Playing hardball
Having just written a comment to my earlier post - I only come to read today’s news now. And there’s a new development to the Kashagan charade: Nurlan Isakov, Kazakhstan’s environment minister said (The Moscow Times):
The permit for 2007 has been suspended. That is, we are suspending work for three months on our part.
Why has the Kazakh government done this? Their list of reasons reads:
- The Eni-led consortium has breached national environmental legislation. No details have been announced yet.
- “We have uncovered serious violations of fire safety rules there.” (Says an Emergency Ministry official.)
- “The Kazakh Finance Ministry’s customs committee said it had uncovered customs violations at the deposit concerning imports of two helicopters, and was opening a criminal case against unidentified consortium officials.” (From the Moscow Times article.)
- The delays in production (Kashagan won’t come onstream for another few years) make Kazakhstan’s oil export targets look increasingly unrealistic. Theoretically, the delay is a great opportunity to renegotiate the deal. Remember that in 2000 and the beginning of 2001, the oil price was extremely low. With the price for a barrel above $60 for the forseeable future, the consortium might just swallow if the Kazakh government gets a higher share of the profits.
And that’s the main point. Kazakhstan just wants to get a higher share than their current (and ridiculously low) 10% of the field’s profits. 40% do sound better. And they might as well get it soon. Otherwise, the Kazakh government’s concern over the environment, fire safety standards or import tax will further delay the $136 billion investment. What are three months when the project was originally slated to be onstream in 2005 already?
on August 28th, 2007 at 5:50 am
It seems like the main reason is this another delay in start of extraction. Other charges are serving this one.
on September 1st, 2007 at 3:21 pm
Perhaps the most interesting article on this subject appeared in the Wall Street Journal. (Reproduced here: http://www.rigzone.com/news/article.asp?a_id=49533)
People I have spoken to essentially support the central gist of this article, which is that Eni may actually be primary source of the problem. That said, if the WSJ account is reliable, it sounds as though the Kazakh government has been woefully optimistic in its expectation of a quick return on this field.
There have been some parallels drawn, on an other point, between the Russian precedent at Kovykta and Sakhalin and Kazakhstan’s current stance, which Ben is to be commended for in pointing out as early as he did. However, although the strategies are notably alike, it is worth observing quite how the Kazakh government’s behaviour differs from its northern neighbour, which is increasingly viewing itself as a geopolitical counterweight as well as economic actor to be contended with.
I should be interested to know how people think whether there is broader international issue at stake in the revision of these formlerly open-ended resource development permits.
Also, have any Kazakh observers been able to shed light on the cadre changes taking place within the state holding that incorporates KMG and in the energy ministry itself?
on September 1st, 2007 at 4:39 pm
Thanks Peter for the link and your comment. I agree with you that Kazakhstan’s behaviour differs from Russia’s.
I don’t think that KMG really wants, in the short to mid term, to take over the operator role in either Kashagan or Tengiz (where Chevron got into “environmental” trouble recently, too). These two are simply too challenging frontier operations, and who knows what other problems Eni (or another to-be-appointed operator) might face. KMG simply is not experienced enough.
That’s why the parallels to Sakhalin should not be overestimated, I think you’re right. At Sakhalin, it only started with three operators (with Shell owning a majority), making it much easier to apply pressure and, above all, negotiate behind-the-door deals (which played a big role in “convincing” Shell into selling half of its shares).
Also, correct me if I’m wrong - but Sakhalin Energy, the operator, is staffed by loads of Shell people and above all, the project is much older and is already, at least in part, onstream.
I think it really boils down to Eni and the Kazakh government being over-optimistic in the beginning. But now the Kazakh government tries to play this to its own advantage.
Masimov’s words that the Kazakh state looses much money with which it had planned to build hospitals and schools are tear-wrenching, but in the end nothing more than part of a clever bargaining strategy.
The pipeline issue, pointed out by the WSJ article you reference, would have prohibited Kashagan to go onstream properly as early as 2005, let alone now.
With Tengiz increasing its daily output but the Tengiz-Novorossiysk pipeline not being approved for extension plus a Caspian seabed pipeline showing no signs of leaving the planning stages, the Kazakh government can use the delay for a reshuffling of the contract details. A Chinese pipeline is also only slowly materialising from the planning stages.
By the end of this year, we might see the exit of one consortium member (and it doesn’t have to be Eni, others as well might just loose their interest and risk-appetite for that project). KMG would most likely take that one over (if there’s cash…). Furthermore, Kazakhstan might receive more than the negotiated 10% of the profits. We shall see.
I would also like to hear more about the recent cadre changes. Could they maybe hint at Masimov or Nazarbayev not being content with their own people’s handling of the whole Kashagan charade?
on September 2nd, 2007 at 12:26 am
We are in Detroit, Michigan and our church is planning a trip to Kazakhstan in 2009.
In tips would be greatly appreciated.