BG Denies Reported Talks with Kazmunaigaz to Sell Karachaganak Gas Field Stake

Flat Denial

BG Group, the largest shareholder—together with Italy's Eni—in the Karachaganak Petroleum Operating BV (KPO) consortium that is developing the Karachaganak gas and condensate field in north-western Kazakhstan, yesterday denied a report that it is in talks with Kazmunaigaz to sell the Kazakh state oil and gas firm a stake in the project. Reuters quoted a BG spokesperson as saying, "We are not engaged in any form of negotiations to alter our shareholding in the Karachaganak joint venture." BG initially declined to comment on a report by The Times, but apparently felt compelled to rebuke the story.

The Times had cited Timur Kulibayev, the chairman of KazEnergy, an association of oil and gas companies operating in Kazakhstan, as saying that Kazmunaigaz "would like to participate" in the Karachaganak project. Kulibayev also said in the report that Kazmunaigaz's participation in the KPO consortium was now the subject of negotiation, with the Kazakh state firm eyeing a stake of between 10% and 20%. The comments carried added weight since Kulibayev, who formerly had a senior role at Kazmunaigaz before moving to KazEnergy, remains an influential figure in the government's energy policy, given the fact that he just happens to be the son-in-law of President Nursultan Nazarbayev.

Signs Point to a Deal?

Despite BG Group's denial that negotiations to include Kazmunaigaz in the Karachaganak project are under way, perhaps they should be. Karachaganak is the only project of Kazakhstan's "Big Three" foreign-led oil and gas projects that has no state participation; Kazmunaigaz already has a minority stake in both the Tengiz and Kashagan oilfield development projects. Moreover, the Karachaganak field, which produced 14.24 bcm of gas in 2007, accounts for nearly half of the country's total gas output. This is set to rise even further with the planned Phase III development of the field, which will boost both gas output and condensate production substantially.

The government has made no secret of its desire to play a larger role in the development of the Central Asian state's oil and gas reserves; BG need look only to Eni, its KPO partner and the operator of the Kashagan consortium, for evidence of the state's intentions. The government successfully increased Kazmunaigaz's stake in the Kashagan consortium to 16.81% following a battle with Eni over delays to the start of development from the offshore Caspian field. With the government seeking simultaneously to increase the tax burden on the hydrocarbon sector—indeed, KPO has already opted to pay a new export duty imposed by Kazakhstan this year, although the consortium is in talks to determine whether it is truly liable for this tariff—the conditions appear to be falling into place such that BG would (or should) be interested in striking a deal with the government to allow Kazmunaigaz into the KPO consortium.

Outlook and Implications

Although negotiations for Kazmunaigaz to join the KPO consortium may not yet have actually begun, it would appear to be in BG's best long-term interests to reach a deal with the government that would also accommodate the state's desire to have a direct stake in the country's largest gas development project. With Russia willing to pay more for gas imports from Central Asia and a new pipeline connecting Turkmenistan to China via Kazakhstan slated to be operational by the end of next year, the value of Kazakhstan's current gas output, as well as its untapped gas reserves, is on the rise. As gas exports from Kazakhstan become more profitable, and as Karachaganak increases its gas production, the importance of the project—in terms of Kazakhstan's foreign relations, as well as its economic growth—will continue to grow as well, making the lack of a direct stake for Kazmunaigaz more of a potential point of contention between BG and the Kazakh government.

With this in mind, it behoves BG to take note of Eni's experience with Kashagan, anticipate the government's next move with Karachaganak, and thus seek to head off a potential confrontation with Kazakhstan by moving proactively to sell Kazmunaigaz a minority stake in KPO. A potential pressure campaign by the government is certainly imaginable, given the ample evidence from the Kashagan situation, so rather than be forced to sell a stake in KPO to Kazmunaigaz under duress (and likely at a below-market price), BG would surely see its long-term interests better served by launching talks with Kazmunaigaz geared to bring the state firm into KPO on more friendly terms. A potential share-out of stakes among the existing KPO members could easily make room for Kazmunaigaz to buy a 15–20% stake while leaving BG and Eni with at least 25% stakes. Increasingly, the question is not whether Kazmunaigaz will be brought into KPO or not, but whether the Kazakh firm will join the project by the force of the government's will or by BG and the other consortium members willingly accommodating the government's desires.

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