Development of the Kashagan oil field appears close to getting back on track, as the Kazakhstani government and a consortium led by the Italian oil company Eni SpA make progress in settling grievances surrounding the project.
On October 8, Italian Prime Minister Romano Prodi visited Kazakhstan, and, in talks with Kazakhstani President Nursultan Nazarbayev, apparently succeeded in repairing the breach between the government and the Eni-led consortium. Kazakhstan ordered the suspension of Kashagan development operations in late August, after the consortium announced that the oil field would probably not begin pumping oil until 2010, and it would cost $136 billion overall to complete the project more than double the original estimate. [For background see the Eurasia Insight archive].
Astana cited environmental concerns in justifying its decision to suspend operations. Officials also announced an intention to seek $10 billion in damages, and hinted darkly that they might cancel the 1997 contract. Foreign analysts believe the suspension was politically motivated, in effect a sign of the Kazakhstani government's displeasure over the production delay and rising costs. Other participants in the Eni-led consortium include ConocoPhillips, ExxonMobil, Royal Dutch Shell, Total, Inpex and Kazakhstan's state energy company, KazMunayGaz.
Technically, the two sides face an October 22 deadline to resolve their differences. But in the aftermath of Prodi's visit, that timeframe appears flexible, as both sides seem interested in a negotiated solution. Eni chief Paolo Scaroni, who also was in Kazakhstan on October 8, said he expected a new deal to be in place by the end of 2007.
Rhetoric on both sides has grown less heated of late. Nazarbayev left no doubt that he wants the Eni-led consortium to remain in place. "We are not talking about revising the contract signed 10 years ago," Nazarbayev told Prodi on 8 October in remarks quoted by Kazinform state news agency. "I hope the Eni group will not go back on its words."
Prodi said he was "very happy" to receive Nazarbayev's "assurances," the Interfax-Kazakhstan news agency reported October 9. According to some reports, Prodi urged Eni and other consortium members to redouble efforts to begin production at Kashagan before 2010.
Nazarbayev indicated that one of Kazakhstan's chief concerns with the Kashagan delay is the impact on budget revenue. The president is intent on transforming Kazakhstan into one of the world's 50 most competitive economies, as well as one of the top 10 oil producers, by 2015. The Kashagan delay could hurt Kazakhstan's chances of accomplishing both these goals. [For background see the Eurasia Insight archive]. Kashagan, with estimated reserves of 13 billion barrels, is the largest oil discovery of the last 35 years.
While signaling a desire to work out existing differences, Nazarbayev held out the possibility that the consortium could face a breach-of-contract suit. "If investors violate an agreed contract, Kazakhstan reserves the right to take measures according to our domestic legislation," the Kazakhstani president said.
In the days leading up to Prodi's visit, there were indications that the administration was softening its line. Speaking at a flagship energy conference in Almaty on October 3, Energy Minister Sauat Mynbayev said he was confident a deal could be reached without resorting to the courts. "We very much hope we will not have to apply legislative measures, and as throughout the history of independent Kazakhstan we will seek to resolve all problems via negotiations.