- The Washington Times - Monday, March 1, 2004

ALMATY, Kazakhstan — The government of Kazakhstan and a consortium of six oil companies have ended a dispute that delayed the development of the country’s largest oil field by more than a year.

“A new era has begun,” Prime Minister Daniyal Akhmetov said at a televised press conference in the capital, Astana, after the signing ceremony last week.

The Kashagan oil field in the northern Caspian Sea is probably one of the world’s largest untapped deposits, but it is also one of the most difficult to exploit.

At a time when global oil consumption continues to rise and experts worry that Saudi Arabia, the biggest exporter, may not be able to sustain its current production levels, analysts have stressed that Kashagan needs to start producing as soon as possible if prices are not to further increase in the next few decades.

Representatives of KazMunaiGaz, the state oil regulator, and of Total, Shell, ExxonMobil Corp., Agip, ConocoPhilips and Inpex signed the consortium’s 30-year, $30 billion development plan.

The deposit, located in the ecologically sensitive shallows of the northern Caspian Sea, presents extraordinary challenges, which is why it was passed over by Soviet oilmen in favor of easier deposits in Russia and Azerbaijan.

The oil lies deep, laced with poisonous hydrogen sulfide, and under very high pressure. Also, the northern Caspian is covered in drifting ice in winter, which necessitated the construction of artificial islands instead of drilling platforms.

“No other field presents so many problems in one place,” said a veteran oilman working on Kashagan.

As a result of these difficulties, the consortium presented a development plan in December 2002 that provided for the first commercial oil to start flowing in 2006, a year later than President Nursultan Nazarbayev had earlier demanded.

The consortium offered to pay a bonus of $100 million as compensation for the delay, but otherwise insisted it had made “all reasonable efforts” to meet the deadline.

But the government, calling the delay a major contract violation, demanded a fine of several hundred million dollars, which the consortium refused to pay. The talks dragged on for more than a year as work on the project slowed down.

The plan finally agreed on Wednesday is more flexible on dates and provides for the first commercial oil to flow in early 2008, according to the oil companies.

The amount of the fine itself has not been disclosed, but sources familiar with the talks said it was around $150 million.

Under the plan, production will grow from 400,000 barrels a day in 2010 to 1.2 million barrels a day by 2018, or about as much as the entire production of such countries as Indonesia, Libya or Algeria.

By then, together with other fields developed by Western oil companies, the sparsely populated former Soviet republic is expected to produce 3.2 million barrels a day, making it one of the world’s top five exporters.

Currently, Kazakhstan produces just over 1 million barrels a day, which has helped the economy to reach an annual growth rate of 9 percent.

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