Accumulating Shoes

We now have a better understanding of why the consortium developing the biggest new oilfield on the planet has expeled its boss, Italy's Eni -- yet another two-year delay has been announced in first oil from the offshore Kazakhstan field. From a contractual startup of 2005, the Eni-led consortium now says it will produce its first barrels from Kashagan as late as 2013, according to a statement by Kazakhstan Energy Minister Sauat Mynbayev.

So yet another shoe drops in Kazakhstan. This pearl of a field -- depending how technology advances, Kashagan contains anywhere from 15 billion barrels of recoverable reserves and up. That's fifteen elephants, the industry term for a monster oilfield -- has been beset by so many delays that one wonders when it truly will come on line.

Mostly at fault are the problems bedeviling the entire industry -- spiraling production costs, and a shortage of equipment and labor (Note to college-age O and G readers: if you study engineering or geology, you are all-but guaranteed a well-paying job).

Yet Eni has long seemed far over-stretched. From a tiny state-run oil company in the early 1990s, it has grown into a hugely successful heir to the Seven Sisters, the most successful of the West's Big Oil companies at finding comfort with the world's autocrats. Where its brethren bicker with Hugo Chavez and Vladimir Putin, Eni has found a comfortable embrace.

But that's resulted in an embarrassment of riches. Eni has too much on its plate. A few months ago, Eni lost its operatorship of Kashagan. Publicly that act was attributed to Kazakhstan's new assertiveness and demand for an equal share of Kashagan. But it's clear that Eni's partners in the field themselves would have acted sooner or later.

The problem with banks: My former colleagues at The Wall Street Journal published a scoop yesterday on the ongoing saga of some $80 million in Swiss deposits belonging to Kazakhstan President Nursultan Nazarbayev and a couple of associates (since a subscription is required to view, I found this link to another site). It's written by Glenn Simpson, Susan Schmidt and Mary Jacoby.

Some nine years after the money was frozen in a money-laundering investigation (the cash came from U.S. oil companies that got deals in the 1990s in Kazakhstan, including at Kashagan), the Kazakhs have said they are willing to give up the money for charitable purposes. Yet the money remains frozen, according to the piece, in part because the U.S. says the charities that the Kazakhs have in mind are too closely linked to the Kazakh government.

Photo: Joe Shlabotnik

Rights: Creative Commons

Two Hours in Astana

My mother's lawyer boyfriend once offered up some legal advice when I was in a dispute with a contractor: It'll all be settled on the courthouse steps. In other words, even though logic says it's less stressful to resolve one's differences at once, and the final deal often doesn't differ much from what's offered along the way, the actual practice is that one or both parties simply won't walk over the line until the very last possible moment.

So it apparently was yesterday in a settlement of the months-long dispute over the supergiant Kashagan oilfield. Recall that new development of this 13-billion-barrel behemoth has been stalled since the summer over a five-year delay in first oil, and a huge cost overrun.

Take a look at the timeline of the weekend events. At the invitation of Kazakhstan's Nursultan Nazarbayev, the chairmen of most of the world's biggest oil companies had readied to pile in to the capital of Astana for a resolution last Friday. They were put off for two days before meetings finally commenced. The trouble was already apparent when Christophe de Margerie, CEO of France's Total, met with the state oil company on Saturday, then simply left town; that's something that a CEO simply doesn't do when an important president has summoned you.

That left Exxon CEO Rex Tillerson, Eni's Paolo Scaroni and Shell's Jeroen van der Veer meeting for nine full hours -- until midnight -- at a restaurant with Prime Minister Karim Masimov.

At 1:56 a.m. today local time, Bloomberg's Nariman Gizitdinov and Lucian Kim filed the following lead paragraphs in a story:

Eni and partners failed to reach an agreement with the Kazakhstan government over stakeholdings in the Kashagan oil field, Eni Chief Executive Officer Paolo Scaroni said, adding he doesn't expect to return to the central Asian nation ``for a long time.'' ``We haven't reached an agreement yet,'' Scaroni said in an interview early today in Astana, the Kazakh capital, after a nine-hour meeting with Kazakh Prime Minister Karim Masimov and the chief executives of companies including Exxon Mobil and Royal Dutch Shell.

Less than two hours later, at 3:49 a.m. local time, Reuters filed the following:

Kazakhstan's KazMunaiGas has reached a deal with an Eni-led consortium over developing the giant Kashagan oil field which will give it an equal share in the project with the largest shareholders. In a statement, the Kazakh company said all companies in the consortium … had agreed unanimously to the new terms.

What happened during those two hours?

The deal on the courthouse steps. Here is a pretty good Bloomberg piece on the deal. Here's Guy Chazan's from The Wall Street Journal.

By the look of things, Masimov and the state oil company pushed matters pretty far and seemed so unlikely to budge that, to put it bluntly, the CEOs of both Eni -- the field operator -- and Total threw up their hands.

At which point Nazarbayev probably stepped in and told his negotiators to agree more or less with the last deal on the table. This is conjecture, but seems likely in the context of how previous disputes in Kazakhstan have been settled.

“Now, a fair decision has been made,” the president’s official web site quoted him as saying in a meeting with company representatives today after the resolution was announced. He said, “After long and difficult negotiations, the Kazakhstani side has protected its interests. … We have prevented a breach of the contract, which was possible if we did not agree.”

