Concern as Kashagan Start Date is Pushed Back Again

The Kazak government is clearly upset at an announcement from the Agip-KCO consortium that oil extraction at the major Kashagan field will start two years behind schedule. NBCentralAsia commentators say there is little the government can do as it is not really in a position to renegotiate the contract, and it will probably confine itself to seeking a bigger share of the oil production.



At the end of July, Energy and Mineral Resources Minister Baktykozha Izmukhambetov said the government had been informed by Agip-KCO that the field will take two years more to develop than planned and would require twice as much spending. Extraction at Kashagan is now scheduled to begin during the second half of 2010, a postponement that Agip-KCO argues is necessary for safety reasons. Development costs are now being put at 136 billion US dollars, instead of the previous 57 billion dollar estimate.



Prime Minister Karim Masimov suggested that the delay amounted to a breach of the consortium’s contract with the government, and warned that the Kazak state would take “adequate” measures in response.



The Agip-KCO consortium, created especially for Kashagan, brings together the oil companies Eni, Exxon Mobil, Royal Dutch Shell, Total, Conoco Phillips, and INPEX, and also KazMunaiGaz, Kazakstan’s national oil and gas company.



Kashagan is an offshore field, the largest in the Caspian Sea with reserves estimated at between 38 and 51 billion barrels of oil. The government has been pinning its hopes on the field as it makes plans to double oil production by 2015.



The start date for Kashagan has already been postponed from 2005 to 2008 due to technical difficulties in developing the offshore site.



NBCentralAsia experts say that while the latest delay may cost Kazakstan dear, there is very little it can do to recover potential losses.



Political analyst Maksim Kaznacheev believes that the extra costs needed to develop the field will come as a real blow to the government because under the terms of the contract, it will not start getting a share of the oil until Agip KCO’s members have recouped their investment.



“The initial cost-recovery period will become considerable longer, making the project a correspondingly greater risk, for instance in the eventuality of a steep fall in oil prices,” he said.



Another analyst, Eduard Poletaev, agrees, saying that postponement “automatically” reduces the government’s ability to ensure a consistent flow of oil to its own foreign customers.



Despite the prime minister’s threat of an “adequate” response, the government has very little space for manoeuvre, Poletaev said. It cannot, for example, replace Agip-KCO with another operating company since that would require different partners to be found and a new contract negotiated, and would just waste more time and delay the project further.



Kaznacheev agreed with this view, saying, “Kazakstan is unlikely to be able to exert a lot of influence on the way the contractual terms are followed. Instead, there will probably be a loud exchange of opinions via the media, without far-reaching consequences.”



In the end, he said, Kazakstan will probably “confine itself to demanding a larger share of the oil that is extracted”.



(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)