Embassy of Kazakhstan

"Contrary to the usual negative perception of state intervention, we believe that restoring a stable environment to a project of this scale and importance, as well as adopting a greater sharing of responsibility between all parties involved, is a better outcome than most were forecasting. This is particularly true in the light of other state-motivated actions taken in the international oil and gas market" said Francesca Fraulo, in Fitch's Energy team.

Fitch notes that the project is likely to benefit from a strengthening of relationships and the sharing of greater responsibilities with its host country. State intervention in the oil and gas sector has become more frequent in the current high oil price environment, especially in countries where economies rely heavily on royalties and /or taxes and dividends from oil and gas companies.

Although the agreement may have a financial impact on the Kashagan project economics, it is difficult to assess the magnitude of it at this stage as the compensation payment structure is linked to oil prices at the start of commercial operations. Additionally, the project was originally conceived in a much lower oil price environment, so any adjustments to the project economics may well be compensated for by a higher price environment.

As one of the largest oil fields in the world, the project was never perceived as likely to be straightforward to execute. Most recently, the Kazakh authorities threatened to oppose/terminate the oil field development, after a revised plan showed further potential delays and a significant increase in development costs. Negotiations between the parties have taken more than six months to complete due to complex issues surrounding compensation for delays and cost overruns, and the willingness of the Kazakh government to play a more active role in the project via state-owned company, National Company KazMunayGas (NC KMG, 'BBB'/Negative).

Under the agreement, NC KMG's stake in the Kashagan consortium has been increased to 16.81% from 8.33% for a consideration of USD1.78bn. The consortium has agreed to pay compensation (expected to average USD3.5bn, depending on the oil price at the start of commercial operations) to the Kazakh government for any cost overruns and delays. Eni will retain sole responsibility for the operation of the field until the exploration phase concludes, expected at end-2011. The field will then be jointly operated by the four major international partners, ExxonMobil Corporation ('AAA'/Stable), Royal Dutch Shell plc ('AA+'/Stable) and Total SA ('AA'/Positive).

Based in north Caspian Sea, the Kashagan oil field is the fifth-largest in the world with reserves of about 7 billion-9 billion barrels of oil equivalent and production estimated in 1.5 million barrel/day.