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International Herald Tribune: Kazakhstan seeks settlement on oil field delay

By David L. Stern Published: December 7, 2007

ALMATY, Kazakhstan: Kazakhstan wants either to raise its stake or receive compensation for cost overruns and delays in the Kashagan offshore field, the world’s largest oil find in more than three decades, the Kazakh president, Nursultan Nazarbayev, said Friday.

Nazarbayev, speaking after a regular meeting with foreign investors in the capital, Astana, said he was not seeking to replace Eni of Italy as project operator. That deflated speculation that Kazakhstan wanted the leading role for its own state company, KazMunaiGaz, which is also a consortium member, or to assign it to another company, possibly ExxonMobil.

“There are different ways” of settling the matter, Nazarbayev said, according to Reuters. “Either paying the sum we have set or Kazakhstan raises its participation. There is no discussion about changing the operator.”

Nazarbayev did not state the sum of money.

The Kazakh president struck a conciliatory note, in a possible attempt to dispel fears of that his country was exhibiting more resource nationalism. “Our government is holding talks with everyone to achieve a solution and come to an agreement peacefully,” Nazarbayev said, according to Reuters. “We are not talking about abandoning the contract.”

Nazarbayev’s comments are the most prominent indication of the substance of the high-stakes negotiations between the Kazakh government and the multinational consortium developing Kashagan. Information from the talks has dribbled out, mostly from Kazakh officials. Consortium members, for their part, have declined to discuss any details publicly.

The talks have been extended twice and are now in their fifth month. A new deadline to resolve the issue has been set for Dec. 20.

Kazakh authorities raised objections in July after Kashagan’s start-up expenses and overall costs nearly doubled, from $57 billion to a reported $137 billion, and the date for first production was pushed back from 2005 to 2010. Because of the overruns and delays, officials said, the government would have to postpone plans for large development projects and expanding the country’s energy sector.

The Kashagan consortium also includes Royal Dutch Shell, ConocoPhillips, Total of France and Inpex Holdings of Japan. With some 13 billion barrels of estimated recoverable reserves, it is crucial to the West’s aspiration to develop oil suppliers outside the Organization of Petroleum Exporting Countries.

Kazakh authorities initially suspended the project on environmental grounds over the summer. Subsequently, they threatened at different points to fine the consortium $10 billion dollars, replace Eni as operator, or force Eni to share operator duties with KazMunaiGaz, or KMG.

This last week, Kazakh officials announced that all consortium members except ExxonMobil had agreed to reduce their own stake in order to raise KMG’s 8.3 percent share to equal the 18.52 percent of the main consortium partners – Eni, ExxonMobil, Shell and Total. Now, apparently, that is just one of the options.

Consortium members now say privately that they are dissatisfied with Eni’s management, and that they feel the Italian oil multinational was overly optimistic in its cost and development estimates.

In the company’s defense, Eni officials and analysts say that historically high prices for oil have driven up development costs by increasing the demand for support contractors.

The Kashagan field is also considered one of the world’s most logistically and environmentally challenging projects, as it is located in a remote, shallow-water corner of the Caspian Sea, and contains high amounts of hydrogen sulfide, a deadly gas.

http://www.iht.com/articles/2007/12/07/business/oil.php?WT.mc_id=rssbusiness

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