Kazakh Government Won’t Force Entry to Karachaganak Oil Project

May 19. Bloomberg

By Eduard Gismatullin and Tara Patel

Kazakh Government Won’t Force Entry to Karachaganak Oil ProjectThe Kazakh government won’t force its way into the BG Group Plc and Eni SpA-led Karachaganak venture as it seeks an equal stake in the biggest oil and gas project in the country that lacks state participation.

“We are not forcing the state in and are just in talks,” Deputy Oil Minister Lyazzat Kiinov told reporters at the CIS Oil and Gas Summit in Paris today. “We are ready to repay the historical costs and contribute to our share equal with other partners.”

Kazakhstan is cracking down on Karachaganak, its second- largest producing oil field, to boost its share of revenue from projects developed under production-sharing agreements, which allow investors to recoup costs before the government profits. To this end, BG and its partners have faced demands for billions of dollars after being accused of inflating costs, as well as for environmental damages, back taxes and fines.

BG and Eni are the largest shareholders in Karachaganak Petroleum Operating BV, each with a 32.5 percent stake, while Chevron Corp. has a 20 percent interest and OAO Lukoil holds 15 percent.

The government doesn’t want to take over the role of operator of the field and is in separate talks with each of the partners, according to Kiinov.

BG said talks are continuing between the partners involved in the Karachaganak project and the government.

Common Position

The shareholders want to resolve a tax dispute with the government as soon as possible and are working on agreeing on a common position, Mehmet Ogutcu, BG’s director for international government and corporate affairs, said in an interview at the conference.

The European Union’s special representative for Central Asia was cautiously optimistic of a settlement.

“It’s the start of an answer which we view with interest,” Pierre Morel said. “We will now have to see how this translates on the ground with the companies operating the project.”

Last month, the Kazakh economic crimes agency demanded about $1.3 billion from the partners after accusing them of inflating costs from 2002 through 2007. BG Chief Executive Officer Frank Chapman “categorically” denied the Kazakh claims at the time.

Kazakhstan has claimed more than $2.5 billion based on environmental damages, back taxes and fines from the oil venture as talks stalled on the state’s entry into the project, two people with knowledge of the matter told Bloomberg in April. Kazakhstan has also threatened to expel foreigners working at the venture.

The dispute mirrors changes at the Kashagan project, the country’s biggest oil development. In 2008, partners led by Eni agreed to pay higher royalties and cede shares to state-run KazMunaiGas National Co. after the government condemned cost overruns and delays.