Kazakhs Seen with Raised Stake in Kashagan Deal

ROME Dec 19, 2007 (Dow Jones Newswires)

After months of hard bargaining and two missed deadlines, a consortium led by Italian Eni SpA (E) looks closer to settling a dispute over developing the offshore Kashagan oilfield in the northern Kazakhstan section of the Caspian Sea.

To help clear the deadlock Kazakh's state-owned oil company KazMunaiGas, or KMG, is expected to have its current 8.3% holding in Kashagan raised to a level that matches the biggest investors in the field - it's thought consortium members will reduce their holdings to boost those of KMG - and analysts say a cash payment from the consortium may also be on the table. The 40-year production sharing agreement may be extended to beyond 2041 as a sweetener to the consortium's oil companies.

"Changes to the (Kashagan) contract would be to the benefit of Kazakhstan," said Neill Morton, a London-based analyst with MF Global, as a settlement of the dispute would mean more advantageous terms to Kazakhstan than the previous agreement. Morton added that he wouldn't be surprised if talks were to continue after Thursday's deadline. "If deadlines are extended it implies they are making progress."

Kazakhstan was furious this summer when notified by the consortium, which includes oil majors ExxonMobil Corp. (XOM) and Royal Dutch Shell PLC (RDSB.LN), of a further delay to the start of production.

Kazakh officials also claimed the total costs of the project had jumped to $136 billion from $57 billion, meaning the date for payments reaching the public coffers would be pushed back. Under the production sharing agreement companies have preference in recouping their investment.

The spat saw Kazakhstan threaten to strip Eni as lead operator of Kashagan, the biggest oil discovery in 30 years when it was found at the turn of the millennium, hit the developing consortium with billions of dollars in compensation damages and change the contract to less favorable financial terms.

At the start of December the consortium agreed to a memorandum of understanding establishing the framework to settle the dispute and set Dec. 20 as a deadline to finalize the terms. The previous deadlines were Oct. 22 and Nov. 30. The official production start date is now the third quarter of 2010 from the original 2005 deadline.

The dispute is further indication of a shift in the balance of power between hydrocarbon-rich countries and oil majors in favor of the host countries. As crude prices maintain their northbound direction and the era of easy oil a distant memory, Western companies are facing tougher terms following a wave of resource nationalism. The Kashagan field is estimated to hold 13 billion barrels of recoverable reserves.

ExxonMobil was fingered as the company refusing to budge on allowing KMG to up its stake in the consortium at the expense of the other members, according to press reports. The Irving, Texas-based oil major is known in the industry as one of the toughest negotiators and one that takes a stance against commercial terms revisions.

Still, Exxon's reportedly uncompromising position might be to the benefit of other consortium members as the Kazakhs know there is only so much they can extract to settle the dispute, said a London-based analyst who requested anonymity.

Analysts won't predict whether Thursday's deadline will be met but they do expect an agreement to be struck eventually.

"The parties will find an agreement; we are not heading towards a divorce," said David Stedman of Daiwa in London. "They all want to put it behind them and get on with the project."

Eni, the sole Kashagan operator, holds an 18.5% stake in the development consortium, the same as ExxonMobil, Royal Dutch Shell and Total SA (TOT). ConocoPhillips (COP) holds 9.3%, while Japan's Inpex Index Inc. (1605.TO) and Kazakh's KMG's each own 8.3%.

Eni's Chief Executive Paolo Scaroni said last week he was "cautiously optimistic" a solution would be found before meeting other members in London the next day.

An Eni spokeswoman said it was premature to comment on ongoing talks.

"Hopefully some of the uncertainties that have been overhanging the (Eni) shares for much of 2007 - such as the Kashagan negotiations - will be resolved shortly," Lehman Brothers wrote in a note to clients last week.

Eni shares have dropped around 4% over the last year compared with a gain of about 13% in the DJ Europe Oil and Gas Index, according to FactSet data.

The president of Kazakhstan earlier this month ruled out ejecting the Italian company as operator of the project, with analysts saying that removed speculation that other consortium members coveting the operator role would replace Eni.

The Kazakh government is counting on the oil proceeds to build key infrastructure such as roads and hospitals.

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