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The Wall Street Journal: Kazakh Energy Plan Seen Aimed at Kashagan

By KADYR TOKTOGULOV and LIAM MOLONEY
September 17, 2007

ALMATY, Kazakhstan — A proposed law that would allow the Kazakh government to annul natural-resources contracts appears aimed at pressuring Kashagan oil developers led by the Eni SpA amid tense negotiations, rather than as a broad-based threat to energy and mining companies, analysts and a person familiar with the matter said.

The proposed amendment, which would give the Kazakh government the right to pull out of natural-resources contracts if there is a threat to national security and economic interests, is expected to be adopted in the next two weeks, lawmaker Valeriy Kotovich said.

Mr. Kotovich said the government has already expressed its support for the amendment, which he said aims to help Kazakhstan in its dispute with the Eni-led consortium developing the massive Kashagan oil field in the Caspian Sea.

Kashagan is estimated to hold recoverable reserves of 13 billion barrels, and the Kazakh government has expressed its anger over the project’s lengthy start-up delays and soaring costs.

Kashagan project operator Eni and fellow consortium members Royal Dutch Shell PLC and Total SA declined to comment on the proposed amendment Friday. Other members, including ConocoPhillips, Exxon Mobil Corp. and Kazakh state oil and gas company KazMunaiGas, weren’t immediately available for comment on the matter. Japan’s Inpex Holding Inc., also part of the consortium, didn’t immediately respond to an e-mail sent outside of its business hours seeking comment.

Yet one person familiar with the matter said the consortium sees the proposal as a way to strengthen the Kazakh government’s hand in its talks with the group over Kashagan.

Analysts point out that Kazakhstan has previously amended legislation in response to issues at individual projects. In 2005, when China National Petroleum Corp. bought Canada’s PetroKazakhstan, the Kazakh government speedily adopted legislation allowing the state the right of first refusal if any “strategic” mineral assets change hands.

The latest proposed amendment doesn’t appear to be a case of Kazakhstan following the lead of hydrocarbon-rich countries such as Venezuela and Russia, which have returned resources to state control to the detriment of some major international oil companies that had invested in them, analysts said.

The Kazakh government “will use legislation to renegotiate” with the Kashagan consortium, said Jason Kenney of ING, though he added that he doesn’t expect Eni to be removed from the Kashagan project.

Eni holds an 18.5% stake in the development consortium, the same amount as Shell, Total and Exxon Mobil. ConocoPhillips has a holding of 9.3%, while Inpex and KazMunaiGas each own 8.3%. Eni is the sole Kashagan operator.

Kazakh officials and the consortium developing Kashagan began talks Aug. 27 aimed at addressing the delays and soaring costs. The talks are scheduled through Oct. 22.

On the day the talks began, the government suspended works on the Kashagan project for three months for alleged environmental violations and opened a probe of a company related to the project over allegations of customs-law violations.

The Kazakh government has said it wants state oil company KazMunaiGas to share the operator role at Kashagan and has demanded “adequate compensation” for the delayed startup of production.

Eni’s latest estimate for the project’s startup is in 2010.

–Jeffrey Sparshott, Spencer Swartz and Benoît Faucon contributed to this article.

Write to Kadyr Toktogulov at [email protected] and Liam Moloney at [email protected]

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