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The Wall Street Journal: Kashagan Disputes Continue As Oil Field’s Partners Agree to Pay for Delays, A Valuation Hits a Snag

December 22, 2007; Page A6A

A Western consortium developing one of the world’s biggest oil fields agreed to pay the government of Kazakhstan as much as $4 billion in compensation for cost overruns and production delays, according to people close to the negotiations.

Another key part of a final settlement of the long-running dispute over the Kashagan oil field, however, is proving more elusive. All of the partners have agreed to give Kazakh state oil and gas company JSC NC KazMunaiGas a larger stake in the Kashagan consortium. But one of them, Exxon Mobil Corp., is unhappy with the price that KMG is offering.

A spokesman for Exxon, Gannt Walton, said the U.S. company was “not opposed” to KMG taking a bigger share and “continues to work with the Republic of Kazakhstan to seek an amicable solution on the appropriate value for the equity.”

The Kashagan dispute has cast a shadow over a region once touted as the world’s most promising new oil province. There are fears that Kazakhstan is joining the club of petro-states, such as Russia and Venezuela, that have sought much greater state control of their natural resources at the expense of foreign investors.

Kashagan was the biggest oil discovery in 30 years when it was found in the northern part of the Caspian Sea in 2000. But efforts by the lead operator, Italy’s Eni SpA, to develop the field have been hampered by spiraling costs, the challenge of working in the often icy, shallow waters of the Caspian, and by high levels of toxic hydrogen sulfide in the oil that have to be separated and disposed of.

Kazakhstan was enraged earlier this year when Kashagan’s production start-up date was pushed back to 2010 — five years later than initially anticipated — and its estimated costs raised to $136 billion from $57 billion.

That meant Kazakhstan will have to wait much longer than expected to see significant revenue from the venture. Under the production-sharing agreement governing Kashagan, the investors can recover their costs before they are obliged to distribute substantial parts of the profit to the government.

Kazakhstan insisted on renegotiating the production-sharing agreement, with officials demanding massive compensation payments and a bigger role for KMG. In a move clearly designed to put pressure on Eni, Kazakh legislators passed a law this year allowing the government to intervene in or cancel oil and gas contracts if they were seen as a threat to national security.

People close to the talks said the consortium agreed to pay Kazakhstan between $2 billion and $4 billion in compensation, depending on a number of scenarios based on the oil price. It also agreed to allow KazMunaiGas to become a major shareholder in the project, virtually doubling its current stake. KMG currently holds an 8.3% interest in the consortium, while Eni, Exxon, Royal Dutch Shell PLC and Total SA have 18.5% each, ConocoPhillips has 9.3%, and Japan’s Inpex Holdings Inc. has 8.3%.

Each partner would have to surrender some of its stake to make room for KMG, according to one of these people. He said ENI, Exxon, Shell, Total and KMG would each end up with roughly 16%. “We’re very close to a final agreement,” this person said.

Talks between the two sides have dragged on for months now, and three deadlines — the latest of them Friday — have come and gone without a settlement.

However, the Eni-led consortium released a statement Friday saying the latest round of talks had made a “significant step forward” and the two sides had “defined the terms of a settlement,” which would be finalized early next year.

•  The News: A Western consortium developing one of the world’s biggest oil fields agreed to pay Kazakhstan’s government as much as $4 billion to compensate for cost overruns and production delays.

•  The Background: The long-running dispute has cast a shadow over a promising new oil region.

•  The Outlook: Another key part of a final settlement is proving more elusive.

Write to Guy Chazan at [email protected] and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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