Takeaways from the deal: According to The Wall Street Journal, the companies will make an immediate, good-faith payment of $300 million to Kazakhstan. Over the life of the contract, which expires in 2041, they will pay an additional $5 billion to the country, depending on the price of oil. And they will begin to pay the money earlier than previously agreed.

Kazakhstan will pay a sweetheart price of $1.78 billion for about 8% of Kashagan, raising its share of the field to 16.8%, the same as Total, Shell, Eni and Exxon.

After Kashagan comes on line in 2011, Eni will lose operatorship. Kazakhstan appear to have won the final say on how the field is run, with the four top shareholders divvying up duties for developing it.

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Report: What the Kashagan Deal May Look Like

Milano Finanza, the daily in the home city of Italy's Eni, is reporting the skeleton of a final settlement of the Kashagan dispute that includes a surprising sweetener for holdout Exxon. The report quotes no sources. I found Thompson Financial's pickup of the piece but not the original.

With at least 13 billion barrels of proven reserves, Kashagan is the largest discovery in the world in the decades. New work there has been suspended for months in the dispute over a five-year delay in producing first oil, and a huge cost overrun.

The basics of the agreement as reported by Milano Finanza are a $3.5 billion fine and relinquishment of a total of about 8% of the supergiant field, which would double Kazakhstan's stake to about 16%, equivalent to top shareholders Eni, Exxon, Shell and Total.

But that's been more or less known for months. The more interesting part is that Exxon -- the squeaky wheel -- may have gotten a bit more than anyone else for its hard-nosed stubbornness. Recall that Exxon has been the holdout for weeks, seeking to make clear that, unlike its rivals, it's no pushover.

The report says that Exxon will receive unspecified new exploration rights plus an extension of the longevity of its deal at Kashagan's sister field, Tengiz. If that's accurate, one has to applaud the company. It would mean that it continues to challenge the newly powerful petro-states and at key times be treated differently from its competitors. Recall that so far it's the only major not to buckle under pressure in Russia.

Confirmation of the settlement may be known Friday, when Kazakhstan's President Nazarbayev has called together the representatives of all the foreign partners. When he makes such moves, he usually has the terms of a deal in mind.

Update: Gabriel Kahn at The Wall Street Journal reports that the Nazarbayev meeting is delayed until at least Sunday.

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Kashagan: Papa Calls Together the Families

It appears that Kazakhstan's Nursultan Nazarbayev is prepared to pronounce judgment on the long-running dispute with the foreign companies developing the supergiant Kashagan oilfield.

Gabriel Kahn, my former colleague at The Wall Street Journal, reports that Nazarbayev has summoned the companies for a meeting with him and Prime Minister Karim Massimov in the capital of Astana next month.

For Kazakhologists, that can mean only one thing -- he will announce to the companies how the settlement will look. Thus, the six-month-old dispute over this 13-billion-barrel field -- the largest discovery in three decades -- appears near a conclusion.

As Kahn quotes Eni chairman Paolo Scaroni, "For me it is difficult to imagine that President Nazarbayev and Prime Minister [Karim] Massimov meet the most important oil companies without a resolution."

Scaroni is right. This is Nazarbayev's style. He's been known, for instance, to scratch out a number on a piece of paper, and hand it to his foreign interlocutor. That's regarded as written on a tablet.

The meeting is scheduled Jan. 11th.

The dispute started because of the Eni-led consortium's over-budget spending and five-year tardiness in field development. As a settlement, Kazakhstan wants to double its current 8.3% holding in the field, plus a cash settlement, and to receive its oil profits on a bigger scale and faster than written into the current contract.

Nazarbayev's intervention is probably welcome news. He's no Hugo Chavez -- look for a decision that all parties can live with. Even malcontent Exxon may grudgingly accept.

Dumbest story on Kashagan: The leaks have been few from the inner chambers in which the Kashagan talks have taken place. Yet in my view the news coverage has been fairly impressive. Even if it hadn't been, I'm not a press-basher, and as a matter of habit almost never go after other writers.

However, a piece by Motley Fool I think begs scorn. This article, posted yesterday, attributes the stand-off to yet another example of "government heavy-handedness," and chalks it up as more proof that "those who follow energy carefully should be concerned about an expanding outbreak of government strong-arming in a number of important producing nations."

In other words, Motley Fool has precious little knowledge of this dispute, and rather than studying up on it so as to accurately inform its investor readers, has conflated Kazakhstan's position with those of other petro-states in the world. As if to underline this point, Motley Fool boasts that the analyst -- David Lee Smith (I am conveniently providing his email address) -- "really has never set foot in Kazakhstan."

For the record, the dispute has nothing to do with Russian- or Venezuela-style petro-nationalism, and a lot to do with incompetence on the part of the oil companies, and an inflexible contract written during the days of $15 oil.

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Rights: Creative Commons

Earth to Exxon: Your World is Not Enough

Exxon Mobil has received a fresh message from Russia: We are in charge. Get used to it.

No doubt the oil giant -- which is in battle on two fronts in the former Soviet Union, not to mention in Venezuela -- will ignore the warning and crash-land blithely into the dinosaur pit.

