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The Wall Street Journal: Kashagan Dispute Ends As State Doubles Stake

January 14, 2008; Page A3

LONDON — A long-running dispute over one of the world’s biggest oil-development projects was finally resolved last night with an agreement to let the Kazakhstan state oil and gas company double its stake in the multibillion-dollar venture.

But the amount JSC NC KazMunaiGaz will pay for its increased share shows how little leverage Western companies have these days when faced with oil-rich countries emboldened by soaring crude prices and determined to regain control of their natural resources.

The agreement brings to an end a quarrel that threatened the future of Kashagan, a vast oil field in the Caspian Sea that has some 13 billion barrels of recoverable reserves, and which was the biggest oil find in 30 years when it was discovered nearly eight years ago. “With this successful end to the long and difficult negotiations which began last August, the way forward for the Kashagan project has been found,” KMG said.

Under the agreement, KMG’s stake in the consortium will rise to 16.6%, at the expense of all the other partners. The other big shareholders — Eni SpA of Italy, Exxon Mobil Corp, Total SA of France and Royal Dutch Shell PLC — will also each hold 16.6%, down from 18.5%. The remaining two shareholders, ConocoPhillips and Inpex Holdings Inc. of Japan, will also see their stakes diminish.

According to a person close to the talks, the Kazakhs will pay $1.78 billion for the additional 8% — a figure analysts said doesn’t fully reflect Kashagan’s significance. The project is expected to cost $136 billion over its 40-year life and will ultimately pump 1.5 million barrels of oil per day.

Some analysts said the partners couldn’t have expected more for the stake. “The below-market value of this transaction makes up for what the Kazakhs perceive as the bargain price the majors originally paid for this concession,” said Alex Turkeltaub, managing director of Frontier Strategy Group, a Boston-based consultancy focused on emerging markets. “This deal allows the Western partners to maintain operational control of the project while satisfying the Kazakhs as well.”

The Eni-led consortium agreed to make an additional payment to Kazakhstan of between $2.5 billion and $4.5 billion, depending on the oil price, according to the person close to the talks. The payment included a one-off bonus of $300 million, with the rest comprising a royalty, he said. Kazakh officials couldn’t be reached for comment late yesterday.

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