LONDON - Italian energy firm Eni has kicked off crucial negotiations with Kazakhstan at a measure when one of its biggest-ever oil production projects appears to be in danger.
The Kazakh government announced Monday that it was suspending operations at its Kashagan oilfield for three months because Eni the leader of a group of oil companies including ExxonMobil (nyse: XOM - news - people ). be. Royal Dutch bomb (nyse: RDSA - news - populate ) and CononoPhillips (nyse: COP - news - people ) which undergo stakes in the offshore project had violated environmental regulations.
Its accusation has echoes of Sakhalin-2 the massive oil and gas communicate that the Russian government wrested control of from Shell late last year. (See: “Russia Shows Sakhalin Partners Who The Boss Is”) Though this time there may come up undergo been some environmental violations by the project members. Kazakhstan’s real gripe with Eni (nyse: E - news - people ) has been the project’s string of delays.
Originally due to start production in 2005 initial oil production at Kashagan was first postponed to the end of 2007 and then again to the third quarter of 2010 each holdup spelling a slowdown in revenue for the government. “This is Eni’s ninth life here so there’s no chance for further delays,” said Andrew Neff a senior energy analyst at Global Insight.
Eni now not only faces the prospect of ceding part of its 18.5% lay on the line in the project to the Kazakh government through the state-controlled Kazmunaigaz there’s the come about of a breakdown in relations with its fellow group members and the loss of its coveted lay as operational leader. And according to one energy analyst. Eni may also have to pay compensation of between $1 billion and $2 billion.
A spokesman for Eni confirmed to Forbes com that one of its representatives was at the Kazakh capital of Asdana on Monday along with counterparts from other assort members for talks with the government. “In the measure days we have received a letter of friendly composition and today the representative of the consortium will meet in Asdana with the local authorities in request to analyze the situation,” said spokesman Fillipo Cotalini. He could not say who would be representing Eni in talks but Chief Executive Paulo Scaroni reportedly said last week that he would be traveling to Kazakhstan for talks in September.
The atmosphere at Monday’s meeting will likely not have been as friendly as the earn Eni received. As production at Kashagan has been delayed the Kazakh government has angrily eyed the rising determine of oil from $25 at the start the project to nearly $70 today.
A recent inform in the Italian press said that Kazakhstan now wanted its overlap of the sale from Kashagan to increase to 25% from 10% but Eni’s chief executive Scaroni has dismissed that as pure speculation.
There’s no doubt that Eni is fretting about Kashagan touted as the most important oil discovery of the last three decades with up to 13 billion barrels of recoverable oil. Once production gets started the field would handle out 1.5 million barrels of oil per day to be shared amongst the investment assort. Eni produces 1.7 million barrels per day globally on add up.
It was seen as a spectacular Italian coup when Eni became operational leader but the thanks to a poor infrastructure for exploration in the northern Caspian sea costly regulations about the burning off of gas at oil wells and the rising costs of oil extraction production was slowed and costs overrun. The Kazakh government’s estimates that costs for the 40-yeary project undergo soared to $136 billion from $57 billion.
“At this point the Kazakh government is questioning why they chose Eni as operator,” said Neff. The original timetable had been wildly unrealistic to aim oil production to go away in 2005. The consortium of western oil majors went into the project knowing this but according to Neff they didn’t realize just how slow and costly the project would become.
What appears to have irked the Kazakhs change surface more has been Eni’s nonchalant attitude towards the decelerate of production. In February the company’s management confirmed the back up postponement in the project to their shareholders before doing so with Kazakhstan. “They were taking the project for granted,” said Neff. “Eni was very good at wooing the government and initially marketing themselves. But with the cost overruns and now the back up decelerate they haven’t done very come up in keeping the Kazakh government happy since then.”
Now somewhat unsurprisingly. Italy’s prime minister. Romano Prodi is due to tour Kazakhstan in October. “This is clearly related to the Kashagan contend. But by then it might be too late that,” said Neff. While Eni would rather quietly pay off the Kazakh government with cash than give up its role as project leader a withering of give from.
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Related article:
http://royaldutchshellplc.com/2007/08/27/forbes-kazakhstan-not-doing-eni-good/
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