Changing composition of the UN of oil

The Kashagan consortium is so big and diverse it looks at times like a UN of oil. And its ethnic make-up is due to change again – in a radical way.

KMG, the Kazakh state oil company, is to buy ConocoPhillips’ 8.4 per cent stake in the project and is then widely expected to sell it on to CNPC of China for about $5bn, further entrenching China’s leading position in Kazakh oil. Chinese companies already account for about 20 per cent of the country’s crude output.

It is a blow for the Indians. ONGC Videsh did a deal last year to buy the stake directly from Conoco in a decision that was hailed domestically as a triumph for the Indian state oil company’s global ambitions.

But CNPC’s entry is only the latest in a long line of changes to the make-up of the Kashagan consortium.

BP and Norway’s Statoil sold their combined 14 per cent stake in the project to the other partners in 2001 for about $600m. Two years later, BG Group arranged to sell its stake to two Chinese companies, but the other members exercised their pre-emption rights, intending to divide the stake between them.

Then KMG muscled in and laid claim to half the stake for itself. After months of negotiations, the Kazakh national champion was finally admitted into the Kashagan consortium in May 2005.

Its stake was to grow even larger, reflecting the rise of resource nationalism in Kazakhstan. Frustrated by ballooning costs and production delays at Kashagan, Kazakhstan decided in 2007 to tighten its grip on the project. After more tense negotiations KMG doubled its stake in the consortium, at the expense of the other partners, and Italian major Eni lost operating control.

By an agreement finalised in 2008, Eni retained responsibility for the first, experimental phase up to the start-up of production. Royal Dutch Shell will take charge of offshore development for the second phase while ExxonMobil will handle the drilling.

But there may be even bigger changes ahead. The Kashagan production-sharing contract expires in 2041. Yet the incessant delays to field start-up mean the companies have much less time to recover their costs than initially envisaged. Analysts expect them now to try to negotiate a contract extension – a process which would require years of hard bargaining with the Kazakh government.

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