An article today in The Wall Street Journal advances the ball toward discovering Kazakhstan's wish list if it's to lift the suspension of work at the supergiant Kashagan oilfield. Its apparent aim: to take over.
It’s been evident for some time that Kazakhstan had high demands in mind of the Italian-led developers of Kashagan, particularly after the government halted development of the field last week. But it turns out that far larger and earlier payment of oil profit isn’t the only issue on Kazakhstan's list.
Greg White, my former colleague at the Journal, rang up the Kazakhs’ deputy finance minister, Daulet Ergozhin, who said that the country has its complaints about how Eni, the Italian oil major, is operating the field.
Here is the key paragraph from the piece: Kazakhstan isn't insisting that state oil company KazMunaiGaz become the operator of Kashagan, he noted, but said the government would "look positively" on a proposal to put a Kazakh company in control or jointly operate the project. Read story
Steve's comment: The Kazakhs are interested in operatorship out of pride and prestige, not to mention lucrative contracts for the actual work.
There is a noticeable pattern in how such assertiveness takes place. In Russia, Moscow acted after Shell got far over budget on its Sakhalin II project, and a bit presumptuous that the Russians would simply swallow it. The Russians used that wedge to force concessions from Total and BP.
Similarly, t
he Kazakhs moved after warning signs about Eni's competence -- a series of huge cost overruns, plus at least a seven-year postponement in first oil. Because of this, the demands of the Kashagan consortium do not say anything negative in my view about the Kazakhs -- the foreigners probably deserved it a long time ago. But they do suggest that similar action will take place in the much better-run supergiant Tengiz and Karachaganak fields.
There will be high tension during the designated 60-day talking period over Kashagan, because the foreigners won't voluntarily agree to cede control of development when they are putting in all the money. If they are forced to, one can imagine one or more of the companies heading for the exits.
One wonders separately about the future of President Nazarbayev's second son-in-law, Timur Kulibayev, whom he has dismissed from his executive position with the state investment fund.
Kulibayev, a billionaire who as Nazarbayev's representative in the oil industry dominates the sphere in Kazakhstan, will definitely be re-appointed to an important government post; Nazarbayev needs him.
One wonders whether that new position will be linked with the crucial operatorship of Kashagan.
Labels: big oil, contract renegotation, ENI, Exxon, kashagan, Kazakhstan, Nazarbayev, Russia, Shell, Total
6 Comments:
Italian prime-minister is set to visit Kazakhstan. Will he be able to salvage Eni's position? What leverage does he have?
"Italy's prime minister Romano Prodi is set to make a visit to Kazakhstan in October where, among other things, he will discuss the dispute over Kashagan."
Link: http://www.forbes.com/markets/feeds/afx/2007/08/24/afx4050730.html
Steve: Do you happen to know what is the projected dollar value associated with, say, 1% of the stake in Kashagan?
In the other news:
Alekperov Disturbed By Large State Firms
The head of oil company LUKoil said Thursday he was worried by the growing clout of state-controlled energy companies.
The unusually forthright remarks by LUKoil president Vagit Alekperov appeared as market rumors are mounting that Russia is preparing to set up a new state oil giant based on the current assets of Rosneft.
http://www.themoscowtimes.com/stories/2007/08/31/041.html
Alex, Nazarbayev will respond well I think to Prodi taking the trouble to come over and pay his respects. I think the Kazakhs are fairly well intent on establishing a new set of rules governing Kashagan, but Prodi could manage to rein in some of the demands.
On the value of Kashagan, there is no set formula for valuing oil assets. Two years ago, BG said its 16.6% of the field was worth about $107 million a percentage point. Two years later, with the global supply crunch, the value is no doubt higher. But the greater challenges to the field's profitability -- uncertainty about getting the oil to market, and Kazakhstan's greater assertiveness -- would seem to temper enthusiasm and thus tamp down the ultimate market price. In the end, it is a matter of whatever the market will bear.
Thanks for this link to the Alekperov remarks, which would be notable in any case, but coming from Alekperov -- allergic to politics as a policy of survival -- are required reading.
Steve, but what are the realistic options at the moment? I can list at least six.
1. ENI remains the only operator, with better conditions for the Kazakhs
2. KazMunaiGaz becomes operator along with ENI
3. KazMunaiGaz becomes the only operator
4. KazMunaiGaz becomes operator along with another company of the consortium
5. KazMunaiGaz becomes operator along with a company from outside the consortium (from Russia?)
6. A company outside the consortium becomes the only operator, of course with much better conditions for the Kazakh government in comparison to the current agreement.
Which of these possibilities can be ruled out completely? Perhaps no 1 for the last decisions and statements from Kazakh officials, and no. 3 given the difficulty of Kashagan oil extraction. But maybe I'm underrating KazMunaiGaz.
In any case, since the Kazakhs want more money and sooner, probably the option no. 2 is the most probable outcome, since all the others will result in even more delay in production.
I agree -- Nos. 2 and 4 are most likely (with an outside chance for No. 1), with No. 2 the more probable of the two. In that event, there would be an understood modus vivendi in which those with the greater technical expertise (the consortium) would carry more weight in the case of a technical decision.
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