The Biggest New (Suspended) Oilfield in the World
Kazakhstan eliminated any uncertainty today about where foreign oil companies stand in the country: on the defensive.
After weeks of salvos regarding work on the Kashagan oil field, Kazakhstan forced a three-month halt to development of the supergiant. The field is the largest found anywhere on the planet in three decades. But Ecology Minister Nurlan Iskakov says it has unresolved environmental problems. As Reuters stated: The dispute is reminiscent of Russia's row with Royal Dutch Shell, which ended up with the multinational oil firm losing control of the giant Sakhalin-2 oil project to Russia's Gazprom.
Here is Reuters' quote from Iskakov: “In 2003-2005 we specified a number of offshore sites and we put forward our demands. As of today, these ecological requirements have not been fulfilled.That's why we decided to carry out such an unprecedented step. I think you will hear in the nearest future what will happen next." Read story
Steve's comment: It's been clear that Kazakhstan has tough demands in store for the foreign consortium developing Kashagan. The companies, led by Italy's Eni, look to be about six or seven years behind schedule in producing first oil, plus they are far over budget.
That alone put Kazakhstan in the driver's seat in terms of changing the 1997 contract negotiated on Kazakhstan's behalf by the country's then-oil adviser James Giffen. But other objective factors have now also conspired in Kazakhstan's favor: the world crude oil supply shortage, expected to last at least through 2012; the shortage of fresh oil reserves for the major oil companies to exploit; and Russia's new, tough approach to the oil companies.
The last item on the list -- Russia -- may be the most influential at the moment. Like Russia, Kazakhstan seems to have taken off the gloves.
Before today's escalation of combat, Eni CEO Paolo Scaroni publicly conceded that the contract would have to change. In another soothing move, the company has arranged for Italian Prime Minister Romano Prodi to visit Kazakhstan on Eni's behalf.
But the field suspension shows that Kazakhstan isn't ready to be soothed.
So what does Kazakhstan want? For starters, a lot more money, and much earlier than the companies had planned.
Like most such deals, the Kashagan contract calls for most of the expenses to be paid out of initial oil production before the partners and government begin to take their big profit. But now look for the companies to be forced to cough up larger profit from virtually the first oil to come out of the ground, probably around 2012.
Another reason why the Kazakhs will play especially tough is that whatever ultimately happens will be a model for a probable follow-on challenge to the contracts governing production at the country's other two supergiants -- Tengiz and Karachaganak.
After weeks of salvos regarding work on the Kashagan oil field, Kazakhstan forced a three-month halt to development of the supergiant. The field is the largest found anywhere on the planet in three decades. But Ecology Minister Nurlan Iskakov says it has unresolved environmental problems. As Reuters stated: The dispute is reminiscent of Russia's row with Royal Dutch Shell, which ended up with the multinational oil firm losing control of the giant Sakhalin-2 oil project to Russia's Gazprom.
Here is Reuters' quote from Iskakov: “In 2003-2005 we specified a number of offshore sites and we put forward our demands. As of today, these ecological requirements have not been fulfilled.
Steve's comment: It's been clear that Kazakhstan has tough demands in store for the foreign consortium developing Kashagan. The companies, led by Italy's Eni, look to be about six or seven years behind schedule in producing first oil, plus they are far over budget.
That alone put Kazakhstan in the driver's seat in terms of changing the 1997 contract negotiated on Kazakhstan's behalf by the country's then-oil adviser James Giffen. But other objective factors have now also conspired in Kazakhstan's favor: the world crude oil supply shortage, expected to last at least through 2012; the shortage of fresh oil reserves for the major oil companies to exploit; and Russia's new, tough approach to the oil companies.
The last item on the list -- Russia -- may be the most influential at the moment. Like Russia, Kazakhstan seems to have taken off the gloves.
Before today's escalation of combat, Eni CEO Paolo Scaroni publicly conceded that the contract would have to change. In another soothing move, the company has arranged for Italian Prime Minister Romano Prodi to visit Kazakhstan on Eni's behalf.
But the field suspension shows that Kazakhstan isn't ready to be soothed.
So what does Kazakhstan want? For starters, a lot more money, and much earlier than the companies had planned.
Like most such deals, the Kashagan contract calls for most of the expenses to be paid out of initial oil production before the partners and government begin to take their big profit. But now look for the companies to be forced to cough up larger profit from virtually the first oil to come out of the ground, probably around 2012.
Another reason why the Kazakhs will play especially tough is that whatever ultimately happens will be a model for a probable follow-on challenge to the contracts governing production at the country's other two supergiants -- Tengiz and Karachaganak.
Labels: Caspian, chevron, conocophillips, contract renegotiation, ENI, Exxon, Giffen, kashagan, Kazakhstan, Russia, Total
5 Comments:
I am not normally one to support the Kazakh government's methods. However, after reading today's Wall Street Journal report on this topic, I can understand how Kazakhstan would be very unhappy at this point. As Prime Minister Masimov states, a 200% increase in costs in unacceptable compared to normal 10% cost increases in business projections. In addition, members of this consortium were already upset with Shell, and now with Eni, so there is plenty of blame to go around. Yes, the Kazakh government is far from being saint-like, however, after reading this article, there are really a lot of mis-steps happening with the oil companies (and Americans really do not care for the large oil companies at this point in time so there is no love lost there). The Kazakh government may give environmental fines, etc. but it is just trying to use legal ways to bring more attention to the enormous, ridiculous delays taking place in Kashagan.
--Vincent
I remember reading that Kazakhstan didn't always get good deals on energy projects back in the 1990s, so it's good if they can get more favorable terms, especially, since Eni didn't live up to its end of the contract.
But the real problem is where would that extra oil revenue go? To line the pockets of a few? Or to some nationwide projects in healthcare and education that would benefit everyone in Kazakhstan? A few years ago Soros Foundation set up Caspian Oil Revenue Watch. Is it still functioning? I haven't come across of any reports from them or anyone else for that matter.
Not sure if Revenue Watch is still operating -- perhaps other readers can advise. But generally lots of experts are watching. Terry Karl over at Stanford is one of them as part of her Paradox of Plenty theme. There definitely is lots of pocket-lining going on, but that is reality. Time will tell rather soon how big the middle class becomes, public services, utilities and schools are developed, and generally the standard of living rises.
Steve, revenue watch is still "somewhat" active. The press release section has not been updated since '06 but there is activity on the main page, showing that there is still someone maintaining the site (a grant or something was just given in July). Here is the latest website for Kazakhstan run by Soros's group: www.kazakhstanrevenuewatch.org
And the main site at Yale, where this was linked: http://www.revenuewatch.org/
--Vincent
Kazakhstan sets foot on EU soil, after it bought the Romanian oil company Rompetrol plus its refinery on the Black Sea coast.
http://www.transatlanticpolitics.com/2007/08/29/kazakhstan-sets-foot-in-the-eu/
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