Eni-Led Consortium, Kazakhstan Sign Framework Agreement to Continue Kashagan Talks

Past the Deadline

When the Kazakh government announced a halt to work at the Kashagan oilfield back in late August in response to environmental violations, concerns over cost overruns, and the official announcement of an expected delay in the start of oil production at the offshore field from 2008 to 2010, officials originally set 22 October as the deadline for a resolution to the impasse. Clearly angered by what it saw as the Eni-led AgipKCO consortium's lax approach to rising costs and the slippage in the timetable for the start of oil production, the government demanded billions of dollars in compensation for lost revenue as a result of the production delay, as well as co-operator status in the project for Kazmunaigaz, the state oil and gas company. Moreover, while noting that "friendly talks" would last until 22 October as stipulated in the contract for the development of the field, Kazakh officials, in their harsh rhetoric throughout much of September with regard to the Kashagan situation, sought to make clear that failure to reach a deal by that time would translate into less amicable negotiations (see "Related Articles").

Yet, in the past few weeks, these officials have significantly toned down their rhetoric, and with hopeful signs that a deal may be nearing, yesterday the government and AgipKCO signed a deal to continue talks beyond the original deadline. In a statement issued by the Energy Ministry and Kazmunaigaz, the AgipKCO consortium (see table) and the Kazakh government said that they had signed a memorandum of understanding (MoU) to continue talking "in a spirit of positive and constructive cooperation". The decision to continue talking is good news, indicating that progress towards a deal thus far has been sufficient to placate Kazakh officials, who can as a result be expected to refrain from issuing ultimata or new demands on AgipKCO.

Indeed, the statement issued yesterday also stipulated that the parties "agreed the framework within which negotiations will be held". Although virtually no details on the negotiations have been publicised by either side, it is widely believed that any resolution of the dispute will necessarily entail AgipKCO paying a hefty compensation to the government for the delay in the start of oil production, an agreement by other consortium members to cede part of their stakes proportionally in order to allow Kazmunaigaz to boost its stake, or some combination of both. Eni's chief executive officer (CEO) Paolo Scaroni said recently that the timetable for the start of oil production by mid-2010 remains in effect, but some question whether 2010 is still realistic with the current impasse. Also, Kazakh officials have sought to ensure that a new budget plan is in place for Kashagan by the end of the year. These issues will have to be clarified in any deal to resolve the current dispute.

Outlook and Implications

The MoU and the framework agreement on what to talk about going forward indicate that the parameters of a new deal are in place, if not a final agreement itself. It appears that there is agreement that Kazmunaigaz will increase its stake in the project as part of a new deal, although it was reported earlier this week that ExxonMobil was opposed to ceding part of its 18.52% stake to allow Kazmunaigaz to bolster its share. The Financial Times reported that the U.S. supermajor wants the contract for Kashagan to be extended beyond 2041 as part of a deal in which Kazmunaigaz would increase its stake, although Eni, the operator of the field, had no comment on the report. One way or the other, it seems the Kazakh oil company will increase its share in AgipKCO, with the question now shifting from whether Kazmunaigaz will increase its stake to just how big its new share will be.

Clearly, one of the major stumbling blocks is compensation for the delay in oil production and lost revenues to the government, but a formula to address this—in terms of payment in cash and/or in a larger stake in AgipKCO for Kazmunaigaz—is surely in the works. A potentially bigger problem is a new budget for the project, which has obviously cost more than originally expected, but—with oil prices just cooling down to US$85/b—the potential payoff from the extraction and export of the 9-13 billion barrels in recoverable reserves from Kashagan is immense. With peak oil production of as much as 1.5 million b/d, the revenues to be garnered from this project are such that it is in everyone's interest—both the government and AgipKCO—to resolve the dispute as fast as possible, ensuring the earliest possible start to oil production. With the parameters of a deal apparently in place, the push will now be for both sides to show that the "spirit of positive and constructive cooperation" can yield results, and in a timely manner as well.

Related Articles

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

Kazakhstan: 15 October 2007: PM Says Kazakhstan Oil Production Target Lowered Due to Kashagan Impasse, Compensation Deal Still Elusive

Kazakhstan: 2 October 2007: Kazakhs Soften Kashagan Demands; Kazmunaigaz May Develop Project N On Its Own

Kazakhstan: 28 September 2007: Eni CEO Sees "Common Interest" in Kashagan Dispute, Says 2010 Timetable Still Accurate

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

Kazakhstan: 27 August 2007: Kashagan Work Halted for Three Months by Kazakh Government; Eni Remains Upbeat on Potential Compromise