Kazakhstan Chamber of Commerce in the USA

KazCham


NCOC and the Kashagan new deal

Posted on March 09, 2010 by KazCham

A KEY ELEMENT of the new Kashagan deal thrashed out by oil companies and the government last year is a greater role for the state oil and gas corporation KazMunaiGaz (KMG) after the ‘big four’ (ENI, Exxon-Mobil, Shell and Total) bowed to government demands for KMG to acquire parity in the new North Caspian Operating Company (NCOC), which has replaced the former AGIP-led KCO consortium.

Under the new arrangements, the oil majors agreed to allow their individual stakes to drop to 16.8 per cent as they sold shares to KMG, whose own share more than doubled from 8.3 per cent. This arrangement converts the ‘big four’ into the ‘big five’ and gives the Kazakh state both symbolically important parity status in the country’s greatest natural asset and equal status in decision-making.

At the same time, however, KMG assumed an equal share in the heavy financial burden of financing another five years of project development, with no return on the investment until 2013 and beyond.

But times have changed. Back in 1998 the predecessor of KMG was forced to sell the state’s original stake in Kashagan to Conoco-Phillips and Inpex for $500 million, precisely because the cash- strapped government needed money in the wake of the rouble crisis in neighbouring Russia. But this time China has come to the rescue, thanks to a $5 billion deal in April under which the China National  Petroleum Corporation will take a 49 per cent stake  in the 500 million barrel Mangistau Munaigas (MMG)  oil and gas field on western Kazakhstan alongside  KMG. Under this deal, China gets access to coveted oil and gas reserves and KMG gets development money for MMG and finance to retain its stake in Kashagan.

Campbell Keir, Shell’s representative in Kazakhstan, spelled out just what this burden entails when he  revealed that Shell, which has already invested more  than $3 billion in Kazakhstan, would be investing  some $900 million a year over the next few years,  most of it in Kashagan. But it is also developing the  Pearls field further south, together with the Oman  Oil Company and KMG, and other smaller projects.  Rather more cheerfully, he added that sharply falling steel and other input prices, thanks to the recession,  meant that it should be possible to contain or reduce  costs, which had spiralled at Kashagan and elsewhere  while the global economy was booming.

The new NCOC arrangement essentially boils down to a division of labour agreement between the ‘big five’. ENI will concentrate on bringing the Eskene processing complex on stream, Shell and Exxon will take a much more hands-on role in managing specific operational aspects of the project, together with KMG. Total, meanwhile, will concentrate on the logistical problems associated with building new export capacity and developing new export routes for the 1.5 million barrels a day of oil expected to flow from the field before the end of the decade. The French are particularly interested in the potential for exporting oil and gas south through Iran at some stage, politics permitting. But they are also working on the other large, new export route projects.

These include the KCTS export pipeline corridor between Eskene, Aktau and Kuryk; and building up tanker, and possibly sub-sea pipeline, routes across the Caspian to Baku and on to Ceyhan in Turkey.  Expansion of the CPC pipeline route through Russia is the other main priority – not only for Kashagan, but also for Chevron, BG and ENI, which already have rising oil and gas condensate production to export from their Tengiz and Karachaganak fields and badly need new capacity fast.

Exxon, meanwhile, is now in charge of drilling operations at the three smaller, and shallower, above-salt fields – Aktote, Kairan and Kalamkas – which are contained within the Kashagan concession area. Shell, which sees considerable synergies in  developing the Pearls field together with nearby  Kalamkas, is working closely with KMG on continuing developments at the main Kashagan project, while  ENI’s Agip, having been relieved of its sole operator  responsibilities, is now concentrating on developing  the complex on-shore facilities at Eskene and the  logistics base at Bautino.

The more focused and co-ordinated approach to developing Kashagan came just in time. Negotiations dragged on against the background of sharply rising global oil prices. But by the time the deal was officially announced, oil prices were plunging below $40 a barrel. The price collapse was partially recouped towards the middle of 2009 as oil prices recovered to around $50, but even at these levels all shareholders, including KMG, will be funding Kashagan and other Kazakh projects from much reduced global cash-flows.

The delayed start of production to 2012/2013  also means that the earning life of the 45-year  Production Sharing Agreement (PSA), which set out the tax and other parameters of the deal back in  1997, is eight years shorter than the oil companies  calculated when first oil was due to flow in 2005. In vain, the companies, especially Exxon, argued for a prolongation of the PSA timeframe, under which the entire project will revert to the state in 2042. The government refused.

Having been denied this extension, the best the oil companies can hope for now is that by 2013 global oil prices will have recovered and remain high for the next generation. The government is also -» hoping for such an outcome – because financing the  government’s long-term development plans, and  ambitions to turn Almaty into a regional financial  centre, are all heavily dependent on high and  rising oil and gas revenues from Kasha an – which,  ironically, is also the key to financing growth of a  more diversified economy.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 36-37.

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