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Analysis: Kazakh oil and Western woes

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by John C.K. Daly
Washington (UPI) Dec 7, 2007
The consolidation of the Kazakh energy industry proceeds apace, and what it eventually means for Western energy companies and investors is unclear.

On Thursday, Kazakh Prime Minister Karim Masimov told an industry roundtable meeting held in Astana: "I would like to inform you that the national KazMunayGaz company turned to me with a proposal to buy a major blocking stake of MangistauMunayGaz and I sanctioned this."

The decision is significant because KazMunayGaz's blocking stake in MangistauMunayGaz will give the state-owned oil company as a shareholder veto power over company decisions, further diluting the power of Western investors.

MangistauMunayGaz is not involved in Kazakhstan's two largest foreign investment projects, the massive offshore Caspian Kashagan field and the onshore Tengiz development.

Founded in 1995, MangistauMunayGaz the following year received a 25-year license from the Kazakh government for prospecting and production in the Asar, Burmasha, Kalamkas, Zhetybay Vostochnyy, Alatobe, Karagiye Severnoye, Oymasha and the Zhetybay Yuzhnyy oil and gas condensate fields.

In 2006, it extracted nearly 5.7 million tons of oil, which it projects will rise to 5.8 million tons by the end of the current year. The company reportedly controls reserves totaling 500 million barrels. Prior to Masimov's announcement, Jakarta's Central Asia Petroleum Ltd. owned 99 percent of all outstanding ordinary shares of MangistauMunayGaz.

MangistauMunayGaz has had a troubled history, having previously been controlled by Rakhat Aliyev, the former son-in-law of Kazakh President Nursultan Nazarbayev, who was married to the president's daughter Dariga Nazarbayeva. In May, the Kazakh Interior Ministry's prosecutor's office issued a warrant for Aliyev's arrest in Vienna, where he was serving as ambassador. The following month, Nazarbayeva divorced him and on Nov. 9 Aliyev went on trial in absentia in Kazakhstan on corruption charges.

In the ensuing chaos of the Aliyev affair, according to a report in the Almaty Vremiia, Western companies expressed an interest in acquiring MangistauMunayGaz. Masimov's announcement makes it clear however that the Kazakh government intends to acquire a dominant position in the company. It is a measure of foreign interest that more than 60 international companies attended the Nov. 7-9 "Mangystau Oil & Gas 2007" exhibition in Aktau, sponsored by Kazakhstan's Ministry of Energy and Mineral Resources. More than 2,000 delegates representing companies in Azerbaijan, Britain, Byelorussia, Kazakhstan, Russia and Romania attended the event.

Record-high oil prices have given MangistauMunayGaz a balance sheet that would cause drooling among the most hardened Wall Street investors, with a September reported quarterly profit margin of 50.36 percent. The Mangistau region accounts for approximately 27 percent of Kazakhstan's hard currency earnings from energy exports.

In early 2000, Kazakhstan's Finance Ministry hired Idey, a consortium headed up by Ernst and Young and including Denton Hall Valdez Krug Company, a subsidiary of IHS Energy Group, and Petroconsult, as its consultant for marketing its state-owned share in MangistauMunayGaz with an eye to offering 30 percent of MangistauMunayGaz after earlier selling a 60 percent interest in MangistauMunayGaz to Central Asia Petroleum. At the time, MangistauMunayGaz with recoverable oil reserves of about 194 million tons was considered one of Kazakhstan's blue-chip companies.

The MangistauMunayGaz affair is indicative of a larger trend among former Soviet countries to reassert increasing control over their energy resources following contracts signed in the immediate aftermath of the 1991 collapse of communism, when a desperate search for Western investment led many nations to sign production joint venture agreements that have increasingly come to be regarded as unfair and exploitative. The rising petro-states of Kazkahstan and Azerbaijan have followed the lead of Russian President Vladimir Putin, who most notably moved against the oligarch Mikhail Khodorkovskii and his Yukos oil company four years ago.

For Kazakhstan, the largest prize is its offshore Kashagan Caspian field, the largest oil field discovered in the last 30 years with potential reserves estimated to be as high as 70 billion barrels with a projected daily output is projected of more than 500,000 barrels per day. Italy's ENI is operator of the project; under terms of the production sharing agreement, KazMunayGas and Inpex hold an 8.33 percent share each in Kashagan; ENI, Total, ExxonMobil and Shell have 18.52 percent stakes apiece while ConocoPhillips holds a 9.26 percent share. Plagued by cost overruns and delays, the Kazakh government has been attempting to renegotiate the PSA to give KazMunayGas a larger percentage of the project, causing enormous unrest among its Western partners.

In the ongoing game of brinkmanship to issue is starkly simple - do foreign oil companies resist Astana's efforts and walk away from their investment, or do they accept a reduced share of the pie. With oil hovering near $100 a barrel, it seems likely that Kashagan's 70 billion barrels of reserves are going to cause some substantial soul-searching among the West's largest oil companies.

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