I mean that only slightly tongue in cheek. Around the world, Big Oil is having to cut deals with petroleum-rich states that want to control their own resources. I've recently come around a bit to Exxon's view that resource nationalism will moderate -- petro-states like Russia will need high technology to arrest their declining production and develop difficult new fields -- but only a bit.

The direction of global oil is clear, and it's toward the demise of the Big Oil companies as we know them. In general, the petro-states that control more than 80% of global oil reserves can get what they need from technology-rich oil services companies, and will largely do without the Exxons, Chevrons and BPs of the world.

Yet Exxon seems to think that the old rules hold, those of prior decades in which Big Oil called the shots.

Forbes reports on the latest news on the Russian front. It's a salvo from a Gazprom deputy chairman named Alexander Ananenkov. In a news conference yesterday, he called Exxon's control of the giant Sakhalin-I natural gas field an "infringement of Russia's national interests." He added that Exxon's wish to sell its Sakhalin-I gas to China had made Russians "poor relations who see their gas siphoned off."

The fact is that, according to Exxon's contract, it can sell the Sakhalin production wherever it wants, and China is willing to pay a higher price than Russia.

But that ignores political reality. Russia wants the Sakhalin gas for the domestic market. Why? So it can keep selling its own gas for enormous profits to Europe. And, in case it must curtail its exposure to Europe because of growing alarm there over Russian market dominance, Gazprom itself wants to be able to sell to China.

Exxon would be wise to find a middle ground now rather than wait -- as Shell, BP and Total did to their chagrin over the last two years -- for Russia to build into a lather.

Exxon is also the lead rebel in a several-month-long dispute with Kazakhstan over the supergiant Kashagan oilfield. The Kazakhs are in a fit over a minimum five-year delay in first production at the Caspian Sea field, plus a huge budget over-run. The Kazakhs want more money, and they want it faster than they are contractually guaranteed.

The word is that the other foreign partners developing Kashagan -- Total, Shell and Italy's Eni -- are amenable to Kazakhstan's terms. But Exxon is holding out for an extension in the length of the forty-year contract.

The reason for Exxon's stubbornness is mainly its instinctual bloody-mindedness. But it's also highly concerned about what a concession on Kashagan will mean for its other former Soviet holdings -- 25% of Tengiz, a supergiant sister field to Kashagan; and of course Sakhalin-I. I personally think that the other companies sympathize with Exxon and are hiding behind its willing to play bully. But that's besides the point. Exxon is the lightning rod.

And Exxon doesn't want to look like a pushover as it stands firm, its back right at the edge of the dinosaur pit.

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A Possible Kashagan Settlement; Exxon Tries to Keep the Old Days Alive

The signs are that the Italian-led partners developing the suspended supergiant Kashagan oilfield are near a settlement with Kazakhstan.

The four-month-old dispute at Kashagan -- the largest discovery in the world in four decades -- has become emblematic of petro-nationalism that has shifted the center of gravity in the energy world.

So far, Kazakhstan has been different from belligerents such as Venezuela and Russia in that it hasn't sought to take back a controlling stake of its oilfields from big private companies. But, given $90-a-barrel oil, the state is highly irritated at the terms of the 1997 Kashagan, and is seeking a better deal. There is at least a five-year delay in first oil from the 13-billion-barrel field.

An excellent report by the U.K. firm PLATFORM provides the first credible numbers I've seen from the contract itself -- it seems to have gotten ahold of a copy. According to these figures, Kazakhstan effectively carries much of the financial risk -- it will get almost no money until the companies recover all the costs of developing the field -- while the companies are virtually guaranteed a profit.

News agencies are reporting that there's been agreement on the payment of a $4 billion fine by the companies as compensation for the delay. And all parties are agreed that Kazakhstan will become an equal partner with the largest shareholders, including Exxon Mobil, Shell, Eni and Total, although according to Kazakhstan officials Exxon has been a holdout on the undisclosed price the country must pay for an increase in its current 8% share.

Exxon -- playing its usual role of no compromise -- is convenient for the other partners because any seeming intransigence can be blamed on the American oil giant. But in the end they're all going to have to bend. What's their leverage?

The biggest stumbling block, as we've discussed previously, appears to be the upside. Meaning, how will Kazakhstan share in the profits should global oil prices remain so high?

The Kashagan deal was signed under an assumption of turning a profit on about $18-a-barrel oil. Meanwhile, power in the industry has shifted, with national oil companies like Kazakhstan's now in the driver's seat as oil has skyrocketed to $90 a barrel and more.

Kazakhstan wants a piece of that -- contractually. In other words, it's probably demanding a contract revision that gives them more profit when the price of oil rises -- an adjustment in the so-called upside clause.

The companies will try to keep the final agreement secret so as not to encourage others to be so bold. Exxon in particular is a stickler on this -- it's a 25% partner in the supergiant Tengiz field, a sister to Kashagan, and it won't want to encourage Kazakhstan to now shift its contract revision efforts there (expect Kazakhstan to do just that).

But the terms are bound to leak out. Petro-nationalism is a spreading disease.

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Is America's Dethroned King of Kazakhstan on his Way Back?

After four years of ignominious exile from his powerful perch in Kazakhstan, New York lawyer James Giffen may have an opening for a revival.

