Kazakhstan: Government Threatens To Halt Major Oil Venture

(RFE/RL) August 23, 2007 (RFE/RL) -- A foreign-led consortium appears close to being thrown out of a project to develop one of the largest oil finds in the last 30 years. Kazakh Prime Minister Karim Masimov has warned a consortium led by Italy's Eni that Astana might suspend its work in the north Caspian Sea's Kashagan oil field because of environmental damage.

Earlier this week, Environment Minister Nurlan Iskakov also warned the consortium that ecological damage could lead to a suspension of its contract.

For the Italian group Eni, a subsidiary of Agip, it is a warning that must be taken seriously.

Kazakhstan's Kashagan oil field in the northern Caspian Sea is thought to hold the largest oil reserves to have been discovered in the last 30 years -- as much as 10 billion tons of oil, by some estimates.

But Kazakh officials are blaming Eni for a rash of Caspian seal deaths and a drastic reduction in the number of fish, and warning that the work at Kashagan might be stopped completely.

'A Serious Warning'

Kazakh economist Kanat Berentaev downplayed the threat of a total stoppage in comments to RFE/RL's Kazakh Service. But he said Eni needs to pay attention to what officials like Iskakov are saying.

"This is not a threat, but it is a serious warning that they might pull the plug on Eni and look for another operator who works under the conditions that Kazakhstan is setting," Berentaev said. "So I think that Nurlan Iskakov, in this regard, is absolutely correct to warn these companies working in Kashagan that it is necessary to fully meet the terms of contracts."

Oil-industry expert and former Kazakh parliamentarian Nurpeis Mukashev told RFE/RL's Kazakh Service that it is unlikely that work at Kashagan would be stopped or that Eni would lose its contract.

"I am 100-percent sure that the operation will not be stopped," Mukashev said. "There is so much of Kazakhstan's infrastructure involved. Every foreign company working there has a workforce that is 20-30 percent from Kazakhstan. Just recently, a half year ago, Agip announced its decision to move offices from The Hague to Atyrau [in Kazakhstan]. They have already bought land and had a groundbreaking ceremony [for offices]. Taking all that into consideration, there is no reason for panic."

Environment Or Money?

Mukashev says there are still questions about whether Eni was responsible for environmental destruction in the Kashagan area.

"I think here there are pure economic motives at work," he said. "They say there are real ecological issues, but there's no proof. Yes, seals are dying and fish numbers are decreasing. But who can prove this is because of Agip's seven facilities? They have their own environmental experts and expertise. Even the foreign laboratories are not able to prove a connection, whatever the speculation is."

There is speculation that the complaints of environmental damage are not the real reason -- or at least not the entire reason -- for this week's warnings. Eni originally said development of Kashagan would start in 2005, but that date has been postponed several times. Earlier this month, Eni again revised its time frame for production from 2008 to 2010 and said the project would now cost $136 billion, more than double the original estimate of $57 billion.

Kazakh political analyst Dosym Satpaev said that could be the biggest reason Kazakh officials are pressing Eni.

"Kazakhstan has been forced to reduce its forecasts for the amounts of oil production leading up to 2015," he said.

Kazakh officials had planned to be producing some 115 million tons of crude oil annually for the period 2010 to 2015. Those plans are now being revised downward to take into account the delay at Kashagan.

New Partner?

Economist Berentaev said he believes a compromise will be reached. But he did not rule out the project slipping out of Eni's grasp.

"They will find some kind of compromise with the contractor and some fine will be paid and the situation will calm down," Berentaev said. "But there are two points to keep in mind here -- one is the financial loss, and why Kazakhstan should suffer from this is difficult to understand; the second is the environmental damage. So there are two violations here, and tearing up the contract could still be possible."

Eni is not the only foreign-led consortium being warned about ecological damage in Kazakhstan. An oil project at western Kazakhstan's Tenghiz oil field, led by Chevron Oil, was also warned this week, as was a daughter company -- CNPC-Aktobemunaigaz Company -- of China's National Petroleum Corporation.

As with Eni, some observers feel the warnings about environmental damage reflect a desire to meet production targets and deadlines.

Eni's consortium includes the French company Total, Royal Dutch/Shell, ExxonMobil, ConocoPhillips, Japan's Inpex, and Kazakhstan's state-owned KazMunaiGaz.

(RFE/RL's Kazakh Service Director Merhat Sharipzhan contributed to this report)