KAZAKHSTAN: KASHAGAN AMENDMENT FINALLY SIGNED

UNCLAS SECTION 01 OF 02 ASTANA 002176 SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR/CARC, EEB/ESC STATE PLEASE PASS TO USTDA DAN STEIN E.O. 12958: N/A TAGS: PGOV EPET EINV KZ SUBJECT: KAZAKHSTAN: KASHAGAN AMENDMENT FINALLY SIGNED REF: ASTANA 2025 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY. On October 31, Minister of Energy Mynbayev and Kashagan consortium partners KazMunayGas, ExxonMobil, Total, ConocoPhillips, Shell, and INPEX signed four documents amending the Kashagan production sharing agreement (PSA) to increase KazMunaiGas's (KMG) stake from 8.33% to 16.81% and restructure the management and operator leads for the project. Several of the companies were represented at the signing ceremony by their CEOs, some of whom expressed disappointment that they were unable to meet with President Nazarbayev. Under the Kashagan PSA, the licensed exploration and production area also includes the oil-bearing structures Kalamkas, Aktoty, and Kairan, in addition to Kashagan itself. According to current operator Agip KCO, recoverable oil reserves at Kashagan are estimated at 7-9 billion barrels and total oil in-place at 38 billion barrels. First oil production will be 150,000 barrels per day (bpd) in 2013, followed by 370,000 bpd in 2014, 450,000 bpd in 2015, and 1.5 million bpd under full field development. END SUMMARY. NEW OPERATORSHIP ¶3. (SBU) The October 31 agreement established a new joint venture, the North Caspian Operating Company (NCOC BV),to assume the Kashagan operator responsibilities currently carried out by Agip KCO. The operatorship will transfer from Agip KCO to NCOC in January 2009. NCOC will provide monitoring and oversight, project planning, partner coordination, reservoir modeling, conceptual studies, early development plans, and government affairs and public relations services for the Kashagan venture. The Managing Director of NCOC will initially be provided by Total and will rotate among the partners every two to three years. The Deputy Managing Director will always be a KMG executive. The NCOC will be staffed by representatives of all partner companies and will be run according to Total's corporate management system. (NOTE: The agreement calls for the Managing Director to employ 350 staff, none of whom have yet been recruited or hired. In addition, Shell and KMG will require another 100 management staff by the end of 2009 and 1100 by first oil in 2013. Privately, Shell executives told us that they are concerned about the consortium's ability to attract, develop, and retain enough qualified staff to fill these positions. END NOTE.) INCREASED KMG EQUITY ¶4. (SBU) KMG increased its equity in the Kashagan project from 8.33% to 16.81%, using finance provided by the consortium at LIBOR plus 3%. The new shareholder structure is as follows: Eni 16.81%, ExxonMobil 16.81%, KMG 16.81%, Shell 16.81%, Total 16.81%, ConocoPhillips 8.40%, INPEX 7.56%. Eni will retain responsibility for the delivery of first oil under the Experimental Program (Phase 1) of the Kashagan Project. In Phase 2, Shell will lead offshore development, Eni will run the onshore plant, and ExxonMobil will manage drilling operations. In addition, Shell will manage production operations after the start up of Phase 1, with KMG progressively assuming greater responsibility. ConocoPhillips will assume audit responsibilities for the new operatorship company throughout the life of project. To carry out their respective responsibilities, Eni, Shell, and ExxonMobil will have appropriate authority on matters such as staffing, procurement, and operating procedures, and will apply their own companies' management systems. PRIORITY PAYMENTS TO KAZAKHSTAN ¶5. (SBU) Bonus payments and schedules were not altered by the PSA amendment, although a new priority payment was introduced according to a Memorandum of Understanding signed in July. According to Minister of Energy and Mineral Resources Sauat Mynbayev, "As soon as oil from Kashagan is sold, a priority payment will immediately go to the state budget." The priority payment is calculated as a ASTANA 00002176 002 OF 002 percentage of the average global price of oil. If the price of oil is less than or equal to $45 a barrel, the priority payment will be 3.5%. If the price of oil is higher than $45 but less than $85 a barrel, the priority payment will be 5%; if the price is greater than $85 a barrel, the priority payment will be 12%. FIRM DEADLINE ON COMMERCIAL PRODUCTION ¶6. (SBU) Agip KCO initially promised to start commercial production at Kashagan in 2005, but was forced to postpone that date several times as the project encountered logistical and technical difficulties and the cost of Phase I increased from an initial estimate of $57 billion to the current estimate of $136 billion. KMG vice President Maksat Idenov, who played a leading role in the negotiations, announced that December 31, 2013 is the new deadline for the beginning of commercial production. He said that first oil will be produced on December 1, 2012, under the Experimental Program. Idenov added that "if the consortium partners go beyond that date, Kazakhstan will not reimburse their capital expenditures." ¶7. (SBU) COMMENT. According to several of the companies which are parties to the agreement, the terms and conditions of the deal were agreed more than a week ago, but the Government refused to sign unless their CEOs came to Astana for a signing ceremony. The oil companies initially resisted this demand, with one calling it a "blatant power play," but ultimately all the CEOs except ExxonMobil's attended the signing ceremony and photo session with Prime Minister Masimov. They were chagrined, however, when a promised meeting with President Nazarbayev failed to materialize, due to his attendance at a meeting of Shanghai Cooperation Organization prime ministers taking place simultaneously in Astana. Neil Carmichael, Shell's General Manager for Central Asian Business Development, described the deal this way: "We gave them a loan at a great rate in the middle of a financial crisis to buy an attractive asset at a price well below its market value. And to top it all off, we have to lower our equity share and increase the amount of staff and management time we put in." Nevertheless, after months of intense negotiations, the companies and the government were equally eager to sign the documents that they hope will put Kashagan back on track. END COMMENT. HOAGLAND