Eni Confirms Fears about Kashagan Oil Field Problems

Kashagan field location
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Feb. 23, 2007 (The Wall Street Journal Europe via Dow Jones Newswires)

Italian oil and gas giant Eni SpA (E) confirmed investors' fears about delays and cost overruns at its mammoth Kashagan oil project in Kazakhstan, but insisted its strong position in the growing European gas market and its alliance with Russia's OAO Gazprom (GSPBEX.RS) will power the company forward.

The announcement came as Eni, the world's sixth-largest oil company by market cap, reported that fourth-quarter net profit slipped to EUR1.52 billion, 28% lower than the same quarter a year earlier, due to lower refining margins, the depreciation of the U.S. dollar against the euro and production disruptions.

Eni said fourth-quarter adjusted net profit, the profit figure most closely watched by analysts and which excludes changes in the value of inventories and special items, dropped 1.7% to EUR2.36 billion from EUR2.4 billion. The company's board proposed a 2006 dividend of EUR1.25 a share, compared with EUR1.10 the previous year.

Eni confirmed that its most important exploration project, the Kashagan field in the Caspian Sea with proven reserves of more than 13 billion barrels, won't begin pumping until the second half of 2010, a full two years later than had previously been disclosed.

That is the latest in a series of setbacks at Kashagan, where Eni had initially expected to start pumping oil in 2005.

In addition, the price tag for the project keeps climbing. Though the company didn't disclose exactly how far over budget the project had come, its effect can be seen in Eni's overall capital expenditure plan, which has shot up to EUR44.6 billion for the 2007-2010 period, a 27% hike over the amount it had forecast to spend during the 2006-2009 period.

Still, Chief Executive Paolo Scaroni was upbeat about Kashagan, saying that the company was now confident that the reserves would be greater than previously estimated, and that production would plateau at 1.5 million barrels a day in 2019, instead of its previous estimate of a 1.2 million barrel per day plateau in 2016.

"It's a mix of bad and good news," he said in a telephone interview. "Yes, the time and the costs of the project are growing. The good news is that Kashagan is even a bigger giant than we thought. Every well we have drilled has been a success. Even the satellite areas are looking promising."

The company forecast its 2007 daily production would remain at 1.77 million barrels of oil per day on the year, but predicted 3% average annual growth through 2013.

Scaroni was also confident that Eni was uniquely positioned to benefit from trends of increased European and U.S. demand for gas. Eni's Gas and Power division - which accounts for 18% of all gas sold in Europe - had an adjusted operating profit of EUR1.27 billion in the fourth quarter, an increase of 42% over the same period a year earlier.

Its gas revenues have acted as a buffer against declining oil prices. He also said that rising concerns about limiting carbon emissions in both the U.S. and Europe stood to further increase a switch to cleaner burning gas.

"Whatever we do in the direction of Kyoto means more gas and less coal," he said. "So that's fairly positive for Eni."

Last autumn, Eni signed a wide-ranging accord with OAO Gazprom, which extended the Italian company's supply contracts with the Russian monopoly through 2035. The two also agreed to jointly invest in exploration projects in Russia.

Scaroni said that bidding for some assets of bankrupt Russian oil firm OAO Yukos (YUKO.RS), including OAO Arcticgas and ZAO Urengoil, could begin next month. He said Eni would likely make a joint bid with Russian firm ESN. He also noted that the Gazprom accord had been essential in opening up Russia for Eni.

"Our relationship with the country goes through Gazprom," said Scaroni.

He also downplayed the concern expressed by the European Union and others about the growing power of Gazprom in ensuring Europe's future gas supply.

He said Europe had to come to terms with the fact that it will be impossible to meet the continent's growing gas needs without Gazprom's help. "Their role will be crucial to European supply and to think about doing it another way is impossible," said Scaroni.

Eni and Gazprom also discussed jointly investing in exploration projects in Africa, but Scaroni declined to give specifics. He said that in certain countries, such as Angola, which has strong relations with Russia, "Going in with Gazprom is a plus."

Copyright (c) 2007 Dow Jones & Company, Inc.

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