Bloomberg: Eni’s Scaroni Says Kashagan Agreement Is `Probable’ (Update1)

By Anthony DiPaola and Nariman Gizitdinov

Oct. 8 (Bloomberg) — Eni SpA will likely reach an agreement with the Kazakh government in a dispute over escalating costs and delays at Kashagan, the world’s biggest oil discovery in 30 years, Chief Executive Officer Paolo Scaroni said today.

“We find it the most probable solution,” Scaroni told reporters in Astana, the Kazakh capital. Negotiations to break the deadlock over Kashagan began officially on Oct. 5 and will likely conclude with a package of concessions to Kazakhstan, according to the head of Italy’s biggest oil company.

International oil companies including Royal Dutch Shell Plc and Rome-based Eni are being forced to renegotiate exploration contracts with resource-rich countries demanding larger profits from surging oil prices. The Kazakh government has said delays, environmental damage and cost overruns at Kashagan amount to $136 billion.

Eni, Exxon Mobil Corp., Total SA and Shell all hold 18.5 percent of Kashagan, while ConocoPhillips has 9.3 percent. Kazakhstan’s national oil company, KazMunaiGaz National Co., and Japan’s Inpex Corp. each own 8.3 percent.

The Kazakh government last week said it would sue Eni, Italy’s largest oil company, and its partners if an accord wasn’t reached. It’s also drawn up legislation that would allow for enforced return of natural resources from foreign companies if they don’t honor contractual obligations.

Foreign Investment

The law “risks not being a positive element” for foreign investment in Kazakhstan, Scaroni said. He said it was unlikely the dispute with Kazakhstan would end up at an arbitration court.

Italian Prime Minister Romano Prodi said the Kazakh natural resources law would damage the country’s relations with international business.

“The danger that could come from this law is greater than any benefits,” Prodi said during a press conference.

Prodi and Kazakh President Nursultan Nazarbayev met in Astana today as part of a state visit that brought 200 Italian businessmen to the country. The prospect of new business for industries like Kazakh agriculture and construction may help ease the negotiating climate.

Eni, the sole operator of the field, may be forced to give KazMunaiGaz a joint role. Kazakhstan could also increase its stake in the field, Scaroni said. Kazakh Prime Minister Karim Masimov declined to comment on what concessions the nation wanted from the Eni-led venture.

Development Costs

“What’s clear is that the Kazakhs want increased involvement in the field,” Scaroni said. The central Asian nation is relying on the start of production to pay off development costs at the field.

The date by which Kazakhstan will begin to profit from the Caspian field depends on when crude production starts, Kazakh Energy Minister Sauat Mynbayev said in an interview.

“Nobody knows,” Mynbayev said when asked when the country would begin to see gains from the field. “We need to start production first.”

“The climate is very positive,” Scaroni said. Still, he added that talks would not be “particularly rapid.”

Eni is ready for “long, fruitful” cooperation with Kazakhstan, Prodi said after meeting Nazarbayev.

Kazakhstan opened negotiations with Eni after delays in the Kashagan development, Nazarbayev said. He said Kazakhstan may have to take recourse to national law to reach a settlement.

`Under Discussion’

“There is a package of proposals from Kazakhstan’s side that are under discussion,” Uzakbai Karabalin, chief executive officer of KazMunaiGaz, said.

Kazakhstan may sue its partners in the Kashagan venture if Eni sticks to its current budget for the project, Mynbayev said Oct. 3. The government must receive and approve a new development plan from the Eni-led group this year, he said.

Eni said in February that production at the field would start two years behind schedule and that costs for the first phase would almost double to $19 billion. It plans to start commercial production at Kashagan in the third quarter of 2010, with output eventually reaching 1.5 million barrels a day.

The Kazakh government previously said that the parties concerned must complete talks by Oct. 22. That deadline may be extended, Mynbayev said last week.

When Scaroni was asked if the talks would be wrapped up by the end of the year, he said that was still the company’s goal, though they could drag on to January or February.

“What I see is a good couple of months of work ahead of us,” he said.

To contact the reporters on this story: Nariman Gizitdinov in Almaty, through the Moscow newsroom ;

Last Updated: October 8, 2007 12:26 EDT

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