Those who have read The Oil and the Glory are familiar with the outsized Giffen, its garrulous principal character. Born to relatively humble roots in Stockton, Ca., the 66-year-old Giffen had a spectacular rise after marrying into American society, eventually becoming the go-to man for American blue chip companies wishing to trade in the Soviet Union. After the Soviet collapse, Giffen gained a similar gatekeeper role in Kazakhstan, where at one point he controlled the world's biggest oil deals.

All that crashed in 2003 with Giffen's indictment in the largest foreign bribery case in U.S. history, what's known in Central Asia as Kazakhgate. On Friday, there's a hearing in New York in the case, in which Giffen is accused of channeling some $80 million in payments from U.S. oil companies to Kazakhs including President Nursultan Nazarbayev and former Prime Minister Nurlan Balgimbayev. Meanwhile Giffen is stuck in New York, his passport confiscated, and by appearances no longer in contact with his old pal Nazarbayev.

It's Balgimbayev who's the key to my suspicion that Giffen may regain, or have already regained, some influence in Kazakhstan. Yesterday, Farkhad Sharip at the Jamestown Monitor reported that Nazarbayev had appointed Balgimbayev as an adviser. And that is Giffen's opening.

The 60-year-old Balgimbayev lost his power at about the same time as his mentor, Giffen. The two were rightly seen as a pair, with Giffen providing intellectual heft to Balgimbayev -- who headed Kazakhstan's oil industry when he wasn't prime minister -- and Balgimbayev supplying Giffen a place to channel his genius. Balgimbayev gave Giffen a hilltop house overlooking Almaty right next door to his, the properties connected by a gate. After the U.S. bribery scandal, Balgimbayev also vanished; some said he had moved to Dubai for awhile.

But now that he's back, I'd say Giffen may not be far behind.

As long as we're on the topic, I had already sensed Giffen's presence over the last couple of months in Kazakh affairs, specifically in the country's dispute with the Italian-led consortium developing the Kashagan oilfield.

The original Kazakh demands, and the style in which they've pursued them, remind me of previous, Giffen-led battles with the companies. One of Giffen's signatures is the use of meticulously prepared reports, done usually by western contractors in London and elsewhere, containing every conceivable profit formula, cross referenced for every conceivable production volume, and so on, all of them beautifully packaged in color and with the rest of the graphic design bells and whistles. Another is the juxtapositioning of these reports with extremely well-reasoned, breathtakingly ambitious, hardball demands.

Sound familiar?

We know that the Kazakhs have allowed Giffen's company, Mercator, to continue operating in Kazakhstan because they don't want him to become tempted to spill some of his many secrets about the First Family. So it's not a stretch to imagine the former King of Kazakhstan providing expert strategic advice from his distant exile, either directly or through his representatives.

Whatever the case, the Kazakhs have clearly been holding their own.

Photo: Andy Freeburg

Don Quixote and Exxon's Contrarian Gamble

Does Exxon Mobil know something that the rest of Big Oil doesn't? Or is Exxon on a noble but ultimately quaint and quixotic quest for the old days?

Around the world, Big Oil has been knocked back on its heels by the assertiveness of state-owned oil companies that are both developing their own fields, and competing vigorously in auctions for the rights to oil and gas reserves elsewhere. The upshot is that major oil companies look to be on the verge of a long, unpleasant (for them) decline, with the result that some of them -- such as Italy's Eni -- are scrambling to adapt by forming alliances with the state-owned companies.

Exxon is not only refusing to play along with this scenario, but is in battle around the world in a claim that the prior rules hold.

In Kazakhstan, it was announced this week that Exxon is the lone holdout on an agreement to resume work on supergiant Kashagan, the largest new oilfield on the planet; the rest of the field's big partners -- Europe's Total, Shell and Eni -- have agreed to shave off a bit of their collective shares in the field so that Kazakhstan can become a full partner.

In Russia, too, Exxon is at odds with Moscow's insistence that the company sell natural gas from its giant Sakhalin-I development within Russia instead of at a higher price to China. Meanwhile, the rest of Big Oil has thrown in the towel and done compromise deals with Moscow.

And, as my friend Paul Sampson at Energy Intelligence notes in a story this week, the company is in conflict with Venezuela after abandoning participation in the Orinoco heavy oil project when Hugo Chavez demanded a larger piece of the pie. Exxon and Venezuela are in arbitration over how the company will be compensated. Meanwhile, Total, Chevron, BP and Norway's Statoil went along with Chavez's terms.

In a speech last month in Rome, Exxon Chairman Rex Tillerson said, "Some exporting and importing countries are losing sight of their interdependence. They are responding to the energy challenge by pursuing policies of resource nationalism."

Tillerson is betting that the current phase is a blip. Oil prices ultimately will moderate, his thinking goes, and state-owned companies in Venezuela, Russia, China and elsewhere will be back on Big Oil's doorstep.

Meanwhile, Exxon's strategy is to morph into more of a natural gas company. My former colleague Russell Gold at The Wall Street Journal reported during the summer that more than a third of Exxon's total proven reserves are in the Middle East and Asia; five years ago, Gold said, Exxon reported just a sixth of its reserves from that region. Exxon's biggest play on the planet is Qatar, which accounts for much of its growth.

