan. ExxonMobil, already embroiled in a dispute with Gazprom over its contractual right to export natural gas from the Sakhalin-1 project in Russia, is expected to adopt a less flexible approach to the government’s demand for a contract revision than some European companies.

The group’s immediate task is to convince the government not to stop the project altogether.

Copyright The Financial Times Limited 2007

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