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.