It seems un-Exxonish to bet one's future on a single country or region. But it's not contrary to company culture to resist change. This is a company that until recently was the biggest corporate funder of the narrow club of greenhouse gas "scientist" deniers. Exxon reduced that funding when it became too public and too embarrassing.

It would be foolish to pass judgment on Exxon's strategy. But it does seem to be betting the house against the tide.

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Kazakhstan Wants Equal Ownership Status at Kashagan

The news today in one of the world's great oil disputes is that Kazakhstan has made public a demand for an equal share in the supergiant Kashagan oilfield. Bloomberg reports that six of the field's seven partners have agreed.

Work at Kashagan, the world's largest oilfield discovery in the last few decades, has been suspended while Kazakhstan and an Italian-led foreign oil consortium settle their differences. Kazakhstan is upset that, in a period of $90-a-barrel-oil, the field will be at least five years late coming to market; in addition, costs are nearly double what was originally estimated, and Kazakhstan will have to wait several more more years for some profit until those costs are paid off.

It's been clear that the Kazakhs want more control over the field, plus more money, and earlier receipt of it. The announcement today, however, is the first concrete statement that the country expects a full share of the field. That would approximately double Kazakhstan's current 8.3% holding.

What wasn't said is the terms: Does Kazakhstan intend to pay for the share? If so, are they talking cash? And if they are, how will the price be decided? Or will the companies carry the Kazakh interest?

And who is the holdout on agreeing? Given its record, a solid guess would be Exxon Mobil, which previously said it would consent only if the country extends the contract beyond its current 40-year life.

Kazakhstan is unlikely to agree to that condition when the dispute revolves around fault on the part of the foreign companies.

Exxon, which like Total, Eni and Shell has 18.5% of Kashagan, still behaves as though it's in the driver's seat. But the final settlement -- according to Kazakhstan it will be tomorrow; the companies say it will be later this month -- is likely to reflect a much stronger position for Kazakhstan.

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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.

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How to Aggravate the Petro-States

If you want to know why the Kazakhs and Russians are irritated with the major oil companies -- and why Big Oil is in trouble all over the world -- look at this quote from a former oil executive in Venezuela.

In the latest New York Times Magazine, Tina Rosenberg asks this fellow why his company didn't do much for the average Venezuelan while at work in the country. The man replies, "It shouldn't have. It was an oil company."

The perverse part of this breathtaking remark is that it wasn't from a western oil executive, but Ramon Espinasa, former chief economist for the country's state oil company, known by its acronym Pdvsa (pronounced ped-uh-VAY'-suh).

Why has Hugo Chavez gone after Pdvsa as remorselessly as Big Oil? Because Pdvsa was behaving as haughtily as the foreigners -- it had learned to be Exxon.

The jury is still out on Chavez's Oil Socialism. But Espinasa reminds me of why Chevron, for instance, is in hot water in Kazakhstan (which though not fully apparent now, will become so in the coming months).

One reason is that at key, needy moments over the years -- needy on the Kazakh side, that is -- the California company declined to accelerate the payment of huge bonuses it owed to the government, to help the Kazakhs obtain cheap loans, or to lend them money itself.

In other words, before Kazakhstan's bonanza struck, when it needed cash, the biggest game in town -- Chevron, Exxon and the Tengiz oilfield -- declined to help. Why? "We're not a bank," one Chevron man once told me. In other words, like Espinasa, Chevron and Exxon are oil companies, businesses, and not a welfare society.

This attitude is blind. It misunderstands the history and enormity of Big Oil in the countries where it works. Oil executives saunter into these poorer nations like heads of state, and the contracts they sign are often seen within the countries themselves as the equivalent of a treaty with a superpower -- as a means of protection and prosperity.

Oil executives and negotiators of course know this, and use it to their advantage to get the deal. Then they conveniently forget, even when a favor sought by the host country isn't welfare, but reasonable need that would be no big deal fulfilling.

And the attitude is currently tripping up both Chevron and Exxon. At $95 oil, they would sorely love to triple production at Kazakhstan's 300,000-barrel-a-day Tengiz oilfield, in which they have a collective 75% stake. But Russia is blocking expansion of the 1,000-mile pipeline that would take that larger production to market.

Russia's condition for going along with the companies? That they effectively finance the construction of another pipeline that would serve Russia's interest -- one that would link the Black and Mediterranean seas through Bulgaria and Greece.

So far the companies have refused. Why? Because they are oil companies, not arms of the Russian strategic policy group.

The companies eventually will have to bend. But meanwhile they are also irritating the Kazakhs. Expect demands for contract renegotiation soon after the Kazakhs are finished with the dispute at the sister Kashagan field.

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The Cheshire Grin in Kazakhstan

Talks under way between Kazakhstan and Big Oil are about much more than the nation's unhappiness with the work on the world's largest oilfield discovery of the last three decades.

It's about the future of oil. And what is it?

Despite their unprecedented profits, the Big Oil companies are on the decline, and in our lifetime -- except for those that manage to reinvent themselves -- will largely go the way of former industrial behemoths like United States Rubber, Goodyear and Bethlehem Steel.

