STUBBORN GIANT PENDING CHANGES

KazMunayGaz Seeks COPROPRIETORSHIP IN KASHAGAN

 

Discovered in 2000 in Kazakh Sector of the Caspian Sea (KSCS), Kashagan field might be truthfully called ‘a project of the century’. Kashagan is the largest of the fields of the kind ever discovered over the last 30 years around the globe. The world’s leading companies are rushing here today. Commercial production at the field is expected to reach 1.5 million barrels per day in 2019, more than in Angola or Qatar.

However, actual schemes of Kashagan field development melted like ice floats around offshore platforms at this field when the project operator, ENI of Italy, announced the delay and rise of project cost. Kazakhstan’s government was pretty displeased with the delay of Kashagan project implementation. The subsoil owner can be understood, the experimental and industrial development program rose to $14.8 billion last year from $9.8 billion in 2004 and to $57 billion in the early 2007; today it is already $136 billion. Thus, the project cost rose more than 13 times. Several times oil production commencement date has been postponed: once to 2007 from 2005, then to winter 2009, and now the year 2010 is stated. The time factor devaluates this 10-year-old contract, minimizing government’s revenues and increasing risks

 

Government is Adamant

We believe the economic balance was disturbed not in favor of Kazakhstan. Unless the parties within consortium agree to satisfy Kazakhstan’s requirements, we have a plan “B” to be advised later, said Prime-Minister of Kazakhstan Karim Masimov. The delay with commencement of production at Kashagan, its bringing to industrial capacity and considerable delay in its repayment, with account for its economic scale, can result in a significant reduction of scheduled rates of growth of national economy through the next decade and jeopardize long-term national economic programs, said Minister of Energy and Mineral Resources of Kazakhstan Sauat Minbayev during his meeting (September 11, 2007) with Paolo Scaroni, President of Eni, operator of Kashagan development Project.

Speaking to local journalists, Mr. Scaroni was quite reluctant. Right after his meeting with Akim of the Region Bergey Ryskaliyev he said: “There will be no comments on the situation at Kashagan field. All will be decided in Astana.” Mr. Scaroni took off from Astana to Moscow, where he had already spoken of other projects as well as of the implementation of the Strategic Partnership Agreement with Gazprom. Italian company has acquired a number of Russian production assets under this agreement.

Thus, it seems that Mr. Scaroni’s visit to Kazakhstan did not cause the desired breakthrough in solution of problems around Kashagan oilfield operated by Italian company. This is a good prove of serious intentions of Kazakhstan’s government.

Romano Prodi, Prime-Minister of Italy is arriving on the next peacemaking mission to Astana (October 7-9). However, this visit will make no good for the Italian operator: the decision is likely to have been made and all talks will be held at the cost of the compromise, but not its cancellation. The Lower House of Parliament of Kazakhstan has already drawn the revisions to the law guided by the dispute with Eni and other foreign investors concerning Kashagan oilfield, said one of MPs.

Kashagan Project is a key issue for the government in light of its plans to bring oil exports to the world markets to 3 million barrels per day by 2015 (comparable to Russia with its nearly 4 million barrels pre day total export in 2005). Having launched oil production at Kashagan, Kazakhstan can get a major ‘black gold’ supplier and at least join top five oil exporting countries. According to official estimations, Kazakhstan expects to obtain $60 billion of revenues over 40 years of production at Kashagan.

Adamant Astana has a good regulatory experience of disputes with foreign businesses. In 2004, the Parliament enacted the article giving the government a priority in redeeming free stocks in the oil industry. This trick very soon enabled KazMunaiGaz to acquire a minority stake in Kashagan. A year later, prior to the sale of Canada-incorporated and operating in Kazakhstan PetroKazakhstan to CNPC of China, this article helped KazMunaiGaz acquire a stock in this company as well.

The law will come in force after it is approved by the Lower House, Majlis, at the plenary meeting, by the Upper House (Senate) and signed by the President.

KazMunaiGaz NC JSC shall become the co-operator of Kashagan field development project, said Prime-Minister of Kazakhstan Karim Masimov. “In accordance with assignments and requirements set by President of our country KazMunaiGaz shall become the co-operator of the project”, said Prime-Minister.

