Joanna Lillis
Thursday, January 24, 2008   

The renegotiation of a deal covering the development of the Kashagan oil field in Kazakhstan indicates that the balance of power in the Caspian Basin energy game is tipping.

Kazakhstan clinched the new deal with a foreign-dominated consortium, led by the Italian energy giant Eni SpA, on January 13. The agreement followed a standoff over rising costs and delays in oil production that had dragged out for six months. [For background see the Eurasia Insight archive]. In the days following the announcement, analysts proclaimed the big winner to be the Kazakhstani government.

But if independent analysts are hailing the new deal as a coup, Kazakhstan’s leaders believe it represents the restoration of a genuine partnership. “Now the balance of justice has been restored,” President Nursultan Nazarbayev said in remarks broadcast by Khabar TV, adding that the agreement was a compromise that satisfied all interests. Meanwhile, the Megapolis newspaper carried a hubristic headline, “Great Oil Victory,” over a story about the new pact. “KazMunayGaz and the government have shown who is boss,” the newspaper article proclaimed.

Under the terms, Kazakhstan’s national energy company, KazMunayGaz (KMG), will double its stake in the Kashagan project and gain extra income of up to $20 billion over the life of the project. KMG is expected to spend roughly $1.78 billion in obtaining shares from the consortium’s Western partners – a price that some analysts pegged at way below market value. “We have agreed that Kazakhstan will purchase on a proportional basis from all existing shareholders in the project an extra stake, and as a result the country’s share in the project will be 16.81 percent,” Energy Minister Sauat Mynbayev said in comments broadcast by Khabar TV.

The deal means KMG’s stake will be equal to those held by the largest Western shareholders, including Eni, ExxonMobil, Royal Dutch Shell and Total. Each energy giant will reduce their stake in the consortium from 18.52 percent to 16.81 percent. The other investors – ConocoPhillips with 9.26 percent and Inpex with 8.33 percent – will sell KMG the remaining 1.64 percent. The deal runs through 2041.

Kashagan represented the largest potential oil jackpot found in 35 years when it was discovered in 2000. The field, located in the northern Caspian Sea, has an estimated 13 billion barrels of recoverable reserves. In 2007, the consortium announced that development costs would balloon to $136 billion – more than double the original estimate – and that the start-up date would slip from 2008 to 2010. [The new deal now sets a later target of 2011]. The consortium had already delayed the original production date from 2005 to 2008.

The Kazakhstani government in 2007 reacted furiously to the latest over-runs and delays. Officials complained that the delay would force the country to downscale output targets from 3.2 million barrels per day in 2015 – by which time Kazakhstan hopes to double oil output and become one of the world’s top 10 energy producers – to 2.6 million barrels. Officials also said the delays were so significant as to jeopardize the government’s election-year pledges to boost social infrastructure. [For background see the Eurasia Insight archive].

“My sense is that [the government] does want to pump some money into Kazakhstan and its economy, building up its infrastructure. … The point is [officials are] not getting anything until oil production starts and they’re angry,” Dr Ustina Markus of the Kazakhstan Institute of Management, Economics and Strategic Research told EurasiaNet.

The developers have blamed the rising costs and delays on logistical challenges at Kashagan, where the oil has high sulfur content and has to be extracted from a deep, high-pressure reservoir in shallow water. Drifting ice during the winter is also a major development obstacle. “The Kashagan project is a unique combination of technical complexity and environmental challenges,” the consortium explains on its website. “The size and the variety of operations make it one of the greatest challenges of the petroleum industry worldwide.”

Analysts broadly suggested that both sides had gained. While it was obvious what the Kazakhstani side gained, some experts characterized the consortium’s benefit as ‘something is better than nothing.’

“The deal has allowed a much fairer distribution of shares than what was previously with KMG having only 8.33 percent of shares,” Maria Disenova, an analyst at the Institute for Economic Strategies-Central Asia, told EurasiaNet. “From the other side, the participants of the consortium were really threatened with termination of the production sharing agreement, so this settlement is really a much better deal for them.”

Disenova said she expected the Kazakhstani government to be more assertive in its future dealings with large-scale investors. “The Kashagan case has set a precedent which the government is likely to follow in other cases,” she said. “Also, the Kazakh government has let everyone know that it would act harshly in the event of violation of a production sharing agreement by passing amendments to the mineral resources law which foresee the possibility for the government to change contracts.”

Other observers believe that Astana will continue to exercise restraint, if for no other reason than because the country is unable to develop its natural resources independently. “They still need the foreign investment; they still need the expertise,” said Markus. “It’s basically the oil companies that have developed the special expertise in these fields. [Kazakhstani officials] can’t simply afford to make Kazakhstan this pariah for foreign investment.”

Editor’s Note: Joanna Lillis is a freelance writer who specializes in Central Asia.

Posted January 23, 2008 © Eurasianet and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.


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