Wednesday, July 16, 2008
A New Oil Bully in the Caspian?
//Kazakhstan, with an output potential of 1.5 million barrels a day, shows signs of rivaling Russia in strut and swagger
July 14, 2008 - Business Week by S. Adam Cardais - The last thing the world needs right now is another petro bully. But with oil prices continuing their ascent, resource-rich Kazakhstan is doing some troubling strutting. Behind the country's swagger is the Kashagan oil field. Found in 2000, Kashagan is one of the largest fields to be discovered since the 1970s. Its recoverable reserves are estimated at 13 billion barrels, or 1.5 million a day. To put that in perspective, from 2000 to 2007, non-OPEC production rose by only 4 million barrels a day. Kashagan could make the country of 15 million people situated between Europe and Asia among the world's most powerful oil exporters. But its development, managed by the Agip KCO consortium of seven companies that include Eni of Italy and ExxonMobil, has been plagued by production delays and swelling budgets. Kashagan has yet to yield a single barrel of oil. The Kazakhs, practically shaking for the cash windfall of Kashagan, blame the consortium for the complications and are using this as a pretext to muscle-up their stake in the project, first revoking Eni's operating license last year, then demanding a hefty bonus from the consortium and a larger share for national energy company Kazmunaygas in January. The consortium has remained largely quiet, but earlier this month it lashed out. Speaking 1 July, Exxon Chief Executive Rex Tillerson blamed Astana for the delays. "It is time for the government of Kazakhstan to stop delaying the project, [to] be supportive of the consortium, and see the project through to a successful startup," he said. Reality is that both sides share blame, but the early wafts of energy nationalism are nevertheless detectable in Kazakhstan's assertiveness. Many observers see parallels to Russia's tactics in effectively forcing Royal Dutch Shell to sell a controlling stake in Sakhalin 2 to Gazprom in 2006 and its rough handling of BP. "The whole saga [over Kashagan has been seen] in the context of Sakhalin 2 and Venezuela and Bolivia," said Shamil Yenikeyeff of the Oxford Institute for Energy Studies. "This whole case was seen as growing state control in energy-rich countries."
ET TU, BRUTE?
That's alarming considering the size of Kazakhstan's reserves, the price pressure of keeping the oil underground, and U.S. and European hopes that the country—also rich in natural gas—will become a friendlier alternative to Russian and OPEC energy. Yet despite the incipient similarities to petro-authoritarianism elsewhere, signalling the rise of another energy brute in Kazakhstan is premature, and concerns that the government's assertiveness with Agip KCO could escalate into a Putinesque style hijacking are overblown. First, it's important to understand that Kazakhstan's annoyance with the consortium isn't unreasonable. Though Agip KCO faces among the world's most technically challenging oil projects in Kashagan—located in the shallow waters of the Caspian Sea filled with floating ice and crude oil that contains lethal levels of hydrogen sulphide gas—it has repeatedly delayed the initial start-up date of 2005, most recently to 2013, and the budget has tripled to around $150 billion. Every budget overrun lowers the government's take, and the Kazakhs have estimated the added expenditures and delays could cost state coffers $20 billion over a decade. (The consortium reportedly doesn't recognize this figure). Then consider that the petroleum industry accounts for 30 percent of Kazakhstan's GDP and around 60 percent of its export revenues, and the government's agitation over Kashagan's protracted dormancy is understandable. To be fair, the Kazakhs are aggravating the situation. Most recently, the government announced strict new sanctions for further delays, and in November it unnerved the consortium with a law allowing the government to walk away from oil contracts. Fines for environmental damage have also been threatened, reminiscent of Russia's tactics against Royal Dutch Shell at Sakhalin 2. This posturing isn't as menacing as it appears, however. Kazakhstan's leverage is in the world's ravenous demand for its oil largess—and the Kazakhs clearly recognize this. But that's the extent of their leverage. The domestic energy market is weak. Kazmunaygas develops only 6 percent of the country's natural gas, according to Yenikeyeff. So Kazakhstan has neither the financial nor the technological capability to develop Kashagan on its own. Quite simply, it needs the consortium. Furthermore, other potential investors are eyeing how this plays out. At the same time, the Kazakhs realize the value of their reserves in this time of $140-plus oil and supply shortages. Most respected energy analysts say the shortages are the driving force behind higher prices, not the oft-blamed speculators. And they're going to capitalize on it, possibly by continuing to push for a stronger position in Kashagan, Yenikeyeff said. "I think what's going to happen is that Kazmunaygas could take a large stake in the project and could even become the project's operator," he said. "In that respect, they're seeking to use Kazmunaygas as a cash cow." The consortium will certainly resist this—but probably won't manage much of a fight. As Yenikeyeff noted, those are just "the new rules of the game."
