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The Wall Street Journal: Eni to Cede Key Role in Kashagan Oil Field

Company Won’t Be
The Sole Operator
With Deal on Project

January 15, 2008

Energy company Eni SpA of Italy will cede its role as sole operator of the huge Kashagan oil field in the Caspian Sea as part of a deal to end a long-running dispute with Kazakhstan over one of the world’s biggest oil-development projects.

From 2011, when oil finally starts to flow from Kashagan, Eni will jointly operate the field with Royal Dutch Shell PLC, Exxon Mobil Corp. and Total SA of France, the other major shareholders in the Kashagan consortium. The renewed operational arrangement is part of a deal signed late Sunday in the Kazakh capital Astana, according to Kazakh officials.

A Kazakh official said Eni was partly to blame for the cost overruns and production delays that have plagued Kashagan. “Eni bears some responsibility for the fact that some of the decisions taken on Kashagan were wrong,” said Daulet Ergozhin, the Kazakh deputy finance minister, in an interview. “The other partners need to be much more hands-on and pool their knowledge and expertise so that the project gets back on track.”

An Eni representative said the company had no comment.

Some analysts, however, played down the change in management, saying it was common for partners to swap the operator role on a big project as it moves from the development phase into production.

“Kashagan is an extremely complex project, and Exxon `Mobil and the other consortium members have reached an agreement on a strengthened operating model,” said Exxon Mobil spokesman Gantt Walton.

Under Sunday’s agreement, Eni and its western partners agreed to double the Kazakh state oil and gas company JSC NC KazMunaiGaz’s stake in the Kashagan consortium. KMG bought the additional 8% for $1.72 billion, a figure considered to be far below its market value.

The consortium also agreed to make an additional payment to Kazakhstan of between $2.5 billion and $4.5 billion, depending on the price of oil.

The dispute has underlined the complexity and high stakes for projects like Kashagan. With recoverable reserves estimated at 13 billion barrels, the field is one of the largest finds of the past 30 years. But extracting the oil, which is laced with high concentrations of deadly hydrogen sulfide, from underneath the shallow, often icy waters of the Caspian has proven more difficult and more costly than previously imagined.

Eni had initially predicted that oil would begin flowing from Kashagan by 2005. But the timetable has been postponed repeatedly, and now Eni concedes it is unlikely that they will begin pumping oil before 2011. Meanwhile, Kashagan’s price tag has soared to an estimated $137 billion from an initial $57 billion.

Those difficulties turned what had once been a prize project for Eni into a persistent management headache. In 2001, when it won the role as sole operator of Kashagan, beating out much larger Exxon and Shell, Eni was still considered a scrappy upstart in the industry. The size and prestige of Kashagan in part helped Eni break into the ranks of top-tier oil firms.

As the price of oil soared, however, Kazakhstan, like many other petro-states, began to agitate for a new contract with more favorable terms. At the same time, repeated delays and budget blowouts started to create tensions with Eni’s partners and with the Kazakh authorities.

The dispute with Kazakhstan had depressed Eni’s stock price by 6% over the past six months, according to a research note published by Credit Suisse.

Eni’s agreement to cede some of its operational control of Kashagan to its partners is more of dent to the firm’s reputation than to its balance sheet.

“Shell, Total and Exxon would have had a big say in how Kashagan was managed even before this happened,” said Tom Ellacott, an analyst at consultancy Wood Mackenzie. “This project was always massively important for all the participants, and indeed for the future of world oil supply.”

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

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