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Exxon, Shell May Seeking Control of Kashagan Field

Thursday 30 August 2012

ASTANA (Bloomberg) – Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) are seeking bigger stakes in the Kashagan oil field and operating control before starting to expand the $46 billion project, according to two people with knowledge of the matter.

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North Caspian Operating Company B.V. (NCOC) became the delegated operator of activities under the North Caspian Sea Production Sharing Agreement on the 22 January 2009, in line with Agreements signed on the 31 October 2008 between the Republic of Kazakhstan and the NCSPSA co-venturers.
Co-venturers under the NCSPSA are also shareholders in NCOC, each holding the same participating interest as in the NCSPSA. Approximate shareholdings are: KMG Eni, ExxonMobil, Shell and Total 16.81% each, ConocoPhillips 8.40% and INPEX 7.56%.

Exxon and Shell also want Kazakhstan’s government to extend the production-sharing agreement for 20 years before investing more in the Caspian Sea field, touted as the world’s biggest discovery in four decades when found, the people said, declining to be identified as the talks are confidential. Exxon and Shell may seek to increase their stakes by buying out ConocoPhillips (COP)’s 8.4% stake in Kashagan, the two people said. ConocoPhillips plans to sell $8 billion to $10 billion of assets by the middle of 2013 and has said Kashagan may not offer a long-term, strategic opportunity.

The partners, which also include Eni SpA (ENI) and Total SA (FP), are looking for the second phase to widen the project’s profit margin. The budget for the first phase is set to reach $46 billion by the time the first oil is exported, according to a person with knowledge of the matter said in January. An early cost estimate put the tab at about $24 billion.

The Kashagan field is located in the Kazakhstan sector of the Caspian Sea and extends over a surface area of approximately 75×45 km. The reservoir lies some 4,200 meters below the shallow waters of the northern part of the Caspian Sea. The Kashagan project, cantered on a man-made island, is slated to produce its first oil by the end of this year. It may reach commercial output by June next year, said Lyazzat Kiinov, head of state-run KazMunaiGaz National Co., said in December 2011 when he was deputy oil minister.

NCOC: Kashagan Operator

Kazakhstan’s biggest oilfield will produce 370,000 to 450,000 barrels of oil a day in the first phase, an amount that may double in the second phase in 2018 or 2019, the government said last year. The Oil Ministry oversees the Kashagan production-sharing agreement, which allows the investors to recoup costs before the government takes its share of oil revenue. Aaccording Eni’s website, the agreement runs to 2041.

In October 2008 the Republic of Kazakhstan reached an agreement with the seven companies participating in the NCSPSA to form a new joint operating company North Caspian Operating Company B.V. In January 2009 NCOC formally became operator under the NCSPSA, taking over the role that was formerly held by Agip KCO (Eni). Assets within the 5,600 km² NCSPSA contract area include the giant Kashagan field, one of the largest petroleum developments in the world. Other assets include the Kalamkas, Aktoty and Kairan fields. Co-venturers in the NCSPSA are also shareholders in NCOC, each holding the same participating interest as in the NCSPSA.

The execution of operations is delegated by NCOC to four Agent companies:

  •  Agip KCO is responsible for delivery of Kashagan Phase I (Experimental Programme, including drilling);
  •  Shell Development Kashagan B.V. (SDK) is responsible for the planning, development and construction of the offshore facilities of Kashagan Phase II, while Agip KCO will do the same for the onshore facilities;
  • ExxonMobil Kazakhstan Inc. is responsible for Kashagan Phase II drilling activities;
  • KMG and Shell will jointly manage production operations of all phases through NC Production Operations Company (NCPOC).

According to Blommberg sources, Exxon and Shell will consider leaving the project if they don’t reach an agreement on prolonging the Kashagan contract and on operatorship. Ross Whittam, a London-based spokesman for Shell, declined to comment, as did an Eni press officer who declined to be identified, citing company policy.

“Exxon Mobil is a long-term investor in Kazakhstan and plans to remain a major investor in the country,” Charlie Engelmann, a spokesman for the Irving, Texas-based oil company, said by e-mail, declining to comment further.

With cost overruns and multiple delays over the past decade, the international partners agreed in 2008 to cut their stakes in Kashagan, boosting KazMunaiGaz’s interest to 16.8%. That is equal to the holdings of Exxon, Shell, Total and Eni. Japan’s Inpex Corp. (1605) is also a partner with 7.56%.

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