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The Wall Street Journal: Kazakhs Seek Bigger Slice

Wall Street Journal Chart

Energy Minister
Cites Costly Delays
At Kashagan Field
By GUY CHAZAN in London and GABRIEL KAHN in Rome
October 23, 2007; Page A14

Foreign investors developing one of the world’s biggest oil fields could see their stakes in the venture whittled down as Kazakhstan pushes to expand the state oil company’s role in the project.

Kazakhstan’s energy minister, Sauat Mynbayev, said in an interview that the government is negotiating a bigger stake for state energy giant JSC NC KazMunaiGaz in the consortium developing Kashagan, a Caspian Sea oil field that is the world’s largest outside the Middle East.

Mr. Mynbayev said that massive cost overruns and delays at Kashagan had harmed Kazakhstan and that increasing KazMunaiGaz’s presence was one way to undo the damage. A bigger stake would give Kazakhstan greater control over costs, he said.
 
A person involved in the negotiations said Italy’s Eni SpA would retain its role as operator and a proposal that KazMunaiGaz become “co-operator” was no longer up for discussion.

The dispute over Kashagan, which was the biggest oil find in 30 years when it was discovered in 2000, erupted this year when Eni announced a big budget increase and production delays. Kazakhstan threatened to fire Eni as operator, and it demanded billions of dollars in compensation. Kazakhstan’s Parliament then passed a law allowing the government to break oil contracts deemed to be a threat to national security.

A deadline for a solution expired yesterday, but the sides agreed to keep talking and signed a memorandum of understanding setting out principles for the next stage of negotiations, Mr. Mynbayev said.

He said there were various ways of resolving the dispute: the consortium could pay a fine, KazMunaiGaz could expand its 8.33% stake, or the terms of the production-sharing agreement could be changed. “With the help of all these levers, we are trying to find a solution acceptable to all sides,” Mr. Mynbayev said. Talks were expected to conclude before the end of the year, he added.

An Eni spokeswoman declined to comment. Consortium members Royal Dutch Shell PLC, Total SA, Exxon Mobil Corp. and ConocoPhillips referred questions to Eni. Japan’s Inpex Holdings Inc. and KazMunaiGaz couldn’t be reached for comment.

Kashagan is increasingly evoking parallels with Sakhalin II, the massive oil-and-gas project in Russia’s Far East that last year became a symbol of the rising tide of resource nationalism in oil-producing countries. Sakhalin’s operator, Royal Dutch Shell, was forced to cede a majority stake to Russian energy giant OAO Gazprom after local regulators applied pressure.

A person involved in the Kashagan negotiations stressed that if KazMunaiGaz acquires a bigger stake in the consortium, it would pay a “real, commercial” price for it. He also said the government appeared unlikely to press environmental and tax claims it made against the consortium this summer. In August, Kazakh authorities threatened to suspend work at Kashagan over alleged ecological infringements.

The person said Kazakhstan would also seek to reduce the Kashagan “uplift,” an incentive found in several taxation regimes in which the government allows oil companies to charge additional depreciation against their profits above the actual investment.

KazMunaiGaz has been a part of the Kashagan consortium since 2005. Two years earlier, Britain’s BG Group PLC announced its intention to leave the project and arranged to sell its stake to two Chinese companies. The other partners exercised their pre-emption rights, saying they wanted to divide the stake among themselves, but KazMunaiGaz laid claim to half the BG stake.

At the time, Eni said that having KazMunaiGaz as a partner would help speed the consortium through nettlesome regulatory procedures.

Write to Guy Chazan at [email protected] and Gabriel Kahn at [email protected]

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