To encourage investors, Prime-Minister said the government regarded situation with Kashagan as an individual case. “Regardless of the result, legal interests of potential and actual investors in Kazakhstan will not be hurt”, he said.

He also said the government ‘is going to adjust its position only towards those who do not comply with assumed obligations.’

Mr. Masimov did not provide any information on how new rights under the project will be delegated to KazMunaiGaz. “Percentage (of national company’s participation in Kashagan) is still early to talk of”, he said in the follow-up of the governmental meeting.

Daulet Yergozhin, Deputy Minister of Finance, assessed economic damage from operators of Kashagan oilfield in more than $40 billion.

Mr. Yergozhin said Kazakhstan intends to receive more than a $10 billion reimbursement from the consortium for the production delay. Yergozhin also said Kazakhstan’s government has some questions on the consortium’s tax contributions, so the scheduled audit is underway.

Recently, Mr. Minbayev and Mr. Masimov said Astana and the consortium will be holding the talks on ‘friendly resolution’ until October 22.

 

Technical issue

Complicated process solutions and work conditions at Kashagan are a weak justification of the operator’s activities. In wintertime, icebergs are formed on shallows of the Caspian Sea, which, driven by strong winds, can crash ordinary drilling platforms. Italian company representative compared Kashagan’s winter frosts with Arctic and summer heat with Africa. These factors combined with small sea depths in development area are complicating the cargo delivery. Furthermore, high formation pressure (850 bar), temperature (110°C), gas ratio and content of sulfur (15%) and mercaptane are also greatly complicating the development.

Therefore, the consortium is building artificial islands (blocks) to be used as an oil production base. Rocks transported from the onshore serve as construction material for these islands. The offshore structures will be connected to the mainland by three pipelines: 450,000 barrels per day (22.5 million tons) throughput oil pipeline; 6.6 bcma gas pipeline and a fuel pipeline.

The field development project schedules the reverse gas-sulfur injection; injection equipment will be installed on one of East Kashagan islands. The feature of gas injection at Kashagan is a higher pressure (up to 800 bar) and H2S saturation (up to 18%). The reverse injection of gas, the consortium specialists say, apart from sulfur utilization problem, will enable to increase the oil recovery factor.

The consortium attached a high significance to relations with regional environmental organizations and ecologists and, in particular, with an account of local ecological community concerns, promised to prevent the impact on populations of sea bears, sturgeons, beluga and other species of the Caspian fauna.

 

EU’s standing by

The situation over Kashagan has gone far beyond Caspian shores; the EU, recently used to lobby Kazakhstan as a potential alternative to energy resource supplies from Russia, notified that it would stand by Eni and other investors in case their rights are encroached.

Japan called Kazakh government’s claims to foreign investors ‘echo of Russian officials’ pressing against Sakhalin 2 Project and encouraged to combat the widespread of ‘resource nationalism.’

Other participants to the consortium are displeased as well: Christoph de Margerie, CEO Total, said his company was not going to temporize with Kazakhstan’s government on the latter’s claims as the terms of said project shall be ‘profitable in the long-range outlook’ and the project economic perspectives shall not be affected by politics.

“The priority task of all concerned parties is the soonest resumption of talks with Kazakhstan’s authorities in order to find solutions to fit everyone. The constructive dialog shall be resumed in a month”, Mr. Margerie added.

Following the recent call of French Foreign Minister Bernard Kouchner on the EU to get ready for war with Iran and the respective reaction of Iranian government, revision of contract with Total covering LNG production at South Pars field in the Persian Gulf, Kashagan is the second project questioned for a foreign investor. So, French investors concerns are understandable.

Again to the project history, back in 2000 UK-Dutch Shell claimed for operating at Kashagan but failed to offer Kazakhstan’s government more economic and cost-effective field development project than ENI. Shell then said the project would prove very expensive and technically complicated and with an average profitability. Today, through the project implementation, it becomes obvious that Shell acted more of a professional than ENI of Italy, which, however, was not appraised. Thus, the government could possibly return to ‘old’ proposals, but in a new capacity: equal operating of KazMunaiGaz National Company; next revision of pilot development program and work schedule is under no circumstances avoidable, which shall delay the first oil production somehow, but guarantee more stable terms than before. Anyway, a compromise with Astana shall be dealt by Romano Prodi during his forthcoming visit to Kazakhstan.