Petro-states like Kazakhstan and Russia, meanwhile, are demanding and obtaining more control over their own fields, and increasingly marginalizing the once-omnipotent oil majors. In just two decades or a bit longer, they will be the world's big, self-contained providers of energy, and companies like BP, Shell and Exxon Mobil will either be transformed into something else, or be far smaller and mousier. They will be employees -- contractors -- for Kazakhstan, Azerbaijan, Russia, Nigeria and so on.

Already, the petro-states control between 80 percent and 90 percent of the world's oil reserves; the clock is ticking for the companies, based on reserves booked long ago, something that Wall Street will recognize at some point too.

The talks in Kazakhstan make it plain that at least Exxon -- long the most far-sighted of the companies -- understands this shift. The discussions are on the supergiant Kashagan oilfield, which is at least five years behind schedule for first oil and well over two-times over budget.

As partial compensation to irate Kazakhstan, the companies (Exxon, Shell, France's Total, Italy's ENI, ConocoPhillips and others) yesterday agreed to grant the state a larger share of the field. It's clear that Kazakhstan wants an equal share with the bigger companies, and since no dollar figures were mentioned there is still the question of whether it's willing to pay market price -- or anything at all -- for that increased stake.

In this gentlemanly form of back-alley extortion, Exxon had the gumption to insist of the man wielding the knife the equivalent of train fare home so as to live another day. Kazakhstan could have this increase, Exxon said -- but only if the contract were extended beyond its current expiry in 2041.

Kazakhstan so far has refused (it's not clear, for instance, if Exxon -- as brazen as any petro-state -- offered any money extension), but the demand is brilliant.

If such an extension is granted for, say, a decade or longer, Exxon and its partners would be on the road to extending their lives just that little bit.

There has seemed to be a Cheshire grin on some of the Kazakh and Russian oil officials in recent months.

Gentlemen on the Caspian

Kazakhstan President Nazarbayev and Italian Prime Minister Romano Prodi have engaged in the latest round of mutual shoulder-massaging amid the Caspian Sea country's recent oilfield muscle-flexing. What does it mean?

We can still be friends.

That's important as contract renegotiations become a principal theme in the former Soviet Union.

The two leaders met today in Astana to talk over Kazakh demands that the Italian-led consortium developing the supergiant Kashagan field cough up some compensation for its miserable performance.

Nazarbayev came out of the meeting saying that he had no intention of revising the decade-old Kashagan contract. That means precisely nothing in terms of the final agreement -- the demands on Kazakhstan's menu involve no contract revisions.

Specifically, Kazakhstan wants big cash much earlier than the consortium had in mind; and, to foreclose future such misunderstandings, it wants to keep the foreigners on a much shorter leash -- meaning some form of joint operatorship of Kashagan.

Rather than any softening of Kazakhstan's demands, what the remarks signify is that both sides would like to conclude this unpleasant business in as civilized a manner as possible, so as to maintain a basis for workable future relations.

Eni Chairman Paolo Scaroni, the field's operator, has done exactly the same thing with Nazarbayev in recent weeks-- gone in, polished the president's apple, then engaged in informal, smiley-face post-meeting news conferences. Chevron Chairman Dave O'Reilly, facing a $609 million environmental fine for his own supergiant Kazakhstan field (Tengiz), did his own diplomatic rounds two weeks ago.

A Few Hundred Millions Dollars Between Friends

Just two weeks ago, Chevron Chairman Dave O'Reilly scurried aboard the corporate jet to Kazakhstan after a legislator urged a shutdown of the company's supergiant Tengiz oilfield for environmental violations.

But O'Reilly emerged cheerily from a meeting with President Nazarbayev -- the Kazakh leader had called Tengiz "an excellent example of how the government and a foreign investor can work together successfully," O'Reilly crowed.

In other works, he seemed to imply, Chevron wasn't in the same boat as the Eni-led Kashagan development, a sister oilfield whose work the Kazakhs have suspended.

Maybe, depending how one defines working successfully. Yesterday, the Kazakhs quantified their own view, and the number is $609 million. That's the fine the Kazakhs have levied against Chevron for three years of alleged sulfur violations at Tengiz.

Dow Jones reports that Chevron is challenging the fine. And it is true that, five years ago, Chevron successfully resisted a similar ecological penalty by the Kazakhs, who sought $71 million but finally accepted $7 million.

Yet, nothwithstanding the warm and fuzzy shoulder massaging that went on between O'Reilly and Nazarbayev last month, look for the current dispute not to end as peaceably.

For one thing, it's a wholly different atmosphere, both in the global oil industry in general, and in Kazakhstan specifically.

Big Oil has been knocked on its heels by a sea change in who gets access to the newest oil fields around the world -- by far, it's nationally owned oil companies and state ministries, not publicly held oil majors like Exxon Mobil, BP and Chevron.

In addition, Russia is leading the way locally in tearing up 1990s-era oil contracts in order to take control of its most promising oilfields. While Kazakhstan is acting under different circumstances, the impact could be similar -- Kashagan (the largest discovery on the planet in more than three decades) is under threat of a Kazakh state assumption of joint operatorship.

In the 2002-2003 row, Chevron played brinksmanship with Kazakhstan, even temporarily shutting down the Tengiz operations to demonstrate its resolve. It will hardly try such antics today, given the possibility -- even if remote -- that Kazakhstan could simply push the envelope all the way and find ready companies or contractors, in China or India, say, prepared enthusiastically to take over Tengiz.