July 14, 2008 - Business Week by S. Adam Cardais - The last thing the world needs right now is another petro bully. But with oil prices continuing their ascent, resource-rich Kazakhstan is doing some troubling strutting. Behind the country's swagger is the Kashagan oil field. Found in 2000, Kashagan is one of the largest fields to be discovered since the 1970s. Its recoverable reserves are estimated at 13 billion barrels, or 1.5 million a day. To put that in perspective, from 2000 to 2007, non-OPEC production rose by only 4 million barrels a day. Kashagan could make the country of 15 million people situated between Europe and Asia among the world's most powerful oil exporters. But its development, managed by the Agip KCO consortium of seven companies that include Eni of Italy and ExxonMobil, has been plagued by production delays and swelling budgets. Kashagan has yet to yield a single barrel of oil. The Kazakhs, practically shaking for the cash windfall of Kashagan, blame the consortium for the complications and are using this as a pretext to muscle-up their stake in the project, first revoking Eni's operating license last year, then demanding a hefty bonus from the consortium and a larger share for national energy company Kazmunaygas in January. The consortium has remained largely quiet, but earlier this month it lashed out. Speaking 1 July, Exxon Chief Executive Rex Tillerson blamed Astana for the delays. "It is time for the government of Kazakhstan to stop delaying the project, [to] be supportive of the consortium, and see the project through to a successful startup," he said. Reality is that both sides share blame, but the early wafts of energy nationalism are nevertheless detectable in Kazakhstan's assertiveness. Many observers see parallels to Russia's tactics in effectively forcing Royal Dutch Shell to sell a controlling stake in Sakhalin 2 to Gazprom in 2006 and its rough handling of BP. "The whole saga [over Kashagan has been seen] in the context of Sakhalin 2 and Venezuela and Bolivia," said Shamil Yenikeyeff of the Oxford Institute for Energy Studies. "This whole case was seen as growing state control in energy-rich countries."
ET TU, BRUTE?
That's alarming considering the size of Kazakhstan's reserves, the price pressure of keeping the oil underground, and U.S. and European hopes that the country—also rich in natural gas—will become a friendlier alternative to Russian and OPEC energy. Yet despite the incipient similarities to petro-authoritarianism elsewhere, signalling the rise of another energy brute in Kazakhstan is premature, and concerns that the government's assertiveness with Agip KCO could escalate into a Putinesque style hijacking are overblown. First, it's important to understand that Kazakhstan's annoyance with the consortium isn't unreasonable. Though Agip KCO faces among the world's most technically challenging oil projects in Kashagan—located in the shallow waters of the Caspian Sea filled with floating ice and crude oil that contains lethal levels of hydrogen sulphide gas—it has repeatedly delayed the initial start-up date of 2005, most recently to 2013, and the budget has tripled to around $150 billion. Every budget overrun lowers the government's take, and the Kazakhs have estimated the added expenditures and delays could cost state coffers $20 billion over a decade. (The consortium reportedly doesn't recognize this figure). Then consider that the petroleum industry accounts for 30 percent of Kazakhstan's GDP and around 60 percent of its export revenues, and the government's agitation over Kashagan's protracted dormancy is understandable. To be fair, the Kazakhs are aggravating the situation. Most recently, the government announced strict new sanctions for further delays, and in November it unnerved the consortium with a law allowing the government to walk away from oil contracts. Fines for environmental damage have also been threatened, reminiscent of Russia's tactics against Royal Dutch Shell at Sakhalin 2. This posturing isn't as menacing as it appears, however. Kazakhstan's leverage is in the world's ravenous demand for its oil largess—and the Kazakhs clearly recognize this. But that's the extent of their leverage. The domestic energy market is weak. Kazmunaygas develops only 6 percent of the country's natural gas, according to Yenikeyeff. So Kazakhstan has neither the financial nor the technological capability to develop Kashagan on its own. Quite simply, it needs the consortium. Furthermore, other potential investors are eyeing how this plays out. At the same time, the Kazakhs realize the value of their reserves in this time of $140-plus oil and supply shortages. Most respected energy analysts say the shortages are the driving force behind higher prices, not the oft-blamed speculators. And they're going to capitalize on it, possibly by continuing to push for a stronger position in Kashagan, Yenikeyeff said. "I think what's going to happen is that Kazmunaygas could take a large stake in the project and could even become the project's operator," he said. "In that respect, they're seeking to use Kazmunaygas as a cash cow." The consortium will certainly resist this—but probably won't manage much of a fight. As Yenikeyeff noted, those are just "the new rules of the game."
# posted by Deval : 7:18 AM
Contact me:
