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Kazakhstan: Oil Majors Agree to Develop Field

by Heather TimmonsThe New York Times
February 26th, 2004

A consortium of international oil companies formally agreed on Wednesday to proceed with a $29 billion development of the Kashagan oil field in Kazakhstan, the largest oil discovery since Prudhoe Bay in Alaska more than 30 years ago.

Under the terms of the deal, the group, led by ENI of Italy, would not extract oil from the site until 2008, three years later than originally planned. A group of oil majors agreed to develop the Kashagan field soon after its discovery in 2000, and the companies in the consortium will pay the Kazahk government an undisclosed amount for the delay.

Total oil reserves are now estimated to be 13 billion barrels, several billion barrels higher than original estimates. The companies in the consortium are ENI, Royal Dutch/Shell, Exxon Mobil, Total of France, ConocoPhillips and Inpex of Japan.

The announcement represents a major step forward for oil production in Kazakhstan. The former Soviet republic is considered one of the United States' most promising alternatives to the Middle East for oil supplies, but development has slowed in recent years as the Kazakh government sought to renegotiate contracts struck with foreign oil companies in the early 1990's.

"This deal is by all means an important breakthrough, both for Kazakhstan and for our Western partners," said Kazakhstan's former minister of foreign affairs, Erlan A. Idrissov, in a telephone interview. Mr. Idrissov is now the country's ambassador to Britain. By 2015, the field is expected to yield more than a million barrels a day, about a third of Kazakhstan's target for oil production, he said.

The oil companies involved in the Kashagan field have been haggling with the Kazakh government for several months over timing and methods of production, taxation and other contractual terms. One major production hurdle is the field's location under the Caspian Sea, which sometimes freezes over. Initial production is expected to be 75,000 barrels a day, Shell said in a statement. Mr. Idrissov said production was expected to rise to more than 400,000 barrels a day by 2013.

Other details of the contract were not disclosed, but analysts said that the project was expected to be taxed at a rate as high as 80 percent .

"The indications have been that this is not a relatively high-return project, but it is enormous," said Jonathan Waghorn, an oil industry analyst with Goldman, Sachs in London. "It will provide a stable stream of cash for the next 30 or 40 years, so it is certainly a good thing for companies that are able to absorb such a project into their portfolios."

Shell, which will hold about one-fifth of the project after a planned exit by British Gas, said on Wednesday that Kashagan was integral to its long-term strategy. The Caspian region and the 12 former Soviet republics that make up the Commonwealth of Independent States are "a future heartland for Shell," Walter van de Vijver, chief executive for exploration and production, said in a statement. The company has been under pressure to increase its reserves since it unexpectedly lowered its proven reserve estimates by 20 percent in January.

ENI, Shell, Exxon Mobil and Total each hold a 16.67 percent stake in the project; ConocoPhillips and Inpex have 8.3 percent each. A 16.7 percent stake held by British Gas will be sold to the remaining partners, except Inpex. Shell will raise its stake to 20.37 percent.

Some oil experts said that given the history of off-again-on-again deals in Kazakhstan, they would withhold judgment on the global impact of the deal until oil is being pumped from the Kashagan field.

The oil business in Kazakhstan has also been tarnished by allegations of corruption. James Giffen, an oil consultant, pleaded not guilty last April to charges of violating the Foreign Corrupt Practices Act by paying $78 million in bribes to Kazakh officials. A former Mobil executive, J. Bryan Williams, pleaded guilty last April to evading taxes on unreported income, including a $2 million kickback.

But if the deal goes through, it may encourage other investors to look at the region, said Katherine Hardin, an associate director of Cambridge Energy Research Associates.

"This is the flagship project in the north Caspian," Ms. Hardin said.

Reserves in the area are still dwarfed by those of Saudi Arabia, which produces 10.5 million barrels a day. Kazakhstan will never rival Saudi Arabia as a source for oil, but it is an important new production region, Ms. Hardin said.





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