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Bloomberg: Eni-Led Group Cedes Kashagan Oil Stake to Kazakhstan (Update4)

By Nariman Gizitdinov and Lucian Kim

Jan. 14 (Bloomberg) — Eni SpA and its partners in Kashagan, a project to develop the world’s biggest oil discovery in 30 years, ceded a greater stake to Kazakhstan after the government passed a law enabling oil contracts to be annulled.

The foreign companies signed an accord to transfer equity and give state-run KazMunaiGaz National Co. a stake equal to the largest shareholders as of Jan. 1, KazMunaiGaz said in an e- mailed statement today, without being more specific. A spokeswoman for Rome-based Eni said an agreement was reached, asking not to be identified because of company rules.

Kazakhstan demanded renegotiation of the Kashagan agreement after the project was hampered by delays, technical complications and cost overruns. The government is following in the footsteps of neighboring Russia, which a little more than a year ago took control of Royal Dutch Shell Plc’s Sakhalin-2 project in the Pacific Ocean after pressure by regulators.

“While this could be dismissed as resource nationalism, it’s actually sovereign nations reestablishing their negotiating positions,” Steven Dashevsky, co-head of equities at Moscow- based UniCredit Aton, said before today’s statement. “They’re behaving as any rational economic agent would.”

Kazakhstan and Russia, struggling with the economic aftermath of the collapse of communism, wooed investment and technology by signing production-sharing agreements with foreign companies in the 1990s. As costs began to soar on higher metals prices and crude oil set fresh records, deals signed in leaner times came under review.

Astana Restaurant

Kazakh Prime Minister Karim Masimov, Eni Chief Executive Officer Paolo Scaroni and Exxon Mobil Corp. Chief Executive Rex Tillerson were among those who met for more than nine hours in a restaurant in Astana, the Kazakh capital, yesterday to reach the deal.

Eni currently operates the development through its local unit Agip KCO. The Italian company, along with Exxon Mobil, Total SA and Royal Dutch Shell Plc, each hold 18.5 percent of Kashagan, while ConocoPhillips has 9.3 percent. KazMunaiGaz and Japan’s Inpex Corp. have each held 8.3 percent until now.

Dinara Shaimardanova, an aide to Kazakh Energy Minister Sauat Mynbayev, said Dec. 25 that Exxon opposed increasing the Kazakh stake.

Janet Grothe, a ConocoPhillips spokeswoman, today declined to comment.

Eni has shed 9 percent in the last six months in Milan trading, compared with the 9.2 percent decline in the 20-member Bloomberg Europe Energy Index.

`Difficult Negotiations’

“With this successful end to the long and difficult negotiations, the way forward for the Kashagan project has been found,” KazMunaiGaz said in its statement. The giant offshore development in the Caspian Sea is crucial for Kazakhstan to achieve its goal of doubling crude output by 2015.

Eni projects that output from the field will reach 1.5 million barrels a day. The government cut its crude output forecast to 2.6 million barrels a day in 2015 from a previously estimated 3.2 million barrels a day because of the Kashagan delays.

Kazakhstan, the second-biggest oil producer in the former Soviet Union after Russia, was seeking to double its stake in Kashagan to 16.8 percent, the Energy Ministry said last month. The government demanded a greater share of profit as compensation for delays that could prolong by as much as 11 years the time it will take for the country to see returns from the field. The government has said costs have more than doubled the price for developing and running the project to $136 billion.

Cut Returns

The delays and cost overruns at Kashagan will cut Kazakhstan’s returns from the project by more than $10 billion over the 40-year life of the field, Deputy Finance Minister Daulet Ergozhin said Oct. 20.

The parties “will now proceed to draft and execute the appropriate amendments” to the production sharing agreement, KazMunaiGaz said in the statement today. “In the meantime, operations will proceed in accordance with the new arrangements.”

Kazakhstan began pressuring the Eni-led project after the Energy Ministry said in May that Kashagan wouldn’t start producing oil until 2011, instead of 2008 as originally planned. The ministry then revised down its production targets.

Kazakhstan published amendments to its subsoil law on Nov. 5, allowing the government to cancel oil projects such as Kashagan if developers “significantly violates the obligations set up by the agreement or the program of works.” The amended law allows the state to annul oil agreements if the contractor doesn’t resolve in a timely manner any obstacles identified by the government as reasons to halt a project.

2004 Fine

Eni and its partners paid a $150 million fine in 2004 after delaying the start of oil production at the Kashagan field to 2008 from 2005. The talks to alter Kashagan’s 1997 contract took place after rising engineering costs and safety considerations forced the group to delay output a second time to the third quarter of 2010.

Kazakhstan ordered Eni to stop work at Kashagan on Aug. 27 for at least three months because of “environmental violations.” State officials also instructed Eni to halt construction of a refinery for alleged breaches of safety rules. Both complaints were subsequently resolved.

To contact the reporters on this story: Nariman Gizitdinov in Astana through the Moscow newsroom at +7 [email protected] ; Lucian Kim in Astana through the Moscow newsroom at 7748 or [email protected]

Last Updated: January 13, 2008 23:46 EST

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