Kazakh Lawmakers OK Bill So Govt Can Break Oil Deals

LONDON Sep 26, 2007 (Dow Jones Newswires)

Kazakhstan's lower house of parliament Wednesday approved a bill that gives the state more power over contracts on subsurface resource use, Russian news agency Interfax reported.

The bill, which amends the law on subsurface deposits and their use, allows the state to revise the terms of a contract at a strategic deposit if the economic interests of the state have been impacted, Interfax said.

The bill will now be forwarded to the Kazakh senate for approval.

Kazakh lawmakers say the bill is needed now because of cost overruns and delays at the Eni-led (E) Kashagan oil field project in the Caspian Sea.

The consortium irked Kazakh authorities after informing them in June of a new delay to the start of production at the massive Kashagan project amid cost overruns.

The consortium is holding talks with the Kazakh authorities as the latter seeks compensation and changes to the Kashagan contract due to the output delay and higher costs.

According to one amendment in the bill, if the license holder's operations have an impact on Kazakhstan's economic interests or are a threat to national security, the relevant agencies "have the right to demand changes and/or terms added to the contracts with the goal of reestablishing Kazakhstan's economic interests," Interfax reported.

The bill also expands the grounds on which the state can annul a subsurface resource use contract.

Grounds for annulment include the following: if within a period of up to two months after receiving notification the resource user doesn't provide its written consent to begin talks on changing the terms of a contract or refuses to hold talks; if within a period of up to four months from receipt of the resource user's consent to talks no agreement has been reached; and if in a period of up to six months from the attainment of agreement on restoring Kazakhstan's economic interests the parties do not sign the contract amendments, Interfax reported.

"This approach gives the resource user up to one year overall to decide the issue," says the commentary attached to the bill, Interfax said.

The amendments "do not require the relevant agencies to seek a court order or arbitration," said Valery Kotovich, a deputy in the Kazakh lower house, Interfax said.

However, the state must give the resource user two months warning before unilaterally annulling a contract.

The bill assigns the government the authority to determine which deposits and fields are strategic.

"The amendments apply retroactively to earlier concluded contracts insofar as they concern production and/or exploration and production at sections of strategic fields," according to the commentary.

Eni holds an 18.5% stake in the development consortium, the same amount as Exxon Mobil Corp. (XOM), Royal Dutch Shell PLC (RDSB.LN) and Total SA (TOT). ConocoPhillips (COP) holds 9.3%, while Japan's Inpex (1605.TO) and Kazakh state oil and gas company KazMunaiGas each own 8.3%. Eni is the sole Kashagan operator.

Kashagan is estimated to hold 13 billion barrels of recoverable reserves.

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