Eni Cedes Control, Output of Kashagan to Kazakhstan

By Adam L. Freeman and Nariman Gizitdinov

(Corrects status of Eni as operator in ninth paragraph.)

Oct. 31 (Bloomberg) -- An Eni SpA-led group of oil companies signed an agreement with the Kazakh government that will give it more royalties and oversight at the Kashagan field when oil starts flowing at the end of 2012.

``I signed; everything is done,'' Eni Chief Executive Officer Paolo Scaroni told reporters today in Astana, Kazakhstan.

The accord sets ``strong mechanisms to control costs'' and gives Kazakhstan a ``priority stake'' in production from the field, the Kazakh Energy Ministry said in a statement. State-run KazMunaiGaz National Co. will raise its interest to 16.81 percent, on par with Eni and partners Exxon Mobil Corp., Royal Dutch Shell Plc and Total SA, according to a statement from Eni.

Scaroni agreed in January to give the Kazakh government a greater share of one of the largest oil discoveries in the last three decades following cost overruns and production delays. The start of production has been pushed back four times. The government today said output should begin in December 2012.

Eni and its partners will ``compensate potential economic losses of Kazakhstan'' by ceding a priority stake, ``increasing Kashagan's production bonus to $4.8 billion in net present value'' based on oil at $55 a barrel, the prime minister's office said today in a statement, without giving a comparative figure. Such an increase had been discussed in January, it said.

Kazakh Stake

The Central Asian country will get 5 percent to 12 percent of the field's production, depending on the cost of crude, according to Kazakh Energy Minister Sauat Mynbayev, who spoke to reporters in Astana following the signing ceremony. KazMunaiGaz will be represented in all areas of operations.

Eni's Kashagan partner Exxon will be responsible for offshore drilling, while Shell will oversee all offshore operations excluding drilling, Mynbayev said. Eni will be in charge of Kashagan onshore operations and Total will direct ``general coordination,'' he said.

``The government for the first time in many years has managed to overcome the domination of foreign capital over domestic capital in strategic industries,'' the prime minister's office said in the statement.

Costs for the so-called experimental phase at Kashagan have risen to $38 billion from $24 billion, according to the statement. Mynbayev said in September that the budget had advanced 33 percent in a year to $36 billion. The experimental period covers exploration and development of the field through the start of production. Eni will lose its position as operator in January 2009, it said today, adding that it retains responsibility for the execution of the experimental phase.

Output

Kashagan's output will total 75,000 barrels a day in 2012 and climb to 1.5 million barrels in nine years, according to KazMunaiGaz Managing Director Aman Maksimov, who briefed reporters today on the agreement in Astana.

The Kashagan field has 13 billion barrels of recoverable oil and 35.8 billion barrels of oil in place, according to a September Eni slideshow for investors and analysts.

To contact the reporters on this story: Adam L. Freeman in Rome at afreeman5@bloomberg.net; Nariman Gizitdinov in Almaty, through the Moscow newsroom at ngizitdinov@bloomberg.net