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Kazakhstan Wins Big In Karachaganak Energy Settlement

By Vusala Abbasova October 3, 2018

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A view of Karachaganak field

Kazakhstani authorities and investors have agreed to settle what has been a three-year dispute over sharing the profits reaped from the Karachaganak gas condensate field – one of the country’s largest hydrocarbon deposits that nets billions of dollars in revenue for the government each year.

“The government of Kazakhstan, represented by Ministry of Energy, Ministry of Finance and PSA LLP, as well as the shareholders of the Karachaganak project, represented by Eni, Shell, Chevron, Lukoil and KazMunaiGas [Karachaganak Petroleum Operating Consortium] have reached an agreement in principle on friendly settlement of the dispute,” reads a statement issued by the Ministry of Energy on Monday, according to reports by Kazinform.

Eni and Royal Dutch Shell each own a 29.25 percent stake in the Karachaganak project, while Chevron Corporation owns 18 percent and Lukoil 13.5 percent. Kazakhstan’s KazMunayGaz holds the remaining 10 percent.

In 2016, Kazakhstan’s government filed a $1.6 billion claim against the five foreign companies due to disagreements over the method of calculation for the parties’ shares of income generated by the project. Astana opposed the consortium’s claim that it could recover some costs before sharing a part of the remaining revenue with the state under a final production sharing agreement signed in 1997 for a 40-year period. The case was sent to international arbitration and was only recently settled.

The basic terms of the settlement include three main points the consortium must follow. First, the group will pay the Kazakhstani government $1.11 billion in compensation fees. Subsequently, the final production sharing agreement will be changed with terms more favorable to Astana, resulting in $415 million more in revenue to be paid until 2035 and based on the Brent crude price of $80 per barrel. Additionally, the group will provide Kazakhstan with a 10-year loan for an infrastructure project, or pay an equivalent value of the loan, which is roughly $200 million.

“Thus, the total value of this settlement is more than $1.7 billion, about $1.3 billion of which Kazakhstan will receive in the upcoming years,” read the ministry’s statement.

While the five-member consortium is getting hit with hefty penalties, that is not discouraging it from further development of the site.

“Preliminary investments are estimated at $5 billion with a possible additional increase in revenues for Kazakhstan until 2037 of about $23.5 billion at an oil price of $80 per barrel,” read the ministry’s statement.

Karachaganak, located in Kazakhstan’s northwest region, has over 1,200 million tons of oil in proven reserves, and more than 1.35 trillion cubic meters of natural gas. Gas production at Karachaganak is equivalent to around 45 percent of Kazakhstan’s total production, and it represents approximately 16 percent of total liquid production.

Overall, the country is home to about 200 oil and gas fields, making Kazakhstan Central Asia’s wealthiest country. Its exports are mostly sent to Italy, the Netherlands, France, Austria, Switzerland and China.