Oil Report

ANALYSIS-Kazakhstan learns from Moscow in squeezing oil firms

LONDON, Aug 28 (Reuters) - Eni SpA and its partners in Kashagan, the world’s largest untapped oilfield, may be forced to cede a greater share of profit to the Kazakh government, industry sources and analysts said on Tuesday.

Kazakhstan stopped work at Kashagan on Monday, putting pressure on Eni ENI.MI over delays and rising costs at the field and signalling a push to look again at the way profits are shared out.

“I think that the partners will be willing to look at the profit oil share in order to secure progress,” said an industry source familiar with the project who declined to be identified.

The move by Kazakhstan, citing mainly ecological issues, echoed Russia's row with a Royal Dutch Shell-led RDSa.L group, which ended in the partners ceding a stake in Sakhalin 2, a huge oil and gas project.

“The Kazakhs seem to have learnt a thing or two from the Russians about how to deal with projects that are overbudget and running late and to use that to extract some more economic rent,” said Neill Morton, analyst at Man Securities.

Emboldened by rising oil prices, governments around the world are seeking more cash and control from firms that drill in their oil and gas fields, a trend dubbed “resource nationalism” by some analysts.

Eni and Exxon Mobil Corp. XOM.N, Total SA TOTF.PA and Shell each hold 18.5 percent of Kashagan and ConocoPhillips COP.N has 9.3 percent.

Kazakhstan's national oil company, KazMunaiGaz, has only 8.3 percent, the same as Japan's Inpex Corp. 1605.T

Kazakhstan has already fined the consortium $150 million for an earlier delay. Analysts say the new spat could be settled by an upfront payment or changes to the production-sharing contract governing the project.

“We view the move as an effort by Kazakhstan to gain a larger share in the lucrative PSA agreement,” analysts at Moscow-based Aton said in a report.

“We view this news as potentially positive for KazMunaiGaz as it could get a much larger stake in the project, albeit the costs of a potential share increase are yet to be negotiated.”


Some in the Kazakh government are unhappy with what are now seen as generous terms signed with foreign firms in the 1990s when Kazakhstan needed investment to overcome a post-Soviet slump, industry sources say.

At the early stages of the project, 80 percent of the revenues go to cover the cost, leaving 20 percent as “profit oil,” said the industry source.

The country’s economy is doing fine without Kashagan, growing 10.3 percent in the first quarter. Kashagan is going to double Kazakh oil output, giving a further boost.

Kashagan’s delays and cost overruns have long irritated Kazakhstan.

Oil output is set to start in 2010, five years later than earlier planned. The Kazakh government says expected costs over the field’s life have increased to $136 billion from $57 billion.

Observers point out that the Kazakh government needs the foreign firms’ technical skills, reducing its bargaining strength, and expect it will settle for more cash up front.

“The foreign oil companies are needed to finish the project,” said an oil industry lawyer. “I think the leverage is not quite the same as Sakhalin 2.”

Oil analysts say a higher level of profit oil for Kazakhstan would not send the companies’ shares tumbling.

Former energy minister, Baktykozha Izmukhambetov, said in July the government was in talks to revise the share of profit oil for Kazakhstan to 40 percent from 10 percent.

Morgan Stanley analyst Theepan Jothilingam said the impact on Eni shares of such an agreement would be muted, although failure to deliver could hamper the company’s attempt to compete with bigger rivals.

“Successful delivery will be used as a gauge to determine the industry and financial market perceptions of whether Eni can compete with the supermajors,” Jothilingam wrote.

For a FACTBOX on the Kashagan field, click on [ID:nL28364723]