Much ado about Kashagan

10 июля 2013, 11:04

Kazakhstan decision to purchase ConocoPhillips’ stake in Kashagan was not the best way for the project’s development. It has made it clear that China will not get its hands on the American company’s stake, reports citing Dmitry Baranov, a leading expert of Finam Management company.

According to him, this approach is politically neutral, as Kazakhstan does not have to choose between India and China. Baranov does not preclude that Kazakhstan will offer China and India stakes in some other energy projects at its territory to straighten out relations with them. “However, we should not preclude in the long run that Kazakhstan will cut its stake in Kashagan, inviting foreign companies, including China and India, to the project,” the speaker said.

Earlier Chinese CNPC expressed an intention to buy the 8.33-percent stake in Kashagan project from KazMunaiGas for $5 billion.

Analyst of the Agency for Research of Investments Profitability Kamilla Manakova believes that Kazakhstan is purchasing the stake in Kashagan using its preemptive right to later resell it to Chinese CNPC. Before the deal was announced then-head of KazMunaiGas Lyazzat Kiimov said that Kazakhstan was not planning to increase its share in Kashagan project. While then Minister of Oil and Gas of Kazakhstan Sauat Mynbayev said that Kazakhstan was considering purchasing the American company’s stake to later resell it to China, but “everything will depend on the terms”.

“Of course, buying Conoco’s stake, Kazakhstan may obtain a greater control of the project. And KazMunaiGas would add a volume of hydrocarbons to its assets. But on the other hand, increasing Kazakhstan’s participation would mean increasing investments into the project and attracting loans for implementation of the investment program. Back in April Mynbayev warned that “the main part of the investments into Kashagan are still ahead of us”,” the analyst reminded.

If Conoco’s stake is bought by China, Kazakhstan will get a reliable investor, the expert believes. “Chinese CNPC already holds a stake in Shymkent Oil Refinery and Kumkol group of fields. Besides, the Chinese company has the necessary experience and required technologies and, what is critical, the financial resources for such a serious project,” she said.

According to the analyst, the drawbacks of CNPC's entering the Kashagan project are increased Chinese presence in Kazakhstan's oil and gas projects, which would mean a further increase of hydrocarbons export to China.

According to Kazakhstan Statistics Agency, China’s share in Kazakhstan's overall export makes 17.9 percent. China imported 10.6 million tons of crude oil and bituminous oil products worth $8.7 billion from Kazakhstan in 2012.

On July 2, 2013 Kazakhstan Ministry of Oil and Gas Ministry notified ConocoPhillips of Kazakhstan's intention to exercise its preemptive right to purchase the stake in Kashagan and the North Caspian Sea Production Sharing Agreement. ConocoPhillips agreed to sell its stake in Kashagan to KazMunaiGas for $5 billion. The deal is expected to be completed by Q4 2013.

ConocoPhillips publicized its intention to sell its 8.4-percent stake in Kashagan project last year. Back then the company’s stake was estimated at $8-10 billion.

India and China were planning to buy a minority stake in Kashagan oil and gas field in Kazakhstan from ConocoPhillips. ONGC Videsh Limited planned to spend $5.5 billion, while China’s CNPC was offering to buy ConocoPhillips’ stake in Kashagan from KazMunaiGas for $5 billion.

The participants of Kashagan project currently include Eni, Royal Dutch Shell, Exxon Mobil, Total and KazMunaiGas that own equal stakes (16.81 percent each), American ConocoPhillips (8.4 percent) and Japanese Inpex (7.55 percent). The project is operated by the joint operating company North Caspian Operating Company B.V.

Oil processing plant at Kashagan field. ©REUTERS

Oil processing plant at Kashagan field. ©REUTERS

Start of the commercial production at Kashagan was delayed several times. The initial plan was to start production in 2005. Then the date was rescheduled several times and finally moved as far as to the end of 2012-beginning of 2013 and later to the middle of July 2013 because of complexity of the oil and gas field.

Members of the consortium are not upholding the date the commercial production was scheduled to begin while Kazakhstan authorities are insisting that the production started on of before July 6, 2013. However, in April 2013 Kazakhstan Minister of Economy and Budget Planning Yerbolat Dossayev announced that the production start was postponed until September 2013. Former Kazakhstan Oil and Gas Minister Sauat Mynbayev also confirmed this deadline saying that the production start was postponed “to September at latest”.

If the commercial oil production at Kashagan does not start before October 1, 2013, Kazakhstan is threatening to refuse the shareholders of the North Caspian Operating Company (NCOC) the right to reimburse their expenses incurred during development of the giant field as the Appendix to the October 31, 2008 product share agreement provides "non-reimbursement of consortium's expenses, in the event commercial production fails to start before October 1, 2013." If the shareholders loose the right to reimburse their expenses before starting to pay the royalty to the Kazakhstan government the project stakeholders will have make the spendings at their own expense, not on the account of future oil.

Kashagan oil and gas field. ©REUTERS

Kashagan oil and gas field. ©REUTERS

As for the expected expenses, the costs were also reviewed several times, same as the deadlines. According to CNN Money, around $116 billion have already been invested in the field, while initially the Kashagan budget totaled at $24 billion. It was later reviewed and increase to $38.6 billion. In the end of January 2013 the consortium requested to increase the budget of the First Stage of Kashagan development to $136 billion. The consortium explained the need for the increased funding by the necessity to improve the project’s ecological part. It was decided that KazMunaiGas part of the investments in the project required for 2012-2013 will be funded by other members of the NCOC consortium; the sum equals to $986 million in two years.

Kashagan field is one of the biggest and most expensive energy projects in the world of the last 40 years. The field was discovered on June 30, 2000 when Voctok-1 well was drilled. Western Kashagan was discovered in 2001 and South-East Kashagan in 2003. Geological oil reserves of Kashagan are estimated at 4.8 million tons (all proven reserves of the U.S. equal to 3.7 billion tons).

Commercial production during the pilot development in 2015 is expected to reach 13 million tons per year.

During later stages of Kashagan project's development, oil production will be increased to 51 million tons of oil per year.

By Azhar Ashirova

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