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The Wall Street Journal: Exxon Knows When to Fold

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The Wall Street Journal: Exxon Knows When to Fold

COMMENT FROM breakingviews 

Lone Holdout Gives Approval
To Save Deal With Kazakhs
Over Kashagan Oil Field

January 15, 2008

Exxon Mobil finally blinked in its showdown with Kazakhstan over the Kashagan oil field. Exxon was the last of the deal’s partners to accept the less-advantageous contract terms acceded to by Italy’s Eni — the project’s leader — under Kazakhstan government pressure. Exxon recognizes that it can no longer afford to simply walk away from deals. So it may face more compromises to come.
 
Exxon isn’t known for being easily bullied. Last year, it said adios to Venezuela after Hugo Chávez tried to strong-arm it into renegotiating its contracts. Earlier, it walked away from a deal to develop natural-gas wells in Saudi Arabia after disagreeing over terms.

But with choice projects becoming rare, Exxon Chief Executive Rex Tillerson has had to rethink his company’s Texas-tough negotiating tactics.

And Kazakhstan was one of its biggest challenges. Last summer, the government tore up the contract it signed with Eni, Exxon and other oil companies in 1997 to develop its 13 billion barrel Kashagan oil field.

By the fall, Eni had negotiated a new deal giving the Kazakhstan government a bigger stake and some cash up front.

Eni couldn’t afford to lose this project, as it is by far the largest one in its portfolio. Royal Dutch Shell, another partner, also needed the reserves. But Exxon balked, putting the project in jeopardy.

In the end, Exxon didn’t want to be left out of one of the few remaining known major oil-field developments. The project was two years behind schedule and was costing Exxon millions of dollars in forgone revenue.

The Irving, Texas, company may worry that giving in to Kazakhstan will embolden other countries.

In reality, in a world where only 6% of known oil reserves are available for private-sector companies to exploit, government-controlled oil companies hold most of the cards.

–Cyrus Sanati and Richard Beales

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