RUSSIA HOPES TO ENTER CASPIAN MARKET WITH NEW KASHAGAN DEAL

In the covert “great game” currently playing out between Russia and the United States to control the hydrocarbon assets of the Caspian, a glittering new prize has appeared on the horizon. Kazakhstan’s massive offshore Kashagan oilfield is the world’s largest discovery in the last 30 years. While Russian companies currently hold no stakes there, the renegotiation of the concession’s production-sharing agreement (PSA) may well provide Moscow with a toehold. Meanwhile Washington, increasingly squeezed out of Caspian development, is discreetly but furiously lobbying behind the scenes for ExxonMobil to become the field’s operator.

The Kashagan contract area covers more than 2,125 square miles and consists of five separate fields: Kashgan, Kalamkas-A, Kashagan Southwest, Aktote, and Kairan.

Kashagan could potentially produce 500,000 barrels a day. The minimum estimate of Kashagan’s total recoverable oil reserves is seven billion barrels, while estimates of its total oil reserves top out at 38 billion barrels (Interfax, November 21). The field is currently under development by a multinational joint venture consortium, consisting of Kazakhstan’s national hydrocarbon concern KazMunayGaz and Japan’s Inpex, which each hold an 8.33% share in the project, while ConocoPhillips holds a 9.26% share. Four major foreign oil companies currently dominate the project: Italy’s ENI, France’s Total, U.S. ExxonMobil, and the Anglo-Dutch Shell, which each have 18.52% stakes.

ENI, operating under the joint-venture company name of AgipKCO (Agip Kazakhstan North Caspian Operating Company) currently manages Kashagan under the North Caspian Sea PSA.

Recently, however, the Kazakh government has taken issue with ENI’s oversight of the project and is threatening to amend or abrogate ENI’s contract, citing time delays, cost overruns, and environmental concerns.

Five months ago ENI told the Kazakh government that production costs had skyrocketed far above initial estimates, with the first phase development price tag of 300,000 barrels per day nearly doubling from its initial estimate to roughly $19 billion, while total project costs would escalate from initial estimates of $57 billion to $136 billion. Even more infuriating to Astana, as the PSA terms only allowed for royalty payments to be made after the consortium recouped development costs, Given that “early oil” was projected to start flowing in 2010, Kazakh royalty payments could be delayed for years.

Consequently, in August the Kazakh government ordered Agip KCO to cease work at Kashagan and to begin renegotiating the terms of the contract signed in 2001. On September 27 the Kazakh parliament passed legislation allowing Kazakh authorities unilaterally to break contracts with foreign oil firms (BBC, September 27; EDM, September 13, October 18). As a result, a 2006-2007 annual worldwide mining survey by Canada’s Fraser Institute placed Kazakhstan in the bottom ten of 59 entities based on investor-friendly environments (Fraser Institute Annual Survey of Mining Companies 2006/2007).

With a November 30 deadline for the Agip KCO consortium to submit proposals to mollify the Kazakh government’s concerns, a Kazakh government source told Interfax, “In principle, progress has been made on all positions laid down in the memorandum: KazMunayGaz’s larger stake in the project, a larger size of profit oil, and lower spending. The government has yet to receive a proposal negotiated with all contractor companies, consider it, and make an appropriate decision…Basically, there is progress in all standpoints set forth in a memorandum to the effect that KazMunayGaz’s share in the project should be raised, the amount of profit oil should be increased, and spending should be cut. Now a proposal agreed to by all contractors remains to be received in order for the government to consider it and take the appropriate decision” (Interfax-Kazakhstan, November 24).

Sensing a potential opportunity, ExxonMobil appears to be maneuvering to usurp Agip KCO to become Kashagan’s new operator. A source who took part in the four-day World Energy Congress, which opened in Rome on November 11, said that U.S. Energy Secretary Samuel Bodman, huddling on the sidelines of the forum with Kazakh Energy and Mineral Resources Minister Sauat Mynbayev, had promised unspecified technological and financial aid to Kazakhstan if ExxonMobil was appointed operator (Almaty vremya, November 21).

If the ExxonMobil proposals were accepted, then the U.S. energy giant would control a substantial share of Kazakhstan’s oil production. As the PSA is potentially subject to a substantial rewrite, ENI could see its incompetence result in the voiding of its share, which Moscow doubtless would fiercely desire.

The question is not whether Kashagan will fulfill its promise, only when and at what cost. The fact that Kazakh sources allege that Bodman had U.S. backing points to a growing U.S. role at the expense of the Italian-led ENI. What is as yet unknown is Russian interest in the project, and what a Kremlin counteroffer might look like.

The only certainties in the short run are that Kashagan will continue to be a monetary black hole and that the Kazakh government is determined to squeeze maximum profit from the venture. Whether Bodman’s blandishments can triumph over other counteroffers remains to be seen. Moscow’s trump card is that it currently controls the majority of Kazakhstan’s export routes via the Transneft pipeline monopoly. What remains to be seen is whether Astana will gravitate towards the devil it knows or waltz with Western interests. The deciding factor may well be who comes up with the biggest cash incentive most quickly.