Publication: Eurasia Daily Monitor Volume: 4 Issue: 169

The ongoing dispute between the Kazakh government and the Italian Agip KCO oil consortium reached a critical point when Kazakh Prime Minister Karim Masimov, addressing the second Eurasian Energy Forum held in Astana on September 6, issued what sounded like an ultimatum. He clearly articulated that the Italian company, which he held responsible for repeatedly delaying the commercial production of oil at the Kashagan oilfield, should either accept all five conditions (see EDM, September 10) presented by President Nursultan Nazarbayev as far back as in February 2001, when Agip KCO was selected as Kashagan project operator, or vacate the field for others. In late June of this year the Kazakh government voiced concerns over the Kashagan project, stating that none of the five obligations, including the original plan to start oil extraction in 2005, has been fulfilled.

It appears, however, that the Kazakh government is not concerned about environmental problems, harnessing the gas released at the oilfield, or purchasing Kazakh equipment and services. Rather, the basic goal of the government’s unrelenting pressure on ENI-Agip is to tighten Astana’s control over the Italian oil company in particular — and over foreign oil companies in general — by gradually returning foreign-operated oilfields to government control. Masimov stressed this point at the Eurasian Energy Forum, sending a clear message to Western companies that Kazakhstan will adopt harsher tactics in dealing with foreign oil companies and punish them for failing to satisfy their investment and production obligations. He told journalists that Kazakhstan will no longer be satisfied with an 8.33% share of the Kashagan project and KazMunayGaz, the leading national gas and oil company, should become co-operator of the project. But he evaded the question about the exact number of shares KazMunayGaz would obtain in Kashagan. Government officials believe ENI has a slim chance of retaining its position as operator, but everything hinges on the outcome of the ongoing talks between the Kazakh government and the Italian company, which are likely to drag on until the end of the year (Express-K, September 8).

Kazakh authorities have repeatedly inspected the Italian firm on suspicion of tax evasion. Kazakh Finance Minister Daulet Yergozhin announced that final results of inspections will be made public in October, but the estimated environmental damage caused by ENI in Kazakhstan stands at $40 billion.

Apparently, the already chilly relations between Kazakh authorities and the Italian company were further aggravated after ENI gave a negative response to Kazakh demands to increase the planned output of profit-oil from 10% to 40%. The cause of production delays at Kashagan cannot be explained by harsh climatic conditions or technical problems alone. Rather, Agip was taken hostage by its own ambitious plans to increase oil production from the initially projected 100,000 barrels a day at the end of 2005 to 450,000 barrels a day. This revised plan proved to be beyond the capacities of the company and accelerated the collision with the government.

Whatever the root cause of the row around Kashagan, the prolonged tension between the Kazakh government and Agip looks like the beginning of the end of the Italian company’s activities in Kazakhstan. Even if Agip remains a co-operator, KazMunayGaz will control all financial aspects of the project, leaving its Italian partner responsibility for oil production and technical problems. Prime Minister Masimov unambiguously declared Astana’s intention to change the project operator if ENI balks at Kazakhstan’s demands. Independent sources name Total and ExxonMobil as possible replacements for Agip KCO (Delovaya nedelya, September 7).

Government members are divided on how to reconcile tough penalties for ENI with the need for Western investment and technical assistance in the oil sector. More than half of the $50 billion Western investment money accumulated since 1993 in Kazakhstan comes from the oil and gas sector. Presumably Kazakhstan will not go so far as to strip the Italian company of its license to develop the Kashagan oil field. Masimov stressed that despite the complicated nature of the confrontation around Kashagan, the Kazakh government is leaving the door open for further cooperation with foreign oil companies, including ENI.

Astana is closely following European reaction to its pressure on the Italian company. The unsettled dispute will probably cause Italian Prime Minister Romano Prodi to reschedule his visit to Kazakhstan, now planned for October. But repercussions from the row between the Kazakh government and ENI reach far beyond European borders. Given the continuing trend for diversification of oil exports in Kazakhstan and growing global demand for energy sources, no foreign oil company operating in Kazakhstan, Europe, or the United States is immune from government pressure. In many ways the scandalous saga of Kashagan follows the Russian pattern, when Royal Dutch Shell, operating at the Sakhalin-2 oilfield, had to cede its controlling package to Gazprom. It is hard to expect that Kazakhstan will soften its tough position on Kashagan. The snowballing conflict with ENI, paradoxically as it may seem, raises Kazakhstan’s profile internationally and domestically. It warns foreign countries that Kazakhstan is no longer an economically weak country that can be treated like a beggar. Back at home, putting the squeeze on foreign oil companies takes the steam out of the brewing anti-government sentiments among the population over selling national resources to foreigners.