Free Lunch at Kashagan

Kazakhstan has offered up another important piece to the jigsaw puzzle in terms of what it wants to allow development to proceed on the suspended supergiant Kashagan oilfield.

A free ride.

The Kazakhs, whose move on Kashagan has made some wonder whether the nation is aping Russia's oil nationalism, had already made it clear that they want at least joint control of the field, the largest oil discovery on the planet in more than three decades. Until they get it, plus a big cash payment, they are holding up field development.

Customarily, in order to be operator of an oilfield, one's share must at least match the largest stake held by any other partner. That's meant to ensure that the operator has at least as much investment at stake -- in other words as much to lose if things go wrong -- as anyone else involved. The current operator, Italy's Eni, has 16.6% of Kashagan, as do Exxon Mobil, Shell and France's Total.

So one apprehension regarding Kazakhstan's demands has been who would be called upon to sell part of their ownership in order to increase the state's current 8.3% share and make it equal to or greater than the rest.

That seemed one of the hardest likely nuts to crack in talks under way with the Kazakhs, since none of the foreigners was likely to want to give up some of their share. Then there was the matter of getting the state to pay a market price certainly exceeding $1 billion. (BG sold its 16.6% of the field for $1.8 million in March 2005, a time of much lower world crude oil prices.)

But in a statement Thursday, Energy Minister Sauat Mynbayev raised the idea of the state obtaining joint control without increasing its stake.

"It's not essential for us to raise the share. That's not the main question," the minister said, quoted by Reuters. "What is essential is to approve or disapprove of Kashagan's development plan and budget." Read Reuters story

Kazakhstan seems not to be guilty of petro-state nationalism as much as trying to get the country's so-far horribly managed jewel in the crown to pay out.

But if Kazakhstan's KazMunaiGas obtains an equal footing without sharing equally in investment and field development costs, that would seem to instantly and considerably raise the foreign partners' risk profile for Kashagan.

And one wonders how company lawyers would get that past their boards of directors and shareholders back home.

The Ripples of an Incompetently Managed Field

The Kazakhs are tightening the screws on the foreign developers of Kashagan, the biggest oilfield discovery of the last three decades. Today they passed a law allowing them to sever any oil contract unilaterally. Reuters story

It's all meant to put most of the leverage on the Kazakh side in their dispute with the managers of the field. But the perhaps unintended consequence has been the impression that the Kazakhs can also apply leverage to change or repudiate any other contract they so wish in the future.

Is it also more evidence of the Caspian states going the Russian way in terms of petro-state assertiveness?

Here is an email I received today from a foreign friend in Almaty who prefers to remain anonymous: "This is a particularly sticky time here. As of the unanimous passing of the new sub surface law. Many are saying that new investment here should go stone cold. Those who have gone to the expense and trouble to set up a rep office here and try to secure licenses may pack up and go elsewhere as hopeful as they have been. This law is expected to be used as leverage in the future when they want something in any negotiation. They can always find or create an infraction giving them grounds to annul a deal whether well founded or fictional. This is generally expected. The question is will they ever actually use the law to close down an investor(s) and resell the asset?"

I've heard such grumbling before over the years in the face of perceived government high-handedness, but I know of no one substantial who ever actually pulled out. Foreign oilmen in the end are focused on the bottom line, and the stakes in terms of profit are too high for impetuousness.

That does not mean that President Nazarbayev is going to be able to allow this new law to stand in the abstract. In terms of satisfying the due diligence requirements of publicly owned foreign companies, he is going to have to explain what a multi-billion-dollar contract means when one side can just tear it up at will.

Yet this dust-up is still not of the same character as the across-the-board contract repudiation going on in Russia. I do think that down the road Kazakhstan will demand better terms from the country's two other major projects -- Tengiz and Karachaganak. But I doubt that the country will insist on majority ownership of the fields, as Russia has.

Another difference from Russia is that it's probable that none of this would have happened if Italy's ENI had not been such a poor field operator. While undeniably the world's most successful charmer of Russian and Kazakh oilmen, which has resulted in the company's friendship with otherwise obstreperous Gazprom, for instance, ENI is over its head and over-stretched when it has come to actually managing these difficult projects.

The Kashagan consortium members are meeting with the Kazakhs next Tuesday in Astana. One way to change the tenor of the discussions would be to take the initiative and announce a management change. Either Exxon Mobil, France's Total or Shell should take over operatorship, with a primary role offered to the state oil firm, KazMunaiGas.

That appears to be what the Kazakhs are looking for, in addition to an enormous compensation payment to make up for the minimum five-year delay in first oil and a bloated project budget. The oilmen should write a first money offer on a piece of paper and offer it up.

Tengiz: Rattling the Cage

The last time Gani Kasimov attracted big attention, it was for throwing a vase at a television interviewer while running for president of Kazakhstan back in the late 1990s. Now the Kazakh parliamentarian has targeted Chevron, calling for the suspension of its supergiant Tengiz oilfield for alleged environmental violations.

Given the perilous atmosphere for oil majors in the region -- the erosion of Big Oil's positions in Russia, and the threat of the same at a sister field in Kazakhstan, the supergiant Kashagan -- Chevron Chairman Dave O'Reilly hopped on the corporate jet to see President Nazarbayev.

