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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