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.

The Old Game is the New Game in Big Oil

Russell Gold, my former colleague at The Wall Street Journal, has an interesting piece today describing how, as contrarian as it can possibly appear, the Middle East is open for business to the oil majors. The upshot: Russia and the Caspian states have a lot of leverage, but not wholesale negotiating power with the western oil companies, which do have options in terms of replenishing their reserve base.

The first paragraph of Russell's piece: Since the 1970s, major oil companies have been shut out of oil production in much of the Middle East. Now, the doors to foreign investment are opening again, this time for natural gas. Read rest of story

Steve's comment: Russia in particular but also Kazakhstan have been wringing concessions from the western oil companies, which have fewer and fewer places to go around the world for new reserves as national oil companies and ministries take control of their own energy supplies.

Though the big-earning companies will deservedly generate little public sympathy, they have been on the front lines of the combat under way at the intersection of geopolitics and commerce.

But the willingness of countries like Qatar and the UAE to grant equity shares in their natural gas fields to western majors is a poke in the eye of the former Soviet petro-states.

Why after making such a fuss over their economic independence are the Middle Eastern countries willing to go back into an equity relationship with the previously expeled majors? In an e-mail exchange, Russell says the majors are "very wary" of Russia now, along with Venezuela, while in their view the Middle East offers some welcome stability.

Russell goes on: "Most of the natural gas projects open to western investment are technically challenging, including Abu Dhabi's $10 billion sour gas project and BP's work in Oman. The Saudi exploration isn't so much technically challenging, but offers the Saudis an opportunity to cement ties with a number of companies from powerful nations, including Shell (UK/Netherlands), Lukoil (Russia), Sinopec (China), Eni (Italy). Add in the big export refinery projects under consideration and you have ties with Total (France) and ConocoPhillips (the U.S.). That's most of the permanent members of the U.N. Security Council."