The Russian Solution

Taking the cue from Russia's triumphant taming of Western oil companies, Kazakhstan says the partners in the super-giant Kashagan oilfield have violated environmental laws, and could lose their license. The upshot: Kazakhstan has a big profit demand in mind.

Here is the first paragraph of today's Reuters account: Kazakhstan threatened on Tuesday to revoke an Eni-led consortium's permit to exploit the giant offshore Kashagan oilfield due to environmental law violations. Read story

Steve's comment: The 1997 contract for Kashagan, negotiated by James Giffen, was regarded at the time as extremely tough on the oil companies, with an upside clause for instance that makes the Kazakh take higher as oil prices rise.

The terms are much stiffer toward the companies for instance than those at Kazakhstan's Tengiz field, whose contract includes no upside clause (look for Kazakhstan to demand one from Chevron and Exxon Mobil, and for them to agree).

Kazakhstan's greater assertiveness precedes the activism in Russia, in which Moscow has successfully demanded concessions from Shell, Total and BP. But the Russian strategy of beginning negotiations with accusations of environmental violations (bound to make any Western company nervous) has changed the underlying equation: Western oil companies are no longer in the driver's seat, regardless of their superior technology; if they want to continue to operate in the former Soviet Union -- in Russia, Kazakhstan and probably Azerbaijan -- they now have to agree to better terms for the countries.

ENI's CEO, Paolo Scaroni, whose company operates Kashagan, has put aside the game of charades and effectively conceded that Kazakhstan will get a better money deal.

But today's threat amounts to bringing out the heavy guns. The Caspian Seal is one bit of potent ammunition -- though previous reports blame the deaths of hundreds of the seals on a parasite or some other culprit rather than the Kashagan operation, the Kazakhs now say they want the issue studied again.

That Kazakhstan followed Scaroni's concession with such a threat shows that it probably plans to demand somewhat more than he and his partners expected.