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Financial Times: Kazakhstan reaches Kashagan accord with consortium

By Ed Crooks In London and Isabel Gorst in Moscow
Published: January 13 2008 23:40 | Last updated: January 13 2008 23:40

Kazakhstan agreed a deal with an Eni-led consortium on Sunday night to develop the Kashagan oilfield.

The consortium – which includes ExxonMobil of the US, Royal Dutch Shell and Total of France – agreed to pay Kazakhstan $2.5bn-$4.5bn in compensation for the project’s late start.

It will also sell shares to KazMunaigas , so the Kazakhstan national oil company’s stake can be doubled to 16.8 per cent, equalling the holdings of the largest western members of the consortium. KMG will take a bigger role in running the project.

Talks between the consortium members and Karim Massimov, prime minister of Kazakhstan, continued late into the night in Astana, the Kazakh capital.

Kashagan, in the north Caspian sea, is the biggest oilfield to have been discovered since the 1960s, with reserves of up to 9bn barrels of oil equivalent. But its development presents technical difficulties and has been plagued by delays and cost overruns.

The consortium led by Italy’s Eni, presented a revised development plan last year delaying first production by two years until 2010 and doubling the first phase costs to $20bn. Separately, Kazakhstan said the full cost of Kashagan’s development had ballooned to $136bn.

Under the terms of the production-sharing contract at Kashagan, investors can delay paying Kazakhstan royalties until development costs are recovered.

The Kazakhstan government began to apply pressure to the consortium last summer to force a renegotiation. Legislation allowing the government to annul natural resource contracts deemed damaging to national interest intensified pressure on the Eni group to settle.

Sunday’s deal is similar to an agreement reached by the consortium, with the exception of Exxon, last month.

The US company was reported to have refused to sign because it was unhappy about the valuation placed on its stake. Under Sunday’s deal, KMG will pay $1.78bn for the shares it is buying, estimated to be about half their fair market value.

It will receive equity from consortium members in proportion to their holdings. KMG said in a statement: “With this successful end to the long and difficult negotiations . . . the way forward for the Kashagan project has been found.”

The contract expires in 2041. The level of compensation paid to Kazakhstan will vary with the oil price, from $2.5bn at $55 a barrel to $4.5bn at $85 a barrel.

Kashagan, one of the only untapped fields in the world with the potential to produce more than 1m barrrels a day of oil, is crucial to Kazakhstan’s plan to triple oil production within a decade.

Copyright The Financial Times Limited 2008

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