Talks Deadline Extended as Deal Nears for Kazakhstan to Increase Kashagan Stake

Close, But Still No Deal

Following the passing of an end-November deadline on Friday (30 November) for the Kazakh government and the Eni-led Agip KCO consortium to resolve their differences and reach a deal to resume work on the Kashagan oilfield, the parties came to the table once again on Saturday (1 December), agreeing to a new memorandum of understanding (MoU) laying down the framework of a settlement agreement to end the impasse. The government and the consortium set 20 December as the deadline to finalise the terms of a settlement agreement.

Thus, a second deadline to resolve the Kashagan dispute—triggered in late August when the government announced it was suspending work on the Caspian field as a result of the consortium's official notification to the government that the first oil production from the field would be delayed from 2008 to at least mid-2010—has now come and gone (see "Related Articles" below). While there are indications that the third deadline may finally be met, putting development of the field back on track, there are certainly no guarantees. Even as the parties agreed to a framework settlement, there are reports that at least one member of the consortium is unhappy with Agip KCO's decision to cede stakes from each member to Kazmunaigaz, the Kazakh state oil company, as compensation for the delay in the start of production from Kashagan (see table).

Indeed, Kazmunaigaz said in a statement that, "In accordance with the new memorandum, all consortium members but one agreed in principle to transfer part of their stakes to KazMunaiGaz to increase its stake to the level of other major [consortium] members." Although Kazmunaigaz did not confirm which company is opposed to the parameters of the settlement agreement, reports have suggested that ExxonMobil—one of the "major" consortium members with an 18.52% stake—is the sole holdout that is preventing the finalisation of the deal. The U.S. supermajor has expressed its unhappiness with the way Eni has operated the project, so ExxonMobil's beef may be more with the Italian company than any opposition to compensating Kazakhstan for the delay in the start of oil production.

ExxonMobil is surely loath to see Kazmunaigaz, a neophyte in the world oil industry, become an equal partner with it and several of the other "big boys", and the U.S. supermajor is no doubt chafing at the idea that it is being forced to cede part of its own stake in the project as payment for Eni's problems. The prospect that Kazmunaigaz could secure the title of co-operator with Eni as part of a settlement of the current dispute may be equally bothersome for ExxonMobil, given that the U.S. company would prefer to see the Kazakh government follow though on earlier threats to strip Eni of its operatorship. Rather than ExxonMobil taking control of Kashagan as the new operator, part of the solution is more likely to see the U.S. supermajor's stake in the project reduced, with Kazmunaigaz joining Eni—which steered Agip KCO into the current confrontation with the Central Asian state—as co-operators of the project; little wonder, then, that ExxonMobil appears to have little stomach for the proposed settlement.

Outlook and Implications

With all but one consortium member agreeing to the plan to share out stakes among existing Agip KCO members to allow Kazmunaigaz to increase its stake, the prospects for the parties to reach a final settlement in time to meet the new 20 December deadline look good. In all likelihood, the make-up of the consortium will essentially mirror 2003, before BG opted to sell its 16.67% stake in the project to two Chinese companies and the five Western firms in Agip KCO exercised their pre-emption rights to buy the stake in order to prevent such a sale. That move, of course, triggered a confrontation with the government, which ended in 2004 with the decision to share out BG's stake, with half going to Kazmunaigaz and the other half split between ConocoPhillips, Shell, Total, ExxonMobil, and Eni. Several years later, Kazmunaigaz is poised finally to take the other half of that stake as payment for the consortium's delay in meeting its target for the start of oil production (although the ultimate composition of stakes will likely be slightly different, since Inpex will be made to cede part of its stake to Kazmunaigaz this time as well).

Still, it is unclear whether a straight-up, equity-for-delayed-revenues deal will be the sum total of a settlement; indeed, co-operator status for Kazmunaigaz, giving the state more of a say in decision-making with Eni, could well be a part of any final deal. Furthermore, the government could well demand some form of remuneration in the form of a penalty on top of a deal giving Kazmunaigaz a greater stake in the project. In addition, any deal will necessarily have to include a new budget for the project, lest a resolution to the current impasse serve as merely a stopgap measure before the next fight over rising costs for Kashagan erupts. It is here where ExxonMobil and the Kazakh government may be on the same page in opposing Eni's run thus far as operator. A deal that forces ExxonMobil to play along by rules set by Eni in the interest of getting Kashagan—which is slated to produce 1.5 million b/d of oil at its peak—back on track in the short run is merely setting the stage for additional problems in the consortium further down the line.

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Kazakhstan: 15 November 2007: Energy Minister Suggests Kazakhstan's Kashagan Talks Deadline Could Be Extended

Kazakhstan: 6 November 2007: Economy Ministry Proposes Revamp of Kazakhstan's Oil Sector Taxation Policy

Kazakhstan: 23 October 2007: Eni-Led Consortium, Kazakhstan Sign Framework Agreement to Continue Kashagan Talks

Kazakhstan: 22 October 2007: Kashagan Talks Reportedly Hung Up on ExxonMobil Opposition to Reducing Stake in Project

Kazakhstan: 26 September 2007: Parliament Passes Law Allowing Kazakh Government to Break Oil Contracts

Kazakhstan: 6 September 2007: Kazakh PM Demands Co-Operator Role for Kazmunaigaz in Stalled Kashagan Project

Kazakhstan: 3 September 2007: Kashagan Suspension Could Be Extended as Kazakh Government Seeks Billions in Compensation for Delay

Kazakhstan: 28 August 2007: Eni Feels the Heat as Kazakh Authorities Maintain Pressure in Kashagan Dispute