Whatever was said in their meeting today, O'Reilly obviously asked Nazarbayev whether he could tell journalists -- and by extension shareholders -- that Chevron was not in a similar fix as its industry rivals. Here is a paragraph from the Reuters story: Mr. O'Reilly quoted Mr. Nazarbayev as telling him that “Tengiz is an excellent example of how the government and a foreign investor can work together successfully,” according to the Kazakhstan Today news agency. “Today during our meeting both the president of Kazakhstan and the prime minister expressed support for our company's activities,” he said.
Read story

Here is the first paragraph of The Wall Street Journal account of the Kasimov remarks that triggered the stir yesterday: In a sign of rising nationalism and intensifying pressure on foreign investors in oil-rich Kazakhstan, a senior Kazakh lawmaker called for a huge oil project run by Chevron Corp. to be shut down over alleged environmental violations. Read story

Steve's comment: Tengiz is part of the same geologic structure as Kashagan, the field that is currently under suspension for alleged environmental violations and contract demands. The two fields are among the biggest in the world.

It is in fact probable that at some point the Kazakhs will deliver demands for contract revisions involving profit-sharing to Chevron. That is the direction of events in the region, and around the world, and there is no reason to presume that Chevron will be exempt.

But it is premature for that to happen now. Kazakhstan is already embroiled in an enormous flap with many of the world's biggest oil majors over Kashagan. Nazarbayev is no Hugo Chavez -- a seasoned strategist on the geopolitical stage, he will settle one battle before moving on to the next.

So what is Kasimov up to? It is quite possible that, as with his antics during the 1990s presidential campaign, he was simply mouthing off in order to attract attention. For now, I go with that explanation -- Kasimov is not in the ranks of Kazakhstan's serious figures.

But the impact is important. In the past, Chevron has carried with it effective diplomatic status -- Washington has been fully behind its Kazakhstan venture since it first embarked on it in 1990 -- and the field is a huge portion of the company's future and current reserves. Its share price would plummet if its share of the field were threatened.

One must also take into account that the biggest company of all -- Exxon Mobil -- also owns 25% of the field. Exxon has so far stood firm against contract erosion in both Venezuela and Russia.

Whether or not he sanctioned Kasimov's statement, Nazarbayev has no doubt taken note of what happened when he rattled Chevron's cage. That will be incorporated into his strategy in the probability of higher demands down the road for Tengiz.

Kazakhstan: Lining Up More Ducks

In case the point were not yet ultra-clear, Kazakhstan wants to make it so – it is deadly serious about getting its way on the supergiant Kashagan oilfield.


Kazakhstan wants cash and effective control of the field -- the largest discovery of the last three decades -- and is in discussions with the Italian-led consortium developing it.

As of now, Kazakhstan has suspended new work on the field for three months. Italian Prime Minister Romano Prodi plans to visit Kazakhstan early next month on a charm offensive.

But given the current state of the industry -- with the demand curve on oil far exceeding expected supply, and Western oil majors locked out of most oil-exporting countries -- Kazakhstan one way or the other will probably get close to what it seeks. The companies will request, and may be able to obtain, some concrete assurance that whatever new deal is set will not be a wedge for an ongoing series of ever-tougher demands down the road.

The Caspian republic’s latest communication of its posture is a law making its way through the rubber-stamp Parliament.

The Wall Street Journal on-line has a piece on the topic today. Here are the first two paragraphs: A proposed law that would allow the Kazakh government to annul natural-resources contracts appears aimed at pressuring Kashagan oil developers led by the Eni SpA amid tense negotiations, rather than as a broad-based threat to energy and mining companies, analysts and a person familiar with the matter said. The proposed amendment, which would give the Kazakh government the right to pull out of natural-resources contracts if there is a threat to national security and economic interests, is expected to be adopted in the next two weeks, lawmaker Valeriy Kotovich said. Read story

The assurance that the law is deal-specific -- meaning only for Kashagan -- cannot be regarded seriously. A renegotiation of terms on Kashagan is bound to whet Kazakhstan's appetite. Russia has led the way in this more assertive attitude. Look for future demands for better terms at both the supergiant Tengiz and Kashagan fields.

Kashagan: Two Ominous Notes

Kazakhstan's Prime Minister Karim Massimov has made it official: The country is seeking at least to share control of the supergiant Kashagan oilfield. Two items in his announcement today were of special note: The decision comes from the very top and was not dreamed up by some ambitious underling; and Kazakhstan is prepared with an unspecified second strategy should its demand be refused.

The development is important not just for the single field, though it is the largest found anywhere on the planet in three decades. It is also a weather vane for how Kazakhstan will treat the other two supergiant projects in the country -- the Tengiz and Karachaganak fields -- and whether the assertive practice will spread over the Caspian to Azerbaijan.

If the Italian-led consortium refuses to grant Kazakhstan co-operatorship of Kashagan, Massimov said, "We have Plan B. I'll tell you about that later."

Here is the first paragraph of the Financial times story: Kazakhstan demanded greater control over the giant Kashagan oilfield in the Caspian Sea on Thursday, complaining that inadequate management of the project by a foreign consortium led by Italy’s Eni had damaged the Central Asian republic’s economy and reputation as a reliable global energy supplier. Read the FT piece. Here is