Kazakhstan blocks India's Kashagan deal in favour of Chinese

By bne IntelliNews July 22, 2013

Clare Nuttall in Astana -

As the long-awaited launch of production at Kazakhstan's offshore Kashagan oilfield approaches, the Kazakh government confirmed in early July that it is using its preemptive right to block the sale of Conoco Phillips' stake in the field to India's ONGC Videsh Ltd. The stake is instead set to be sold to China National Petroleum Corp (CNPC), reinforcing China's growing role in Kazakhstan's energy sector.

Shortly before being moved to head of state oil and gas company KazMunaiGas (KMG), Oil and Gas Minister Sauat Mynbayev said the government would buy US major Conoco Phillip's 8.4% stake through KMG, which is one of Kashagan's largest shareholders.

Mynbayev's announcement came a day after the then chairman of KMG, Lyazzat Kiinov, said on July 1 that Conoco Phillips's stake will be sold to China National Petroleum Corporation (CNPC) via back-to-back deals with KMG. He did not offer a deadline for the deal's completion but said he hoped it would close quickly.

Speculation had already spiked that Chinese state-owned CNPC would get its hands on the stake, despite an agreement struck by the US company in November 2012 to sell it to India's ONGC Videsh Limited (OVL). The price the Chinese company has reportedly agreed is slightly above the $5bn that the Indian state-controlled company had agreed.

Having invoked legislation allowing it the final say on "strategic" investments in the country to delay that deal, the Kazakh government was expected to make a decision on the sale of the stake to OVL by May 25. However, those negotiations have dragged on, with Chinese officials understood to have been lobbying hard for the asset.

China has been steadily increasing its investment in Kazakhstan's oil and gas sector, as it seeks to secure steady supplies of hydrocarbons to meet growing domestic demand. Around 25% of Kazakhstan's oil output is now produced by Chinese companies. The purchase of Conoco Phillips' stake would finally give Beijing an interest in the massive offshore field a decade after members of the North Caspian Operating Consortium (NCOC), which is developing the field, blocked an attempt by CNOOC and Sinopec to buy BG Group's holding.

With a similar thirst for energy, India has also invested in oil and gas assets in the Caspian region, buying into Kazakhstan's Satpaev field as well as investing into Azeri assets. However, there is no infrastructure linking the region to India, despite a proposal from New Delhi to build a pipeline.

Almost there

The news comes as the existing consortium approaches the start of commercial production at the field after years of delays - mainly due to technical difficulties - that have frustrated Kazakhstani officialdom. The much-postponed launch of production at Kashagan is believed to have been the reason behind the decision to sack Mynbayev after six years as oil and gas minister, demoting him to head KMG on July 3.

The consortium, which includes Shell, ExxonMobil, Total and Inpex as well as KMG, faces heavy financial penalties if production does not begin by October 1, but the launch date is still not clear despite pressure by the Kazakh government to start by July 6 - the Capital Day holiday and President Nursultan Nazarbayev's birthday. New Oil and Gas Minister Uzakbai Karabalin then announced during a visit to Atyrau on July 18 that preparations were 98% completed, and production would start by October at the latest, according to Kazinform. However, an oil and gas industry source tells bne that there is still the possibility that production may again be postponed until early 2014.

In recent weeks, the start date has edged closer. In June, the Bolashak Processing Facility, which will process crude from Kashagan, was formally opened. NCOC has since announced that it had started introduction of sweet gas into the offshore facilities on the artificial D Island on July 17, following the lighting of the flare on 14 July - another milestone bringing the project "a step closer to the start of production later this year," the consortium said in a statement. Workers are also being laid off at several Kashagan-related sites as construction work is completed, triggering a three-day strike at D Island in early July.

Kashagan is the world's largest oilfield discovery in the last three decades, with an estimated 35bn barrels of oil, and the government is eager to start receiving revenues from increased oil exports. The NCOC plans to produce 180,000 barrels per day in the first phase of operations, increasing output to 370,000 b/d in the second phase. When the field reaches peak production it will launch Kazakhstan among the world's top oil exporters.

In the shorter term, the production launch will revive Kazakhstan's slowing economic growth, which has taken a hit from the slowdown in China and other trading partners. The International Monetary Fund (IMF), which forecasts 5.5% GDP growth in 2013, cites possibility of delays in the start of production at Kashagan as one of the main downside risks for this year.

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