- The Washington Times - Friday, June 25, 2004

THE WASHINGTON TIMES

Kazakhstan, flush with cash from increasing crude exports and high prices, is making a hostile bid to wrest a portion of the country’s most important oil field from international oil companies that own the project.

Kashagan field, considered the world’s costliest oil development project, is also Kazakhstan’s biggest oil discovery in the past 30 years. Located in the shallows of the northern Caspian Sea, it is expected to produce 1.2 million barrels per day — more than some OPEC countries — while absorbing development costs estimated at $30 billion over 30 years.

On Monday, Reuters news agency reported that Kazakh Energy Minister Vladimir Shkolnik confirmed the government was negotiating with the Kashagan consortium to acquire a 16.67 percent share that BG Group, the former British gas monopoly, announced last spring it would sell to two Chinese companies, Sinopec and CNOOC, for a profitable $1.23 billion.

But the main partners — Agip, ExxonMobil, Shell and Total, all with 16.67 percent shares — chose to exercise their right to preempt the sale — to buy the BG share and divide it among themselves, a process that was to have ended last fall.

For the oil companies, the prospect of the Kazakh government as an equal partner is not an appealing one, analysts and oil men say. In the past three years, the government has picked fights with the country’s largest foreign investors; diplomats and analysts say the investment climate has deteriorated.

First, the government challenged ChevronTexaco and ExxonMobil on the financing of an expansion of its giant Tengiz field and was forced to back down after the U.S. giants stopped the project.

Then it pounced on a one-year delay in the start of commercial production in Kashagan, demanding a huge fine that the consortium refused to pay. By the time an agreement was reached last February, commercial production was pushed back to 2008.

Laurent Ruseckas of Eurasia Group, a Caspian oil analyst, said the Kazakh claim of a preemption right over the BG shares has no legal merit and could be a serious blow to investor confidence in Kazakh contracts.

Julia Nanay of PFC Energy, another Caspian analyst, said the move could result in more delays.

“It’s going to be hard to sort this one out without leaving hard feelings,” she said.

BG is being adversely affected by the government’s action. Since it remains a member of the consortium, it must continue to pay its share of the outlay for the project, at the rate of $1 billion to $2 billion a year, while the sale price of its share remains fixed at $1.23 billion.

When BG announced last year it was selling its share, preempting the sale was “a no-brainer,” an executive involved in the deal said recently.

“This project is unique in having so many majors with equal shares. It makes decision-making very difficult. And we still need to bring the number of partners down.”

A source in Almaty, Kazakhstan’s economic capital, said in a telephone interview Thursday that while Kazakh officials had expressed an interest “in passing” in early 2003 in which the partners could buy BG’s share, they had gone no further.

But the government’s required approval for the sale of BG’s share to the other partners never materialized.

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