PetroKazakhstan and LUKoil in crude oil quarrel

Dec 30, 2004 01:00 AM

PetroKazakhstan, embroiled in yet another fight with partner LUKoil, made an aggressive move, cutting the flow of production at a major oil field the two companies co-own in an effort to settle a dispute over the sale of crude.
"Sometimes people don't react just to ordinary discussions," Ihor Wasylkiw, a PetroKazakhstan vice-president said from Calgary, where the company's head office is based. "Sometimes you have to take some physical action to get people to listen. We think they're listening."

Investors, having watched the Russian government gut oil giant Yukos, are increasingly worried about the business situation in the former Soviet Union, especially in the energy industry, where many people think the Kremlin is effectively nationalizing assets.
The PetroKazakhstan-LUKoil scrap -- the second one in 2004 -- began quietly at first and escalated later on. It came to a head with PetroKazakhstan turning off the tap on production from the Kumkol North field in central Kazakhstan. The company is a 50:50 owner in the field with LUKoil, Russia's largest oil producer.

LUKoil issued a press release about the production cut and a negative brokerage report warning of "severe long-term damage" was published by Aton Capital of Moscow. PetroKazakhstan didn't make its own announcement.
"This really is not of a material nature and it will be resolved shortly," Mr Wasylkiw said. "In Kazakhstan, we have daily operational challenges. This is one of those issues.... [But] all of a sudden, people start panicking, equating our scenario in Kazakhstan with Russia. It's so far from the truth it makes no sense."

PetroKazakhstan's dispute with LUKoil is over the sale of oil. The two have a deal to supply the domestic Kazakh market based on the volume of their production. Kumkol North, the field the two co-own, is operated by Turgai Petroleum. Turgai decided to reduce supply to the domestic market in favour of the export market, where the prices for oil are higher. The decision left the Shymkent refinery, which is wholly owned by PetroKazakhstan, short of supplies. The two sides had "extensive but inconclusive" discussions before PetroKazakhstan issued two formal warnings that said it would cut off production.
"It's sort of like playing chicken. If you don't respond in kind, it leads to further bullying," said Wilf Gobert, vice-chairman at Peters & Co. in Calgary, who has visited Kazakhstan several times. "If you push back, it can be resolved fairly quickly."

In LUKoil's release, the company said PetroKazakhstan had blocked production "without lawful grounds." PetroKazakhstan is full owner of the Kumkol South field and owns and controls the processing facility in the region, meaning it can refuse to handle production from Kumkol North. PetroKazakhstan said it was protecting its rights and seeks an "amicable resolution" with LUKoil.
PetroKazakhstan described the production cut-off as a "curtailment." Mr Wasylkiw said a "significant amount" of production was affected. PetroKazakhstan's shareof production from Kumkol North accounts for about one-quarter of its total.

In the first quarter of 2004, LUKoil and PetroKazakhstan were involved in another dispute, leading to reduced production for PetroKazakhstan and forcing the company to lower its 2004 projected production by 3 %. LUKoil accused PetroKazakhstan of drilling horizontal wells at the edge of Kumkol South to tap oil from Kumkol North. Both sides went to the Kazakh government, which sided with PetroKazakhstan, and production eventually resumed.
The Kumkol field was discovered in 1984 and started producing in 1990. In 1996, PetroKazakhstan -- then known as Hurricane Hydrocarbons -- paid $ 120 mm for its Kazakh assets, including all of Kumkol South and half of Kumkol North.

Kumkol North is PetroKazakhstan's second-biggest producing field. Production increased 17.8 % to 36,700 bpd in the July-September period from the same period last year.
Kumkol South production, PetroKazakhstan's No. 1 field, declined 15.8 % to 48,126 barrels.

Source: The Globe and Mail
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