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Financial Times: Foreign delegation in push to calm dispute over Kazakh oilfields

By Isabel Gorst in Almaty
Published: November 27 2007 02:00 | Last updated: November 27 2007 02:00

A high ranking foreign delegation arrived in Astana yesterday to discuss Kazakhstan’s demands for compensation for production delays and soaring costs at the Kashagan oilfield in the Caspian Sea.

A group led by Italy’s Eni is under intense pressure to meet a November 30 deadline set by Kazakhstan for amicable settlement of the dispute which erupted after the Italian energy group presented a revised development plan for Kashagan, one of the world’s biggest oilfields.

The plan postponed first production by two years until 2011 and increased Eni’s estimate of the project’s cost to $136bn from an earlier $57bn.

Julia Nanay, a senior partner at the consultancy firm PFC Energy, said: “There is unlikely to be an early solution to a problem involving so much oil, capital and risk to the reputations of both the oil majors and Kazakhstan.”

Kazakhstan complains that consortium infighting has exacerbated the mismanagement of the Kashagan project and now threatens to derail settlement of the dispute.

“They hate each other. Each company has its own agenda and they are constantly trying to trip one another up,” said one Kazakh official.

Stefano Cao, the head of Eni’s exploration and production division, is attending this week’s talks alongside vice-presidents of Exxon, Royal Dutch Shell, Total, ConocoPhillips and Inpex of Japan.

Experts said Kazakhstan was unlikely to invoke recently passed legislation empowering the government to terminate natural resource contracts deemed harmful to its strategic interests.

However, the new law signalled Kazakhstan’s determination to exact compensation from the Eni group for failing to honour earlier contract commitments.

Kazakhstan is demanding a larger stake for KazMunaigas, the state oil company, in the project, and a revision both of the bonus payments paid to the government and of the interest rates known as “uplift” added by investors to development costs.

The republic is also seeking financial compensation for the production delay at Kashagan which has undermined its plan to enter the ranks of the world’s top 10 oil exporters.

Exxon has asked for an extension of the Kashagan contract beyond 2041 in exchange for allocating KazMunaigas a larger share in the project.

Eni has been the target of bitter recriminations from within the consortium about its operatorship of the Kashagan project, according to industry sources.

Some companies are understood to be considering exiting the project altogether.

Ms Nanay said: “It would be understandable if some companies decided Kashagan was just too big a bullet to bite and opted to pull out”.

Karim Massimov, Kazakhstan’s prime minister, said Western concern that the republic was using the Kashagan dispute as an opportunity to nationalise oil resources was unjustified.

“Kazakhstan honours, and will continue to honour, the security of contracts.

“But I would like to remind you that signed contracts should be honoured by both parties,” he said last week during a visit to Karachaganak, another giant Kazakh foreign oil development.

Copyright The Financial Times Limited 2007

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