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New Europe: Don’t Mess with Texas: Exxon’s tough play in Kashagan

BBC image of ExxonMobil HQ Iving TX

ExxonMobil corporate headquarters in Irving, Texas

Author: Kostis Geropoulos
8 December 2007 – Issue : 759 

At the end of 2006, when Shell was effectively forced to yield majority control over the huge Russia’s Sakhalin II field to Gazprom, Shell CEO Jeroen van der Veer stood up at the press conference and smiled through gritted teeth.

But less than a year later, Shell was back with Dutch Prime Minister Jan Peter Balkenende asking the Russian government to allow them to participate in the development of the richest gas fields on the Yamal Peninsula located above the Arctic Circle.

The example of Sakhalin shows that western companies and the western governments can act tough when they are muscled out of their stakes but once the deal is done they quickly accept it and move on.

But not ExxonMobil! The Texas-based company, already embroiled in a dispute in Russia’s Sakhalin-I and Venezuela’s Orinoco fields, is a tough negotiator. In Kazakhstan, ExxonMobil seems determined to stick to its guns over attempts by state company KazMunaiGaz to increase its share in the Kashagan project, the largest oilfield in the world. “ExxonMobil has disagreed with the opinion of other participants of the project,” Kazakh Minister of Power and Mineral Resources Sauat Mynbaev told reporters in Astana on December 4. The rest of the field’s partners, who hold stakes of similar size to Exxon –- operator ENI, Total and Shell — have thrown in the towel, agreeing to clip their collective shares a little in the field so that Kazakhstan can become a full partner. Kazakhstan has also been pressing for KazMunaiGas to be joint operator for the consortium.

The dispute over Kashagan with the government of Kazakhstan, which blew up over the summer, threatens ENI with a reduction in its stake in the project and less favourable financial terms.

It was earlier reported that ExxonMobil wants to become Kashagan field operator but the company’s media advisor, Margaret Ross, told New Europe “that’s really a speculative question and we really don’t speculate.” Exxon also participates in Kazakhstan’s huge Tengiz oil field.

Kazakh leader Nursultan Nazarbayev on December 6 met senior officials of ExxonMobil, but little emerged from behind the closed doors of the presidential palace meeting.
So far it looks like Kazakhstan is following Russia’s Sakhalin-II model. “We’re definitely seeing a clear follow through in the Caspian countries of what Russia did in terms of energy and I think it’s absolutely inevitable that the countries of Central Asia will follow the Russian lead and will follow that model where state companies — Russian companies or Kazakh companies — have 51 percent control and then the other 49 percent with an operational company and some other private investors,” Chris Weafer, chief strategist at Uralsib investment bank in Moscow, told New Europe. “Obviously Exxon and the others will resist very hard because presumably they would think they are in a stronger position with Kazakhstan than with Russia because Kazakhstan is a smaller country and requires more foreign investment than Russia does, but I would actually expect Kazakhstan … to go all the way to the wire.”

Both sides have a strong case. On one hand, Exxon would be making the case that if they would leave then Kashagan would become almost untouchable by other western companies. On the other hand, Kazakhstan argument would be that there are companies in China and Russia with very deep pockets that would welcome the opportunity to step in and do it, maybe less efficiently, maybe slower but it can be done.

“That’s the standoff position, but Exxon would not want to leave this because the Kashagan field is the largest undeveloped oil field in the world so no oil company would want to walk away from that,” Weafer said.

At the same time, the Kazakh government would much rather have Exxon and ENI stay because clearly western companies have more experience with these types of fields, better technology, etc.

The Kashagan oilfield was first discovered by the Soviets more than 30 years ago but it remained undeveloped before the collapse of the Soviet Union.

Chevron Texaco former vice chairman of the board, Richard H. Matzke, told New Europe during a trip to Astana, he is finally convinced that Chevron made the right decision to choose to develop Tengiz over Kashagan 15 years ago. In addition to political problems, the shallow water, extreme temperatures (below minus 30°C in winter), huge amounts of associated gas and sulphur make Kashagan even harder to develop. As he pointed out, “You drill through a layer of thick salts, hit gas and then go to hell.”

 http://www.neurope.eu/articles/80633.php

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