Kazakhstan still stalling on Kashagan stake

By bne IntelliNews March 6, 2013

bne -

The Kazakh government is still to decide on the bid from Indian state-owned energy giant ONGC to buy into the Kashagan oilfield, Kazakh Foreign Minister Erlan Idrissov said during a visit to New Delhi on March 5. The long delay suggests Astana is struggling with what is a tough choice.

Pushed on the topic by Indian officials during his visit, Idrissov told a press briefing that Astana is still mulling the bid from OVL - the international arm of Oil and Natural Gas Corporation (ONGC) - to buy Conoco Phillips's 8.4% stake in the North Caspian Operating Company (NCOC). Kazakhstan suggested last month that it may block the deal in order to allow its own state oil and gas company Kazmunaigas to acquire all or part of the stake in the international consortium developing the giant Kashagan oilfield.

Idrissov's Indian counterpart Salman Khurshid said the meeting had covered Kazakh-Indian cooperation in the areas of defence and nuclear energy, as well as the oil and gas sector. "We reviewed our growing cooperation in the energy sector ... We also explored further possibilities of cooperation in the hydrocarbon sector. We requested the support of the government of Kazakhstan for an important bid that OVL is making for a stake in the Kashagan oil field," Khurshid told journalists, according to Livemint.

Idrissov however, claimed that the decision is too complicated to rush. "This is a very complex project and it involves work of partners in the consortium changing hands ... It involves a lot of technical, financial issues and therefore everyone is keen that the decision is taken in a well informed, well balanced way," the foreign minister said. "We of course are aware of the proposal made by ONGC... I hope a decision will be done sooner than later."

ConocoPhillips announced in November that it had agreed to sell its stake in Kashagan to OVL, with the $5bn deal set to be finalized in the first half of the year. Existing members of NCOC, which include Kazmunaigas, 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.

However, Kazakhstan has at its disposal a 2007 law that hands Astana the right to block foreign investment should it be judged against the country's interest. In February, an unnamed source at the Kazakh Oil and Gas Ministry told trend.az the government plans to take until June to reach its decision.

Tough choice

It's a choice which is far from clear cut given the enthusiasm of Central Asia's energy producers to diversify their exports further from the previous dominance held by Russia, and raise investment for other strategic projects.

On the one hand, Astana has been looking to increase its stake in the country's largest oil and gas projects in recent years. 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.

On the other, increasing its stake to become the single largest shareholder in Kashagan would raise challenges. KMG would 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 in February.

"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 Conoco Phillips stake with KMG.

Kazakhstan is also keen for investment into other major projects. Irissov told the press "[L]et me stress that Kashagan is not the end of life. We have a very successful example of cooperation in the same Caspian Sea area but on a bilateral basis," he added, referring to OVL's acquisition of a 25% share in Kazakhstan's offshore Satpayev block in late 2011.

Meanwhile, the delayed start of commercial oil production at Kashagan was confirmed on March 5. Output is now due to start in June, rather than this month, regional officials said, according to Kazinform.

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