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Lloyds List: Eni hopes for peace talks in row over Kashagan field

John McLaughlin, Lloyds List
Published: Sep 14, 2007

SENIOR executives at Italian energy company Eni face weeks of tough negotiations over the fate of the Kashagan oilfield development, after the Kazakh government criticised delays and cost overruns as a threat to the national economy.

In a statement issued following an initial meeting with Eni managing director Paolo Scaroni in Astana on Tuesday, Kazakh energy and mineral resources minister Sauat Mynbayev said ‘inflicting damage on Kazakhstan’s economic interests is inadmissible’.

He added: ‘Delays in the development of the Kashagan oilfield and the upgrading of the site to commercial production level will result in a significant decline in the scheduled growth rate of the national economy during the next decade and will pose a threat to the implementation of long-term projects for the country’s development.’

He argued that accurate observation of the country’s laws, and fulfillment of obligations, are an imperative for all the companies operating in Kazakhstan, including foreign ones.

‘If these legislative requirements are not met, we will have to take all the necessary measures prescribed by our laws,’ he said. Kazakhstan has already called a halt to work on the project although development is understood still to be going on claiming that total costs had ballooned from $57bn to $136bn and threatening to change operator.

Both Mr Scaroni and Kazakh prime minister Karim Masimov made conciliatory noises on Wednesday, the latter noting that under the terms of the contract there was still time for ‘friendly talks’ until October 22.

At the same time, there is no disguising Kazakhstan’s mounting frustration with the pace of development, with production now not expected until 2010, two years later than anticipated, and costs running at more than double initial projections. Indeed, Italian reports suggest that Kazakhstan will press for a substantial indemnity or a larger stake in the consortium for Kazakh national energy company KMG in recompense.

Eni is the sole operator at Kashagan for a consortium that includes ExxonMobil, Shell and Total, with all four companies holding an 18.52% stake. ConocoPhillips, KMG and Impex of Japan retain smaller shares.

The project has long been the focus of huge expectations, with Kazakhstan viewing it as critical to its aim of raising production to 3.5m bpd by 2015.

Eni estimates its capacity at up to 13bn barrels of recoverable oil and now anticipates production of 1.5m bpd at its peak, 25% up on initial calculations.

At the same time, it is a highly complex project, including the construction of production hubs on platforms and artificial islands, and an expensive one, not least because of the Caspian’s delicate ecosystem.

The cost of developing the field has also risen inexorably, with Eni citing in its defence sharp increases in the cost of materials and oilfield services since the contract was signed in 2004, a significant increase in the value of the euro, in which many of Saipem’s costs are denominated, and additional engineering costs as the production potential of the field has become apparent.

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