ASIA: Eni-Led Group Cedes Kashagan Oil Stake to Kazakhstan

Eni-Led Group Cedes Kashagan Oil Stake to Kazakhstan
Eni SpA and partners in the Kashagan oil field agreed to cede a greater stake in the world's biggest crude discovery in 30 years to Kazakhstan, giving the government more profit and resolving a dispute over delays and costs.

State-run KazMunaiGaz National Co. will pay $1.78 billion to double its Kashagan stake to 16.8 percent, on par with the top shareholders, Energy Minister Sauat Mynbayev said today at a news conference in the capital Astana. The Eni-led group will pay the government $5 billion as compensation for lost revenue and start sharing profit with the state earlier than planned, he said.

Kazakhstan demanded renegotiation of the Kashagan agreement after delays, technical complications and cost overruns hampered the project. The government is following in the footsteps of Russia, which a little more than a year ago took control of Royal Dutch Shell Plc's Sakhalin-2 project in the Pacific Ocean after pressure by regulators.

``Although none of the foreign oil companies will be happy to give up equity, it's a small price to pay to resolve the impasse,'' said Chris Weafer, chief strategist at Moscow-based UralSib Financial Corp. ``It's better to have reduced equity in a project that has full state support rather than a bigger position in a project that faced an increasing number of problems.''

New Operating Company
Eni will lose its role as sole operator of the field after production starts at the end of 2011, Mynbayev said. KazMunaiGaz, Exxon Mobil Corp., Total SA and Shell will join Eni in a new operating company, with Kazakhstan holding a ``controlling function'' in the field's future development, he said in an interview after the press conference.




``The new company will coordinate and approve work,'' Mynbayev said. ``The actual development work will be split up among the partners, for example with one doing the drilling and another building coastal infrastructure,'' he said.

Kazakhstan will now take as much as 5 percent of profit even before the foreign partners recoup their costs, Mynbayev said. Under the original contract, the state would have received nothing until the companies had recovered their initial investment. Mynbayev said Kazakhstan will keep its 10 percent share of so-called ``profit oil,'' the crude that will be sold once the project's costs have been paid.

Tax breaks for the foreign investors, known as uplift, will also be trimmed, Mynbayev said.

Shareholdings
Eni, Exxon, Total and Shell each now hold 18.5 percent of the development, while ConocoPhillips has 9.3 percent. KazMunaiGaz and Japan's Inpex Corp. have each held 8.3 percent until now. Kazakhstan will pay to double its stake only after production starts, Mynbayev said.

Eni and its partners will make the $5 billion payment to the government over the life of the Kashagan contract, which won't be extended beyond 2041, Mynbayev said. The amount is based on oil at $65 a barrel and may fluctuate with crude prices, he said.

The companies, which will transfer some of their Kashagan stakes to KazMunaiGaz, and the government are set to complete the changes to the development contract resolving the dispute by the end of May, Mynbayev said.

``We didn't let the contract be annulled, which would have happened if we hadn't reached an agreement,'' Kazakh President Nursultan Nazarbayev said in a statement on his Web site. Nazarbayev met representatives of Eni's partners, including Shell Chief Executive Officer Jeroen van der Veer, at his Astana residence today, according to the Web site.

Astana Talks
Eni Chief Executive Officer Paolo Scaroni flew to Milan right after the completion of talks last night. Exxon's local spokeswoman, Patricia Graham, declined to comment on whether CEO Rex Tillerson attended the meeting with Nazarbayev. Tillerson was the first person to leave yesterday's talks held at an Astana restaurant.

A spokeswoman for Rome-based Eni said an agreement was reached, without giving further details and asking not to be identified.

Kazakhstan and Russia, struggling with the economic aftermath of the collapse of communism, wooed investment and technology by signing production-sharing agreements with foreign companies in the 1990s. As costs began to soar on higher metals prices and crude oil set fresh records, deals signed in leaner times came under review.

``This is likely to be only phase one of the ownership question,'' Weafer said. ``As Kazakhstan appears to be following the path set by its neighbor and mentor Russia, we should expect to see them eventually build their position at least to a blocking stake and perhaps higher.'' A blocking stake would be about 25 percent of the deposit, he said.

Tengizchevroil, Karachaganak
Mynbayev denied that the government was now planning to review contracts held by other foreign-led groups, such as Chevron Corp.'s Tengizchevroil project and BG Group Plc's Karachaganak development.

``We don't have such plans,'' Mynbayev said. ``They are different from Kashagan: there was no way we could accept an unjustified cost increase and delays.''

Kazakh Prime Minister Karim Masimov joined Scaroni, Tillerson and other representatives of the project for yesterday's talks, which lasted more than nine hours.

``Everyone put as much pressure as they could on everyone else to get a good deal,'' said Rinat Gainoulline, an equity strategist at Moscow's Alfa Bank. Kazakhstan could earn an additional $7 billion in revenue between 2010 and 2015 by doubling its stake in Kashagan, Gainoulline said.

Double Output
The giant offshore development in the Caspian Sea is crucial for Kazakhstan to achieve its goal of doubling crude output by 2015. Eni expects output from the field to reach 1.5 million barrels a day. The government cut its crude production forecast to 2.6 million barrels a day in 2015 from a previously estimated 3.2 million barrels a day because of the Kashagan delays.

Kazakhstan demanded a greater share of profit from Kashagan as compensation for delays, which may prolong by as much as 11 years the time it will take for the country to see returns from the field. Costs have more than doubled the price for developing and running the project to $136 billion, according to the state.

The delays will cut Kazakhstan's returns from the project by more than $10 billion over the 40-year life of the field, Deputy Finance Minister Daulet Ergozhin said Oct. 20.

Kazakhstan had pressured the companies by amending its subsoil law to allow it to cancel oil projects such as Kashagan if developers ``significantly'' violated production contracts.

Eni and its partners paid a $150 million fine in 2004 after delaying the start of oil production at the field to 2008 from 2005. Talks to alter Kashagan's 1997 contract took place after engineering costs and safety considerations forced the group to delay output a second time to the third quarter of 2010.


Via: Bloomberg

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