MONTREAL - The Kazakhstan government, concerned about runaway costs and
repeated delays in the vast Kashagan oilfield, has increased its role in the
Italian-led consortium charged with developing the most important oil reserves
in the Caspian Sea Basin.
Under the terms of a newly amended North Caspian Sea Production Sharing
Agreement (NCSPSA), the share in the Agip KCO consortium held by state-run
KazMunaiGaz will more than double to 16.81%, equal to those of Italian company
Eni, ExxonMobil, Shell, and Total. ConocoPhillips and INPEX retain
8.4% and 7.56% respectively.
Early next year a new North Caspian Operating Company (NCOC) will be created,
taking over operatorship of the NCSPSA Consortium, currently managed
exclusively by Agip KCO, an affiliate of Eni.
Failure to meet deadlines will also lead to swingeing penalties running into
billions of dollars.
The government of Kazakhstan last August had suspended for three months work at
the offshore oil field, with officials in the capital, Astana, saying it had to
respond to increasing costs and delays in the implementation of production
plans as well as violations of ecological legislation.
The consortium projected that costs originally estimated at US$27 billion could
more than double to $60 billion, while the government estimated that ultimate
costs could reach over twice that figure to $136 billion. Two months later,
President Nursultan Nazarbaev approved parliamentary amendments to the
governing national law, permitting the government to amend or annul
natural-resource contracts if these were judged to threaten the country's
national security.
The move was widely interpreted as a means of putting pressure on the foreign
members of the consortium in the ongoing renegotiations. Just before expiry of
the three-month suspension, the Western members of the consortium agreed in
principle to increase the share held in it by KazMunaiGaz (KMG), the national
energy company .
Nazarbaev later denied rumors that Kazakhstan was looking for KMG to replace
Eni as consortium operator. Astana meanwhile was said to reject a reported
counter-demand by a Western member objecting to increasing KMG's share and
proposing to extend the consortium's contract beyond 2041.
Despite significant technical obstacles, which were all known in 2000 when the
strike was confirmed, Kazakhstan has considered the Western members of the
consortium responsible for delays in production.
After the strike at Kashagan was confirmed, the production start-up date was
set for 2005. The KCO consortium later delayed that date to 2008, then to 2010.
In January this year, the consortium and the government finally arrived at a
framework agreement to indemnify Kazakhstan for increasing project costs and
for the delay in production start-up, then set for 2010, and soon once more put
off by the consortium to 2011.
When production was postponed again to 2013, the government sought a solution,
finding one in June this year. It has always been the case that the
consortium's sunk investment costs (amounting to US$17 billion by mid-2008)
would be repaid to it in oil, once production begins. However, if investment is
not completed by the beginning of October 2013, then that sum will now become,
in the words of energy minister Sauat Mynbaev, "purely their loss". His
understated conclusion was to consider that probably "this is the last time
there will be a delay".
This condition represents a successful implementation of overall changes in
national energy development doctrine announced earlier this year, two months
after the initial memorandum of late 2007 was concluded that seemed to resolve
differences over Kashagan at the time.
Those changes imposed a temporary suspension of all negotiations pending
elaboration of a new tax code and the explicit declaration of the policy to
"recover the balance of the country's interests" in "strategic objects". (The
third new policy direction was the creation of a new state trust like KMG but
focused on solid rather than liquid hydrocarbons, mainly coal. For details, see
Kazakhstan announces new energy directions, Asia Times Online, February
13, 2008.)
In line with the new energy development doctrine, it is likely that there are
as-yet-unwritten conditions concerning support for downstream projects and
social infrastructure to diversity Kazakhstan's national economy.
Already on an emergency basis in response to the global financial crisis and
its threat to continued economic growth, the government has announced the
intention to spend up to $10 billion from the National Oil Fund of Kazakhstan,
set up analogously to Norway's fund but for different purposes, in order to
promote agriculture and other non-energy economic development (see
Kazakhstan does its own bailing, Asia Times Online, October 30, 2008,
).
Under the terms of the newly amended agreement, Kazakhstan will get US$4.8
billion as compensation for "potential economic losses", which will include
payments for delays, profit from its priority stake and a reduction in the tax
breaks it offers the partners, Bloomberg reported, citing KMG.
The partners will increase payments to $80 million for every year that output
is delayed from 2008 through 2009, KMG said, without giving a comparative
figure. That will rise to $100 million a year in 2010 and 2011 and to $120
million in 2012. The partners will also pay $250 million as a one-time bonus
when production starts, the Bloomberg report said.
Eni remains in charge of Phase I of the project. Its responsibility for Phase
II will be reduced to the onshore plant as ExxonMobil will run the drilling and
Shell will manage offshore development and production after Phase I starts up.
Total will be responsible for coordinating oil transport.
These companies will themselves run the operations for which they are directly
responsible, managing them according to their distinct existing corporate
structures and cultures. At the same time, KMG will increase its role and
participate in every stage of project development. As time goes on, KMG's
participation in Shell's offshore operations is set to increase.
Also KMG will supply the deputy managing director to assist the NCOC managing
director, with the senior post to rotate among the consortium's members and be
filled in the first instance by a representative from Total, who will implement
his company's management system for the administration of NCOC itself, all
partner companies contributing to the staffing.
This transformation, which involves creation of a new operating company to
absorb the old one, is a potentially efficient restructuring of the existing
administrative organization, involving as it does an apparent decentralization
and probably greater transparency, in line with the requirements of the
execution and management of complex energy projects.
At the same time, NCOC appears to emerge as a sort of "secretariat" for the
manifold development and production operations, with KMG supplying the
continuing "second secretary" to verify and oversee that the project
development and administration are executed according to Astana's desired
directions, as the formally superior, titular post of managing director itself
rotates among foreign companies.
R M Cutler (http://www.robertcutler.org) is a Canadian
international affairs specialist.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
