Kazakhstan Signals Possible Kashagan Breakthrough

The government of Kazakhstan has signaled what could be a breakthrough in its long-running standoff with foreign oil companies developing the massive Kashagan oil field in the northern Caspian Sea.

In a Dec. 26 letter viewed by The Wall Street Journal, Kazakh President Narsultan Nazarbayev has called the heads of the six foreign oil firms to Astana, the Kazakh capital, for a meeting on Jan. 11 with himself and the country's prime minister.

The presence of Nazarbayev, who holds a tight grip on power in the oil-rich country and has rarely been involved in talks over the oil field, is a signal that the two sides could be close to a deal.

"For me it is difficult to imagine that President Nazarbayev and Prime Minister (Karim) Massimov meet the most important oil companies without a resolution," said Paolo Scaroni, chief executive of Eni SpA (E), which is the chief operator of the Kashagan field and has been leading the negotiations.

The other foreign oil companies in the consortium are Exxon Mobil Corp. (XOM), Total SA (TOT), Royal Dutch Shell PLC (RDSA), ConocoPhilips (COP) and Japan's Inpex Holdings (1605.TO).

With its 13 billion barrels of recoverable reserves, Kashagan is one of the largest discoveries of the past 30 years.

Yet development of the Kashagan oil field has been stalled for the past six months after a dispute erupted between the consortium of oil companies and Kazakh authorities who were demanding a bigger share of the returns from the project.

In the interview, Scaroni said that because of the recent dispute - which comes on top of other delays and cost overruns at the field - oil is likely to begin flowing at the field in 2011, rather than 2010 as previously planned.

The tense negotiations with the Kazakh government have taken on a soap-opera quality, as the two sides have burned through three previous deadlines.

The final deal that could be forged at the Jan. 11 meeting is expected to include a modification to the production-sharing agreement that will guarantee the Kazakh government more revenues even if there are future delays with the project.

The five foreign oil companies will also pay a lump sum to the government and will sell a portion of their stakes to KazMunaiGaz, the state oil company, which already holds an 8.3% interest in Kashagan.

Eni, Exxon, Royal Dutch Shell PLC and Total SA have 18.5% each, ConocoPhillips has 9.3%, and Japan's Inpex Holdings Inc. has 8.3%.

Scaroni estimates that, in all, the deal will cost the foreign oil companies between $3 billion and $4 billion.

"Of all the problems we had four months ago, 99% have been solved," said Scaroni. Exxon remains the last holdout, insisting on the right to negotiate a better price on the sale of part of its stake to KMG.

The initial agreement signed with the Kazakh authorities in 1997 was very advantageous for the foreign oil firms.

However, at the time, oil was trading at around $15 dollars a barrel, and the risks of investing in Kazakhstan, which had broken away from the Soviet Union in 1991, were high. In addition, the Kashagan field remains one of the most technically challenging oil projects in the world.

But as the Kazakh government began to agitate for a bigger share of the project, tensions mounted. Eni was accused of everything from tax evasion to environmental violations.

Parliament began working on a law that would allow the government to seize oil assets in the name of national interest. That raised fears that Kazakhstan was flexing its muscle the way other petro-states had recently in order to gain greater state control of its natural resources at the expense of foreign investors.

Separately in the interview, Scaroni said he will recommend that Eni retire the almost 9% of its shares it currently holds and begin a new share- buyback program, a move which could boost the sagging stock price of the Italian oil-and-gas company.

As part of a seven-year-old stock-buyback program, Eni has purchased close to 9% of its own shares. Italian law prohibits a publicly traded company from holding more than 10% of its capital. Eni shares closed Friday at EUR25.05, up .20%, in Milan trading.

Eni, the world's sixth-largest oil company by market capitalization, has been trailing its peers recently. Eni's current valuation is up about 9% compared with the start of the year, compared with about 26% for Exxon Mobil Corp. and about 16% for Royal Dutch Shell PLC and Total.

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

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