Satisfying the Kazakhs at Kashagan

My former newspaper, The Wall Street Journal, is reporting that the Italian-led consortium in Kazakhstan has signed a "memorandum of understanding" toward settling their dispute at the supergiant Kashagan oilfield. They will now have until Dec. 20th to talk.

This is a huge issue -- involving 13 billion barrels of oil at a time big private oil companies are having momentous trouble finding new reserves to back up their value. The players include the biggest names in the business -- Exxon, Shell, Total, Eni, ConocoPhillips and others.

But today's announcement smells like the boilerplate Soviet-era "protocol," the worthless pieces of paper that two interlocutors would sign at the drop of a hat to demonstrate continued good will, or simply to show their bosses some sign of progress.

The two sides have much separating them.

Yesterday, the WSJ's Guy Chazan reported that a chief stumbling block is Kazakhstan's demand for a $7 billion penalty payment. According to the report, the companies want to pay just $4 billion. I suspect that is not a key stumbling block, as they'll no doubt settle at a middle point between the two sums.

This is only conjecture, but I'd say the bigger obstacles must include how to meet Kazakhstan's demands for a larger share and co-management of the field. And, possibly more important, there's Kazakhstan's demand for an earlier and bigger share of the proceeds once oil sales begin in 2010 or later.

When you are discussing a one-time-only penalty of a few billion dollars spread over several partners, it's painful but not overly so in a $90-dollar-a-barrel world. But when you are shaving percentage points off a field ownership share to give to the country involved (Kazakhstan), that's tens of billions of dollars spread out over decades.

And when these proceeds are demanded earlier than expected -- before the field development costs are paid off -- you are also increasing the companies' risk profile, the calculation that an investment could go south before it begins to earn money.

And, as much as everyone understands that Kazakhstan is in the driver's seat, and the companies have few places to turn for large reserves these days, the corporate lawyers will have something to say about any change in the risk involved. And so will the shareholders.

Photo: Stussi
Rights: Creative Commons