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Forbes: Kazakhstan Leader Won’t Review Oil Deal

By LILYA ERZHANOVA 10.08.07, 6:44 AM ET

ASTANA, Kazakhstan – Kazakhstan’s president pledged Monday not to review a major oil development contract with an international consortium led by Italy’s Eni SpA amid a row sparked by production delays.

“We are not talking about revising the contract that we signed (with the consortium) 10 years ago,” said President Nursultan Nazarbayev. However, he warned that the government will take measures in line with the national law against any foreign investor who “breaks the existing contracts.”

“I’m sure that Eni understands the task it faces,” Nazarbayev said after talks with visiting Italian Prime Minister Romano Prodi.

Prodi, on his first trip to the oil-rich Central Asian nation, said that “Eni is ready to accept (the Kazakh government’s) terms and continue cooperation.”

“The issue of timing and other terms are up to the Kazakh government,” Prodi said through a translator.

The ex-Soviet republic’s government wants to renegotiate with the consortium the terms of the development of the massive Kashagan oil field in the northern Caspian Sea over delays in commercial production and cost overruns.

Kazakhstan’s government in August suspended operations at Kashagan and warned that the state-run energy company Kazmunaigaz could increase its role in the project. Kazmunaigaz now has a stake of just over 8 percent in the project.

The Kashagan project is now scheduled to start commercial production in 2010, delayed from an original 2005 date. Kazakh officials also say Kashagan’s total costs have jumped to US$136 billion (euro96 billion) from an initial estimate of US$57 billion (euro40 billion).

The development of the Kashagan field is at the core of Kazakhstan’s strategic plan to triple its oil output by 2015 and become one of the world’s top oil producers.

Last year, Kazakhstan downgraded its long-term oil output forecast from 3 million to 2.6 million barrels a day by 2015 because of delays with development of Caspian Sea fields.

Eni estimates Kashagan, one of the biggest oil discoveries of the past 30 years, will produce 1.5 million barrels of oil a day at its peak output.

The Eni-led consortium also includes U.S.-based Exxon Mobil Corp. (nyse: XOM – news – people ) and ConocoPhillips (nyse: COP – news – people ), Royal Dutch Shell PLC (nyse: RDSA – news – people ), France’s Total SA and Japan’s Inpex Corp.

Last month, Kazakhstan’s parliament passed a bill allowing the government to review contracts with foreign companies on the development of subsurface resources if they are deemed damaging to the country’s strategic economic interests. The bill will become law after it is signed by Nazarbayev.

The past few years, Kazakhstan – a vast country lying south of Russia and west of China – has been trying to increase state assets in its energy sector, which is currently dominated by Western investors.

A law adopted in 2004 gave the Kazakh government the preferential right to buy stakes in private companies that are being sold to other private companies.

The next year Parliament passed a law allowing the government to revoke oil licenses from oil companies in case of change of ownership. That threat eventually forced China’s National Petroleum Corp. to sell to Kazmunaigaz a 33.3 percent stake in the Canada-listed PetroKazakhstan.

But Kaan Nazli of the New York-based Medley Global Advisors consultancy said that Kashagan is not a case “when a national company tries to elbow out a foreign investor.”

The Kazakh government has “legitimate concerns” because the production delay deprives it of revenues until 2018, Nazli said. Under the contract covering Kashagan the Kazakh government begins to get its share of revenues only after investors recoup their developing costs.

Nazli said that at the same time the Kazakh government must realize that the problem of revenues can’t be solved through punitive measures, such as replacing Eni as operator.

He said that one proposal currently under discussion is to separate two independent oil fields, Kairan and Aktoty, from the larger Kashagan field and develop them separately which would bring more production in the short term.

The Kazakh government will likely also strengthen the supervision of the project by Kazmunaigas and other project partners, Nazli said.

Trade between Kazakhstan and Italy rose by 70 percent in 2006 to US$8.5 billion (euro6 billion), Nazarbayev said Monday. Italian investment in Kazakhstan has reached US$1 billion (euro700 million).

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