NAZARBAYEV HINTS AT LARGER STATE SHARE IN KASHAGAN

One of Vladimir Putin’s most notable accomplishments since he assumed the presidency of the Russian Federation on December 31, 1999, has been his relentless effort to downsize the Western presence in the Russian Federation energy sector. Now it seems that Kazakhstan might be pursuing similar action. According to Kazakh Energy Minister Baktykozha Izmukhambetov, delays in bringing the massive Caspian offshore Kashagan field online have pushed back the date for the first “early oil” from 2008 to 2010. Kashagan was originally scheduled to begin production in 2005.

In August 2007, brinksmanship over the delays, environmental hazards, and ballooning costs led the Kazakh government to threaten to abrogate its contract with Italy’s ENI, leader of the multinational consortium developing the project, as operator of the site. The previous month ENI had suggested that the deadline to begin commercial production should be shifted from the second half of 2008 to the second half of 2010, but what startled Kazakh officials were ENI’s projected operating costs rising from $57 billion to $136 billion. Kazakhstan will not receive any oil from the venture until the operator recoups all operating costs.

Believing that Astana might re-open bidding for Kashagan, other Western energy concerns rushed to Kazakhstan to try to secure the lucrative contract. However, ENI’s role as operator apparently remains secure – at least for the moment. This week Kazakhstan’s President Nursultan Nazarbayev told journalists that his government will seek either cash compensation or a larger state share in the Kashagan development to settle its dispute with the Western-dominated consortium, stating, “Our government is holding talks with everyone to achieve a solution and come to an agreement peacefully. We are not talking about abandoning the contract…There is no discussion about changing the operator” (Kazinform, December 7).

These stakes are immense – the Kashagan oil field is the largest oil field discovered in the last 30 years, with proven reserves of 35 billion barrels and potential reserves estimated to be as high as 70 billion barrels. When the project comes on line its daily output is projected to be at least 500,000 barrels per day. KazMunayGaz and Inpex each hold an 8.33% share in Kashagan. ENI, Total, ExxonMobil, and Shell each have 18.52% stakes, while ConocoPhillips holds a 9.26 percent%.

ENI has faced significant environmental challenges in leading the efforts to develop the site. Temperatures range from –40 to +40 degrees centigrade, while pack ice up to several feet thick in the winter threatens offshore structures. In 1999 the Parker Drilling Barge Rig 71 was modified to permit operations in the northern Caspian, where challenging conditions include shallow water that behaves like the open sea, and reservoir conditions combine the characteristics of the North Sea’s high-temperature, high-pressure wells and Canada’s heavily hydrogen sulfide gas-laden wells (Joe Evangelista, “The North Caspian’s icy offshore challenges” American Bureau of Shipping Surveyor at https://www.amcham.kz/article.php?article_id=758).

As sometimes occurs in the Kazakh press, Kazinform has an unsubstantiated report — which could be part of a deliberate disinformation campaign by envious parties in Kazakhstan — that among the consortium participants, ExxonMobil is opposed to any increase in Kazakhstan’s share in the Kashagan oilfield. Echoing the Kazinform report, Kazakh Energy Minister Sauat Mynbayev did, in fact, suggest that the government wanted a bigger stake in the project for state energy company KazMunayGaz, “We reckon that it should be raised to the level of big shareholders. We’ll see whether that is possible” (Kazinform, December 4).

In what appears to be continued reluctance by ExxonMobil, discussions remain ongoing on the basis of an initial December 2 memorandum of understanding, with all the parties agreeing to complete talks on the transfer of shares by December 20.

The negotiations represent a personal triumph for Nazarbayev, who has walked a fine line between increasing state ownership of national resources deemed to have been sold too cheaply in the immediate aftermath of the 1991 collapse of the USSR and not scaring away significant Western investment in the country’s energy infrastructure. It is significant that of the consortium members only ExxonMobil is resisting the policies of the Kazakh government. Given Kashagan’s immense reserves, there could possibly appear an unseemly rush to replace ExxonMobil should it decide to cut its losses and abandon its share in the project. The Kashagan project has had a long gestation, as its initial production-sharing agreement (PSA), valid for 40 years, was signed in 1997. Besides Kashagan, under the terms of the PSA, the licensed area also includes three oil-bearing structures – Kalamkas, Aktoty, and Kairan – and 11 marine blocks, which occupy an area of about 2,162 square miles. Despite its reluctance to see its 18.52% share possibly reduced, it would seem likely that at a time of record high energy prices, ExxonMobil will eventually swallow hard and agree to the revised terms laid out by Astana, especially given the fact that Kashagan represents the largest single oil discovery of the last three decades.