Where's My Cut?
What does $86 oil mean in the former Soviet Union? More muscular attitude from Russia's already swollen President Putin, and greater petro-assertiveness from Kazakhstan.Putin is on his way to Tehran, where there will be much in the way of chest-beating from him and the leaders of the other Caspian Sea states with whom he is meeting tomorrow.
But Kazakhstan in particular will be in a fighting mood over the now 41% surge in crude oil prices this year (read New York Times account). Why, when it is earning more money than it ever expected from contracts negotiated years ago on the basis of $17-$20 a barrel oil?
Because it would be receiving much more money had its foreign partners -- Big Oil -- fulfilled their word and begun producing oil by now at the supergiant Kashagan oil field. The Italian-led consortium -- which includes most of the big names in Big Oil -- was supposed to produce the first barrel in 2005, but now says that won't happen before 2010.
Some people interpreted a recent public remark by Kazakhstan President Nazarbayev as proof of a calming ocean on the topic of Kashagan. If it was, the storm is back.
Over the weekend, Prime Minister Karim Massimov made that plain with a renewed demand for a higher state stake in Kashagan, according to a report in The Independent of London. If he was having sleepness nights over such assertiveness, it did not show, as he said there was "big line of potential investors" should anyone be excessively discomfitted.
Chevron is in the same stew. The California company cannot seem to close a deal with Russia over doubling the size of the dedicated export pipeline from Kashagan's sister oilfield, Kazakhstan's supergiant Tengiz, of which it has a 50% share. That is sure to slow down and complicate Chevron's plans to vastly increase Tengiz production next year, and to vex Kazakhstan over the relative stagnation of its bottom line.
Kazakhstan has already made it plain to Chevron that, as with the Kashagan partners, it means business. It recently levied a $609 million environmental fine for sulfur deposits from Tengiz, demonstrating that the country expects the companies to think of Kazakhstan, too, when they are counting their windfall profits.
Labels: $86 oil, big oil, Caspian, chevron, Exxon, Kazakhstan, Russia, windfall profits
3 Comments:
Steve, it's obvious that Kazakhstan is using every pretext to put pressure on the oil companies and increase its negotiating position. And it's true that the Kazakh government wants to profit from the high oil prices --- but so do the oil companies. A project like Kashagan would hardly be sustainable if the world oil prices decresed significantly. And while there are no signs that this could happen in the near future, I don't think that any of the oil companies involved want to take the risk and purposely delay the project.
Furthermore, changing the operator would only slow down the development of the field. First, a new operating contract would have to be negotiated; and second, Kashagan is a unique project, and Eni acquired unique know-how as an operator that none of the other oil companies have. Therefore, the best bet for everyone involved, in my opinion, is for Eni to keep its operating role. That, however, does not preclude Kazakhstan from putting pressure on Eni (or operators of other projects like Chevron) to leverage its position and possibly renegotiate the contracts to give Kazakhstan a larger share of the future revenues.
I really enjoyed your comments on the Caspian Summit - I could not agree more.
Hi Ladi, thanks for the note. It is true that all sides are exploiting the price environment to personal advantage. On the company front, they negotiated the deal on the basis of $20 oil, so even with cost inflation there would appear to be some margin before we've got a deal-breaker. I've not heard anyone say that Eni is deliberately delaying -- why would it given $88 oil? On the other hand, nothwithstanding any unique knowledge (I wonder if the Exxon folks, partners in the sister Tengiz field, would agree with that point of yours, or Shell for that matter; readers?), Eni has failed utterly to execute field development with a disciplined plan. Perhaps it is capable of doing so. I personally think it's taken on too much given its relative youth as a major, what with co-operatorship of Karachaganak, its pipeline partnerships with Gazprom and so on. Thanks again and best, Steve
Ladi: I would agree with you that Kazakhstan was using every pretext if it really needed any. It doesn't. Eni has utterly failed to deliver. It promised that oil would start flowing in 2005. Now Eni says:"wait till 2010". This is one case where one cannot help but understand Kazakhstan's reaction: they are losing out on big oil bonanza big time.
As far as the unique know-how that Eni may have accumulated: even if that's the case, the change of operatorship shouldn't further delay the project. It would be in Eni's interest to share their know-how with whomever might be running the project next: Eni would still be a partner and would want to cash in on the record high oil prices as early as possible.
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