The Silk Road Intelligencer has moved!

You should be automatically redirected in 3 seconds. If not, please visit
http://silkroadintelligencer.com
and update your bookmarks.

Silk Road Intelligencer: Kazakhstan Stepping Up Pressure Over Kashagan

Aug 13, 2007

Kazakhstan Stepping Up Pressure Over Kashagan

Last Monday, the government of Kazakhstan and Agip KCO began negotiating the conditions of the cost overruns and delays in commercial production of the giant Kashagan oil field. The goal of the negotiation that could take several weeks is the review of the production sharing agreement that was signed almost ten years ago in November of 2007. It is the second time Agip KCO announced that it could not fulfill the conditions of the PSA - this time, however, it is widely expected that the consortium will have to pay a heavier price than the $150 million in fine it was forced to pay in 2004 when the first delay in production became public. This time, it is reported, the authorities are determined to put the consortium under significant pressure and aim to seek not only a fine and a bigger share of the revenues but may also demand a new operator of the project or introduce the Kazakh national oil company KazMunaiGas as a cooperator.


At the end of July when Agip KCO first time announced the delay in commercial production, Kazakhstan energy and mineral resources minister Bakhtykozha Izmukhambetov announced that Kazakhstan will seek to increase it shares of revenues from the project from 10 percent to 40 percent. Last week on Wednesday, Kazakhstan's prime minister Karim Masimov admitted in an interview to The Wall Street Journal that Kazakhstan may seek the removal of Eni as operator of the Kashagan project as a consequence of its failure to develop the project on the terms specified in the PSA. Mr Masimov was very sceptical about the proposed increase in costs to $136 billion; according to his statements made to The Wall Street Journal the more than twofold increase can be either a result of poor planning ot execution, or of bad intention.

According to some Kazakhstani analysts, it is highly unlikely that the government will actually go ahead and replace Eni as operator of the project. It is almost certain that the government will impose a fine on the consortium and will seek a greater share of the future revenues - but a replacement of the operator would only lead to further complication and delays in commercial production. The government and Agip KCO have held an open dialogue on this topic ever since the the consortium announced the first delay in production in 2004. However, it is clear to both sides that finding and putting in place a new operator would hardly be beneficial for the whole project. In order to estabish a new operator of the field, the entire operational procedures would have to renegotiated - the timeline, budget, management... All in all, regardless of Eni' shortcomings, if alleged or true, this far into the project there is hardly any alternative if the field is to be developed in a foreseeable future. The recent bashing by the energy minister and the prime minister of Kazakhstan can therefore be seen rather as another form of exercising pressure on the consortium than as a serious attempt to remove Eni from the project.

The other scenario that has been floated in Kazakh media is the establishment of KazMunaiGas as the cooperator of the field alongside Eni. This would give KazMunaiGas (and Kazakhstan) a greater share of the profits without having to bear the operation burden of the project. As I argued in an earlier article, KazMunaiGas does not have the necessary expertise to develop this notoriously difficult field entirely on its own; however, acting as a cooperator alongside an experienced Western company is an entirely different story.

The roots of the repeated delays could also lie in the still unresolved question of how the oil from the Kashagan field will be transported to the Western markets. Even though Kazakhstan and Azerbaijan signed a declaration of cooperation on creation of the Kazakhstan Caspian Transportation System (KCTS) as a part of the Baku-Tbilisi-Ceyhan pipeline, the construction of the Eskene-Kuryk pipeline that is to bring the oil from Kashagan to the tanker port of Kuryk and is an essential part of the project has not even begun. Besides the Eskene-Kuryk pipeline, the KCTS project consists of two tanker terminals in Turyk and in Baku and a system of tanker transportation across the Caspian. Sofar, however, KazTransOil, the Kazakh national oil transporation company, only announced a preliminary study of the project.

As it seems now, there is no final strategy on how Kashagan oil will get to the markets, especially considering that even in the best case scenario that the KCTS projet is up and running by the time Kashagan is ready to pump oil, it still would not solve the oil transport problem entirely. At the current state of affairs, only four companies of the consortium (ConacoPhiLlips, INPEX, Eni and Total) will be allowed to use the capacity of KCTS. And as the Tengiz field is also nearing its peak, by the time Kashagan is in production there will be vast quantities of oil in dire need of transport , and it seems reasonable to expect that the issue of a planned increase in capacity of the CPC pipeline and the Atyrau-Samara pipeline both of which go through Russian territory will not be solved in the near future.

As of now, the consortium has not commented on the issue besides a statement that it puts an emphasis on long-term cooperation with the Republic of Kazakhstan and will take part in talks on the future of the project scheduled for the month of August.

No comments: