Kazakhstan still mulling acquisition of Kashagan stake

By bne IntelliNews February 5, 2013

bne -

The Kazakh government said on February 4 that it's still mulling whether to acquire ConocoPhillips's stake in NCOC, the company developing the giant Kashagan oilfield. The claim comes despite the end of the official period for existing shareholders to exercise pre-emptive rights in late January.

Oil and Gas Minister Sauat Mynbayev told journalists on February 4 that Astana is still undecided on whether to buy the 8.4% stake, and that the ministry is working with other members of a government commission set up to consider the issue. "Kazakhstan has not yet acquired the ConocoPhillips stake in Kashagan. The interdepartmental commission continues its work and we still have enough time to make a decision," Mynbayev said.

The US oil major announced in November that it had agreed to sell its stake in the Kashagan project to OVL, the international arm of India's state owned Oil and Natural Gas Corporation (ONGC). The $5bn deal is due to close in the first half of the year.

Existing members of the North Caspian Operating Company (NCOC), which include state oil and gas company Kazmunaigas (KMG), had a 60-day period in which they could decide to exercise pre-emptive rights to buy the stake instead. However, that expired on January 25.

"By not exercising their ROFR [right of first refusal], they (the project partners) have agreed to OVL joining the project," an OVL official claimed on January 28. However, the unnamed official admitted to the Economic Times that the deal still hinges on approval from Astana. "The Kazakhstan government now has until the end of July to decide on the bid," he said.

Kazakhstan has at its disposal a 2007 law that hands Astana the right to block foreign investment should they be judged to be not in the country's interest. Last week, an unnamed source at the Kazakh Oil and Gas Ministry told trend.az that the government plans to consider the issue until June 2013. "The state has this right," the source said.

In recent years, Astana has sought to increase its stake in the country's largest oil and gas projects. KMG bought into NCOC in 2004 and increased its stake in 2008. It is now one of the largest shareholders alongside Eni, Royal Dutch Shell, Total and Exxonmobil, all of which hold 16.81%. Last year, the state company finalised a deal worth $3bn for a 10% stake in the huge Karachaganak gas field close to the Russian border.

However, increasing its stake to become the single largest shareholder in Kashagan would raise challenges. KMGwould need to secure the funds not just to buy out ConocoPhillips, but also to provide the largest share of investment costs for the second phase development.

"It's a tough decision for KMG to make. Pre-empting the stake would make it the largest shareholder in the company, whereas there is currently an equilibrium as all the major shareholders have the same sized stake," Matthew Shaw, an analyst at Wood MacKenzie, told bne.

"However," he adds, "Kazakhstan's relationship with India also has to be taken into account, as does funding for the investment - both upfront and for the ongoing costs of development." Such concerns have led to speculation that OVL will eventually get the go ahead to buy into the project - albeit, it may have to be satisfied with splitting the ConocoPhillips stake with KMG.

The north Caspian Kashagan field was the largest oilfield discovery in the last three decades, with estimated recoverable reserves of around 13bn barrels of oil. Following many years of delay, production is due to start in the first half of this year. Once the first phase begins, negotiations between the Kazakh government and the consortium will step up a notch as they approach investment decisions on the second phase development.

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