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FT REPORT – INTERNATIONAL ACCOUNTANCY: Oil companies facing a litmus test in Kazakhstan

By PAUL BETTS, Financial Times

Resource patriotism has thrown the oil and gas industry into turmoil. Kazakhstan is only the latest example, but is drawing plenty of attention because of the scale of the resources at stake there.

The country’s Kashagan field is considered the most important energy find since the discovery of Prudhoe Bay in Alaska in the 1960s. So it was always going to be only a matter of time before the Kazakh government decided to press the oil companies developing the Kashagan field – Eni, Exxon, Total, Royal Dutch Shell, Conoco and Japan’s Inpex – to renegotiate the original contract.

Oil companies have already been forced to renegotiate contracts with the Russians, the Libyans, the Algerians, and have even faced resource nationalism in Britain where the government has also sought to squeeze more money out of oil companies.

This is simply the new order of things. Back in 1997, when Kashagan was first discovered, oil was trading at about $10 a barrel and it was difficult to find anybody interested in developing such a complex, albeit giant prospect. Now oil is trading at $70 a barrel and it only seems natural that governments want to renegotiate the original contracts to secure a greater share of the pie. And should the price of oil suddenly drop again to $10-$20, the oil companies themselves would probably be the first to demand new terms from these governments.

Nobody should get carried away. Oil majors are used to this type of situation and living with high risks. In the case of Kashagan, it could clearly still go terribly wrong – the Kazakhs could throw out the western partners and start from scratch. Yet this is just as high risk for the Kazakhs themselves. For they need the experience and money that the western oil companies have to offer to get the field on stream and fulfil the nation’s high economic expectations.

Thus the chances of some sort of compromise do not appear hopeless.

The Kazakhs want money more quickly and this is perfectly feasible. They want to operate the field alongside Eni, and this kind of window dressing can be arranged. Third, they could demand that their 8.3 per cent stake in the field is increased. This would be more difficult, because the majors would be reluctant to give up a share in such a promising prospect.

Yet as Russia has shown, the majors may even have to give in on this third point.

What is really at stake for the oil companies is not a few pennies or barrels less. Rather, the question is whether the industry is capable of showing a united front in negotiating against the wave of resource patriotism. Or will oil companies simply try to trip each other up to take advantage of the miseries of their partners and rivals? If this is the case, they will simply be playing into the hands of resource-rich countries.

Published: Sep 10, 2007

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