Kazakh PM Sees Kashagan Delay as Breach of Contract

ROME, (Dow Jones Newswires), Jul 30, 2007 (Dow Jones Commodities News)

The Kazakh government views the failure of the consortium developing Kashagan to start production by 2008 as a breach of contract, the news agency Interfax quoted Prime Minister Karim Masimov as saying Monday.

"Through the press I warn the company that we consider changes to the timeline for Kashagan to be a change of the contract itself," Masimov said.

He added that the government would take "adequate measures" in response, but didn't elaborate.

Italy's Eni, the operator of the project, formally notified the government last week that the first oil from the project would be produced only in 2010.

This is the second delay for the Kashagan project after the initial 2005 start date was postponed.

In addition to the delay to the start of production, Eni also notified the Kazakh government that the project's costs would rise to $136 billion from $57 billion, Kazakh news agencies reported Monday.

That figure appeared high said a London-based analyst. He said he forecasts total costs for the project to be in the EUR70 billion-EUR80 billion range, including facilities to export hydrocarbon from the field.

Eni hasn't made public total estimated costs for Kashagan.

An Eni spokeswoman said Monday that June 29 Eni presented a development plan to the Kazakh authorities on behalf of the joint venture, which forecast 2010 as the date for the first oil and confirmed the increase in costs for phase 1 and 2 of the development.

"As requested, meetings with the Kazakh authorities will take place as soon as possible," the spokeswoman said. Eni declined to comment on any other details.

Kazakh Energy and Natural Resources Minister Baktykozha Izmukhambetov was quoted by Interfax as saying the government would hold a month-long negotiation with Eni in August over revised terms for Kashagan.

Kazakhstan Today news agency quoted Izmukhambetov as saying the government would demand compensation from the operator for the production delay, although he didn't elaborate.

He also said the delay was related to safety.

"There's no other project like Kashagan in the world and there was a need to revise its timeframe and costs not only because of technological problems but also because of ecological and general safety," Izmukhambetov was quoted as saying.

The Kazakh government said on its Web site that it would seek to raise Kazakhstan's share in Kashagan oil profit to 40% from the current 10%.

This change in the production sharing agreement, or PSA, is "unexpected" if it turns out to be true, writes Armando Iobbi, a Milan-based analyst with Centrosim, in a note Monday. Iobbi said such a change would be "negative" for Eni, which he rates Buy, although he isn't able to quantify currently the impact.

The recoverable oil reserves at Kashagan are estimated at a minimum of 7 billion-9 billion barrels and the total oil in place at 38 billion barrels.

In February, Eni said Kashagan is seen starting production in the third-quarter of 2010. It upped production plateau at 1.5 million barrels a day in 2019, from the previous estimate of a 1.2-million-barrel-a-day plateau in 2016.

Eni calculated it will cost $19 billion to give the Caspian Sea field daily capacity of 300,000 barrels of oil equivalent.

Agip KCO, the field's operator, is owned by Eni, Total SA (TOT), Exxon Mobil Corp. (XOM), Royal Dutch Shell (RDSB.LN), all of which have 18.52% each, ConocoPhillips (COP) - 9.26%, Inpex (1605.TO) and KazMunayGas - 8.33% each.

Monday, Eni shares closed down 0.3%, at EUR25.46 in a lower overall market.

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