ASTANA, Dec 14 (Reuters) - Kazakhstan secured 10 percent of the Karachaganak gas condensate field for $1 billion net cash and the settlement of disputes with foreign partners in an agreement on Wednesday that affirms state influence over every large energy project in the country.
The consortium led by Britain’s BG Group and Italy’s Eni will lend state company KazMunaiGas the $1 billion needed to finance a deal that mirrors moves by other emerging nations to exert control over their natural resources.
"KMG will service and repay this debt with the cash flow that its 10 percent stake will generate," Oil and Gas Minister Sauat Mynbayev told reporters. He said the three-year loan would carry a rate of LIBOR plus 3 percent.
A more assertive Kazakhstan, home to more than 3 percent of the world’s recoverable oil reserves and the largest economy in Central Asia, has sought in recent years to revise deals struck with foreign energy companies in the lean post-Soviet years.
Kazakhstan is comfortably the second-largest oil producer in the former Soviet Union after Russia, which has also moved in recent years to exert greater management control and secure bigger revenues from foreign-owned oil and gas developments.
The Karachaganak deal follows Kazakhstan’s entry into the Kashagan oilfield in the Caspian Sea, the world’s biggest oil discovery since the 1960s. After entering the Kashagan field in 2005, the state later doubled its stake to 16.8 percent.
The agreement, signed two days before the 20th anniversary of Kazakhstan’s independence from the Soviet Union, ends more than two years of court claims and wrangling over the state’s role in a field that supplies nearly half of the country’s gas.
The deal will draw a line under a series of back-tax, labour and environmental claims against the operators of the project and the costly disagreements that have delayed its technologically challenging but lucrative third phase.
The agreement will also allow the consortium partners, which include Chevron and LUKOIL, to pump additional volumes into the Caspian Pipeline Consortium’s export pipeline to the Black Sea, securing more high-revenue sales to the West.
"Completion of today’s deal should allow both sides to move forward on developing a joint plan for the Phase Three expansion after years of stalling," said Dominic Lewenz, director of oil and gas research at Visor Capital in Almaty.
‘IRREVOCABLE SETTLEMENT’
In a statement explaining the breakdown of the agreement, BG said Kazakhstan would pay $1.5 billion in cash to the consortium partners, before tax, in exchange for a 5 percent interest.
To earn a further 5 percent, the state will pay a second pre-tax consideration of $1.5 billion, split into a $500 million cash portion and a $1 billion non-cash consideration.
"The non-cash consideration includes final and irrevocable settlement of cost recovery and other related claims," BG said.
The consortium partners will pay $1 billion tax on the total consideration, giving a final deal that represents $1 billion net in cash and a further $1 billion in non-cash considerations.
BG and Eni said the Karachaganak consortium would also secure up to 2 million tonnes per year of additional volumes through the Caspian Pipeline Consortium’s (CPC) pipeline.
Mynbayev said the extra volumes would initially be set at 500,000 tonnes, rising to 1.5 million tonnes and finally 2 million tonnes in line with the expansion of the CPC pipeline.
CPC, owned by the Russian and Kazakh states and a group of international oil companies, is undertaking a $5.4 billion expansion to raise annual capacity of the pipeline to 67 million tonnes by 2014. It pumped 34.9 million tonnes last year.
BG and Eni also said the consortium partners would transfer a portion of their stakes to KMG on a pro-rata basis.
When the deal is completed by June 30, 2012, BG and Eni will each reduce their stakes to 29.25 percent from 32.5 percent. Chevron will hold 18 percent and LUKOIL, Russia’s largest non-state oil company, will hold 13.5 percent.
"The settlement terms are slightly better than we had feared and appear credibly definitive to bring complete closure to this issue," JPMorgan Cazenove analysts said in a research note.
BG shares were down 0.7 percent by 1120 GMT, roughly in line with the wider oil and gas sector. Eni’s stock was down 1.2 percent.
COST CONTROL
Karachaganak, located in northwestern Kazakhstan near the Russian border, has trebled production since 1999. As well as producing 49 percent of Kazakhstan’s gas, the field contributes 18 percent of liquid hydrocarbon production.
BG executive vice-president Ashley Almanza said Karachaganak was estimated to have hydrocarbons initially in place of 9 billion barrels of condensate and 48 trillion cubic feet of gas. To date, less than 10 percent of this total has been produced.
The protracted ownership squabble had stalled plans for a lucrative third phase of development. The Oil and Gas Ministry said the deal would allow it to achieve its goal of exercising greater cost control over "large-scale investment projects".
Kairgeldy Kabyldin, chief executive of KazMunaiGas until October this year, said in January 2010 that the third phase of the Karachaganak project would need investment of $14.5 billion.
"This is a subject for further discussion, agreement and confirmation," Mynbayev said of the expansion. "We are counting on significant investment and on the growth of this project."
Citi analysts estimated the third-phase expansion could add around 75,000 barrels of oil equivalent per day to the project’s gross volumes, around a 20 percent increase on existing output.
Visor Capital’s Lewenz said: "Although the technical details of Phase Three are not part of this deal, it would surprise me if the negotiations hadn’t also involved reaching a consensus on the principal terms."
Karachaganak produced 133.7 million barrels of oil equivalent in 2010. Output included stable and unstable liquids, sour gas and sweet gas for use as fuel.
