Standoff on Kazakhstan Oil

Nov 30, 2007 (From The Wall Street Journal via Dow Jones Newswires)

Talks between Kazakh authorities and a group of Western companies developing an oil field in the Caspian Sea have bogged down over a multibillion-dollar fine Kazakhstan wants to impose on the consortium.

The slowdown sets the stage for a standoff over the future of one of the world's biggest oil projects.

Kazakhstan and the consortium, led by Italy's Eni SpA, had hoped to conclude talks aimed at resolving their conflict over the Kashagan field by today. But officials in the Kazakh capital of Astana said the deadline will pass without a resolution.

People familiar with the matter said Kazakhstan was demanding $7 billion in compensation for holdups to the project, while the consortium is prepared to pay no more than $4 billion.

Kashagan was the world's largest oil find in 30 years when it was discovered in 2000. But getting its oil out of the ground has proved harder and costlier than expected. The standoff has cast a shadow over the future of an oil field that is seen as crucial to world energy needs in a time of tight supplies and rising demand.

Earlier this year, Eni presented the Kazakh government with a revised production plan that pushed back the start-up date by two years and more than doubled projected costs over Kashagan's 40-year life to $136 billion. Kazakhstan threatened to remove Eni as operator and to rewrite terms of the contract.

In October, Eni and Kazakh authorities agreed to a framework for negotiations that set out various ways of resolving the dispute, including a fine, a move to expand state-owned oil-and-gas firm JSC NC KazMunaiGaz's share in the consortium at the expense of the other partners, and changes to the terms of the production-sharing agreement. People close to the talks said any solution likely will involve a combination of all three mechanisms.

By 2019, Kashagan -- with some 13 billion barrels of recoverable reserves -- is expected to be producing 1.5 million barrels of crude a day. It is pivotal to Kazakhstan's ambition to triple the country's total output to three million barrels a day by the middle of the next decade, making it one of the world's top 10 exporters of crude.

The dispute has turned Kashagan into a symbol of the growing assertiveness of oil-producing countries. Kazakhstan has joined the ranks of countries like Russia and Venezuela that have tightened the screws on foreign investors, and in some cases driven them out of projects altogether. Earlier this year, Kazakh lawmakers passed legislation allowing the government to cancel natural-resource contracts deemed harmful to Kazakhstan's strategic interests.

Officials in the Kazakh prime minister's office, Finance Ministry and KazMunaiGaz confirmed that the parties will miss today's deadline.

Other consortium members comprise Royal Dutch Shell PLC, Total SA, Exxon Mobil Corp., ConocoPhillips and Inpex Holdings Inc.

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

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