ASTANA – The Kazakh government and shareholders of the Karachaganak project agreed on a methodology for sharing revenues from the sale of oil, the press service of the Energy Ministry of Kazakhstan reported on October 1.
“The Kazakh Government represented by the Ministry of Energy, the Ministry of Finance and the Limited Liability Partnership PSA, as well as the shareholders of the Karachaganak project represented by Italy’s ENI, Royal Dutch Shell, US major Chevron, Russia’s LUKOIL and KazMunaiGas (Consortium, Karachaganak Petroleum Operating).
“They have reached an agreement, in principle, on a friendly settlement of the dispute on the Objectivity Index. The parties signed the Agreement on Principles, which fixes the main terms of the settlement”, the Kazakh ministry informed journalists.
The Agreement on Principles establishes the basic conditions for the settlement: The Consortium will pay Kazakhstan a monetary compensation in the amount of $1.111 billion; changes will be made in the mechanism of product sharing, which will provide the former Soviet republic with additional revenues from the project in the amount of about $ 415 million until 2037 at a price of $ 80 per barrel. The consortium will provide Kazakhstan with a long-term loan for a period of 10 years for the construction of an infrastructure project worth $1 billion or it will pay an equivalent value of the loan (in case Kazakhstan refuses a loan) in the amount of about $ 200 million.
Kazakhstan’s Energy Ministry noted that between Kazakhstan and the Consortium there were disagreements on the “method of calculating the shares of the parties in the section of profitable products,” so the government of Kazakhstan filed a suit in international arbitration to protect its rights. Given the long-term experience of the cooperation, however, the parties in the negotiation process found “a mutually beneficial way of amicable settlement of the dispute.”
“These were very difficult negotiations with the Consortium, which lasted about three years. Such a long period of time testifies not only to their complex content and nature, but also to the fact that we placed the emphasis on economic interests of the state first and, accordingly, insisted on maximising the benefits for the republic,” Energy Minister Kanat Bozmubayev was quoted as saying in a press release.
Bozmubayev noted that by the end of the year the deal is expected to be completed and a final agreement signed.
“I want to emphasise that it was important for us to settle this dispute as it introduced uncertainty into the further development of the Karachaganak project. In this regard, one of the principal elements of these agreements is the commitment by the Consortium to implement important investment projects for the future development of Karachaganak,” Bozumbayev said.
Kazakhstan’s Energy Ministry said the aggregate monetary value of this settlement is over $1.7 billion for the republic, of which the state will receive about $ 1.3 billion in the coming years.
In addition, the Kazakh government agreed on the Consortium’s acceptance of commitments on the implementation of investment projects important for the future development of Karachaganak. Previously, the volume of investment is estimated at up to $5 billion, with a possible additional increase in revenues for the Republic of Kazakhstan up to 2037, about $23.5 billion (or about $6.4 billion in NPV10) at $80 per barrel.
The parties also agreed on the possible supply of hydrocarbon raw materials on commercial terms for local refineries and for the development of a gas chemical complex in western Kazakhstan.
The Karachaganak field, discovered in 1979 during the Soviet-era, is one of the world’s largest gas and condensate fields. Located in the north-west of Kazakhstan and covering an area of over 280 square kilometres, it holds estimated hydrocarbons initially in place (HIIP) of 9 billion barrels of condensate and 48 trillion cubic feet (tcf) of gas, with estimated gross reserves of over 2.4 billion barrels of condensate and 16 tcf of gas.
The Karachaganak Venture brings expertise and knowledge from five oil & gas companies – ENI (29.25%), Royal Dutch Shell (29.25%), Chevron (18%), LUKOIL (13.5%) and KazMunaiGas (10%). Together they share their experience and expertise with the republic in looking at both domestic and export options for maximising the value of these resources.
In 1997, Venture partners set out with the former State Oil & Gas Authority to develop the vast reserves of Karachaganak. They signed a Final Production Sharing Agreement (FPSA), which will see the partnership operate Karachaganak until 2038. Since signing this agreement they have invested over $22 billion in the operations and have applied industry-leading hydrocarbon technology to one of the world’s most complex reservoirs.
In 2016 KPO produced 139.7 million barrels of oil equivalent of stabilised and unstabilised liquid hydrocarbons, gas and fuel gas. In addition, 8.04 billion cubic meters of sour dry gas were re-injected, a volume equivalent to approximately 46% of the total volume of produced gas.
While delivering on its operation commitments, KPO as a responsible corporate citizen works towards generating maximum social and economic benefits from the Karachaganak field for the local communities and Kazakhstan as a whole.