Forbes: Scaroni’s Kazakh Challenge

Vidya Ram, 09.20.07, 1:58 AM ET

LONDON – Italian energy company Eni is treating the outcome of a meeting of its Chief Executive Paulo Scaroni with the Kazhakh government as a closely guarded secret. But the outcome of the negotiations — whenever they emerge — will be an important sign of whether Eni can remain at the helm of a joint venture to exploit one of the largest oil fields discovered in the past four decades, capable of pumping out 1.5 billion barrels per day.

Last week, Scaroni visited the former Soviet republic after the government suspended operations at the Kashagan oil field in the Caspian Sea. A spokesperson contacted by Forbes.com on Wednesday said the company wasn’t commenting on the outcome. Last week the company said the talks were “held in a climate of cooperation.”

The Kazakh government is seeking billions of dollars in compensation for delays in the project and spiraling costs, and has even threatened to remove Eni from its coveted position as lead operator of the project. Kazakh Prime Minister Karim Masimov said that at the very least, the government wanted Kazmunaigaz, the state-owned energy company, to become co-operator of the Kashagan oil fields.(See: ” Kazakhstan Gives Eni Some Room To Breathe.”)

The government has proved that it can play hardball. The question is how much it can squeeze out of Eni (nyse: E – news – people ) and the other consortium members. In addition to Exxon Mobil (nyse: XOM – news – people ), Total (nyse: TOT – news – people ) and Royal Dutch Shell (nyse: RDSA – news – people ) all have 18.5% stakes in the project, with the remainder shared between ConocoPhilips (nyse: COP – news – people ), Japan’s Inpex (other-otc: IPXHF – news – people ) and Kazmunaigaz.

“The growing pressure campaign against the Italian firm represents a new approach, signaling that mere compensation may not be sufficient to satiate Kazakhstan,” wrote Andrew Neff, senior energy analyst at Global Insight, in a note published in late August.

“Eni should be well prepared to pay compensation for the delay, but is almost certainly going to be made to pay more than it originally expected, given the government’s newly robust approach.”

He told Forbes.com on Wednesday that now the best possible outcome that Eni could hope for is millions rather than billions of dollars in compensation to be paid to the government, in addition to the sale of part of its stake in the project.

Time is running out for Eni as the pressure is likely to increase.

“The longer this gets dragged out towards the October deadline, the more likely Eni gets ousted as operator,” said Neff.

A clause in Eni’s contract with the government names Oct. 22 as the deadline for the cessation of “friendly” negotiations.

And it’s not just the Kazakh government that Eni will have to deal with, but the concerns of its consortium partners, who have just cause to be miffed with the way Eni has tackled its crisis.

Neff pointed out that despite repeated complaints by the Kazakh government it took drastic action to get Eni to begin to take notice.

Just who is to blame for the troubles that have plagued the technically difficult project is a matter of dispute. Production was originally scheduled to begin in 2005, but now has been pushed back to 2010. The Kazakh government estimates that costs for the 40-year project have soared to $136 billion, from $57 billion. Eni argues that the conditions in the Caspian Sea, where the reserves lie, are far harsher than originally anticipated. (See: ” Kazakhstan Not Doing Eni Good”)

http://www.forbes.com/facesinthenews/2007/09/20/paulo-scaroni-eni-face-cx_vr_0919autofacescan01.html

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