Kazakhstan sues foreign oil majors over flailing Kashagan

Mar 07, 2014 12:00 AM

Kazakhstan is suing foreign oil majors developing its huge Kashagan oilfield in the Caspian Sea, a tactic similar to those that secured the government large stakes in two of the three multinational energy projects on its territory.

Repeated delays at the 13-year-old project, targeted to produce as much oil as OPEC member Angola from a reserve almost as big as Brazil's, have infuriated the Kazakh government.

The consortium, led by Exxon, Royal Dutch Shell , Total and Eni as well as Kazakh state oil firm KazMunaiGas, may face Kazakhstan seizing a bigger stake in Kashagan or refusing to reimburse a big chunk of the $50 billion spent on bringing it onstream.

The latter option is written into the Kashagan contracts.

"The delay is impacting effectively the GDP growth of the country," Fadi Farra, adviser to the Kazakh prime minister, told a conference in London.

"We're not talking about small game; we are talking about an impact of two to three points on the GDP of the country. Therefore a failure in pipelines, a technical issue, is impacting the economic development of the country," he added.

Production at Kashagan, the world's biggest oil discovery in 35 years, began in September but was stopped just weeks later after gas was found to be leaking from its pipelines.

Residual sour gas was then burnt in flares at Kashagan's processing plants, polluting the environment, the Environment Protection Ministry said in a statement.

Checks showed that the volume of gas burnt in flares last September and October was 2.8 million cubic metres, exceeding legal limits, the ministry said, and a claim for 134.2 billion tenge ($737 million) against the North Caspian Operating Company (NCOC) has been made by Atyrau Region authorities in western Kazakhstan where Kashagan is located.

Kazakhstan, a vast steppe nation of 17 million people, is Central Asia's largest economy and the second-largest former-Soviet oil producer after Russia. It is home to slightly more than 3 percent of the world's recoverable oil reserves.

GAS LEAKS

State firm KazMunaiGas took a shareholding in the Kashagan consortium in 2005 and later doubled its stake to 16.81 percent, equal to those of the four foreign stakeholders.

Japan's Inpex has 7.56 percent, and China National Petroleum Corp (CNPC) bought 8.33 percent in 2013 from ConocoPhillips.

KazMunaiGas also secured a 10 percent stake the giant Karachaganak oil and gas condensate field in northwestern Kazakhstan in 2011. Other project participants are BG, Chevron and Russia's Lukoil.

Before the gas leaks brought Kashagan's output to a halt, the consortium had failed to achieve so-called "commercial output" at the field by Oct. 1 as stipulated in its contract.

This means that NCOC members will not be reimbursed for costs between then and the date when they finally achieve commercial output, KazMunaiGas head Sauat Mynbayev said, reiterating a clause added to the production sharing agreement in 2008.

Kazakh Prime Minister Serik Akhmetov said last week he hoped that the field could start producing again in the first half or early in the second half of this year.

Kazakhstan's central bank governor, Kairat Kelimbetov, said in February the government had no plans to nationalise Kashagan.

NCOC said last month that, as a precautionary measure to save time, it had begun a tender process for the potential purchase of pipeline joints "for various scenarios".

Much of its infrastructure is built on artificial islands to avoid damage from pack ice in a shallow sea, which freezes five months a year in temperatures that drop below minus 30 degrees Celsius (-22 F).

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