Kazmunaigaz Says Kashagan Is a Done Deal, At Last

Talks and More Talks Prove Successful

More than four months since the government ordered a halt to work on the Kashagan oilfield project in a dispute with Agip KCO over its plans for development of the massive offshore field, Kazmunaigaz, the Kazakh state oil company and a minority stakeholder in the project, said that a deal has finally been reached to end the dispute (see "Related Articles" below). In a short statement, Kazmunaigaz said that, "With this successful end to the long and difficult negotiations which began last August, the way forward for the Kashagan project has been found." The firm said that a new memorandum of understanding (MoU) had been signed by the members of the Agip KCO consortium that "sets forth the agreement of all private contracting companies to transfer equity to Kazmunaigaz's subsidiary, bringing its participating interest in the PSA equal to that of the largest shareholders as of January 1, 2008."

Few details on the MoU were released, but a press conference slated for later in the day was expected to clarify details on the agreement. Kazmunaigaz officials said that the company will hold a stake of 16.81% in Agip KCO, with the four largest partners in the consortium—Eni, Total, ExxonMobil, and Shell—all ceding parts of their stakes (previously 18.52%; see table). The other partners in the project, ConocoPhillips and Inpex, were also expected to reduce their stakes in the consortium to make more room for Kazmunaigaz. According to a report in the Wall Street Journal, Kazmunaigaz will pay US$1.78 billion to increase its stake as part of the deal.

Although this figure is well below the actual market value of the additional stake in Agip KCO that Kazmunaigaz is receiving, this reflects the fact that Agip KCO's shareholders were under pressure from the government to cede their stakes as compensation for the delay in the start of oil production from Kashagan. Indeed, while much of the focus has been on the seeming "power play" by the government in demanding a larger share of the project, the genesis of the four-plus-months' dispute was the consortium's announcement of this delay, from 2008 until mid-2010. After initially threatening to remove Eni as operator of the project, the government changed its tune and focused on pressuring the consortium into compensating Kazakhstan for the delay in the flow of revenues from Kashagan due to the new timetable. As a result, in addition to Kazmunaigaz boosting its stake in Kashagan, the government is now reportedly slated to receive between US$2 billion and US$4 billion from Agip KCO as compensation, according to a Dow Jones report.

Outlook and Implications

Although the outlines of a deal to resolve the dispute have been in place for at least a month, actually clinching a deal has been elusive. ExxonMobil, in particular, had been an obstacle, but the U.S. supermajor appears to have consented to the deal with Kazmunaigaz agreeing to pay for increasing its stake in the field. Moreover, ExxonMobil appears to have achieved an internal victory in the consortium, as Italian daily Corriere della Sera reported today that Eni, Total, ExxonMobil, and Shell will co-manage the project from 2010 as part of the deal reached over the weekend. The U.S. supermajor had made no secret of its displeasure with the way that Eni has operated Kashagan, at which costs have escalated from US$57 billion to US$136 billion, according to the Kazakh government.

Resolution of the Kashagan dispute will hopefully put the project back on track finally, although the extended talks to resolve the most recent hang-up will almost surely push back the timetable for the start of oil production until 2011. Indeed, Kazakh Energy and Mineral Resources Minister Sauat Mynbayev told reporters today that the government now believes the start-up of Kashagan output "will happen at the end of 2011 because we have spent around half a year on the dispute." Still, so long as the Kazakh government is happy with the new deal and the Agip KCO consortium resumes progress on developing the oilfield, the successful resolution of the dispute will be a boon for the oil market, putting Kashagan back on track to begin producing oil early next decade. Peak output from Kashagan will add 1.5 million b/d of new oil to the world market, with initial output of around 370,000 b/d. With the Kazakh government and Agip KCO now putting their differences behind them, the hope is that Kashagan makes headlines in the future due to booming oil production from the field rather than any further problems between the two parties.

Related Articles

Kazakhstan: 10 January 2008: Key Kashagan Meeting Delayed; Kazakhstan Levies Tax Claim Against Agip KCO

Kazakhstan: 9 January 2008: Report Suggests Deal on Kashagan Dispute in Kazakhstan Pending, Will Include US$3.5-bil. Compensation

Kazakhstan: 24 December 2007: Eni-Led Consortium, Kazakh Government Close Gap in Kashagan Dispute Talks; Deal Seen in Early 2008

Kazakhstan: 22 October 2007: Kashagan Talks Reportedly Hung Up on ExxonMobil Opposition to Reducing Stake in Project

Kazakhstan: 26 September 2007: Parliament Passes Law Allowing Kazakh Government to Break Oil Contracts

Kazakhstan: 3 September 2007: Kashagan Suspension Could Be Extended as Kazakh Government Seeks Billions in Compensation for Delay

Kazakhstan: 28 August 2007: Eni Feels the Heat as Kazakh Authorities Maintain Pressure in Kashagan Dispute

Kazakhstan: 27 August 2007: Kashagan Work Halted for Three Months by Kazakh Government; Eni Remains Upbeat on Potential Compromise

Kazakhstan: 22 August 2007: Pressure Builds on Eni as Kazakh Government Threatens Kashagan Halt Due to Environmental Violations

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