ConocoPhillips in Kashagan project: Why the ways parted?

ConocoPhillips in Kashagan project: Why the ways parted?

Azerbaijan, Baku, Oct.4 / Trend /

Trend commentator Elena Kosolapova

The ConocoPhillips Company, one of the shareholders of a project on the development of the world's major oil field Kashagan (Kazakhstan), plans to sell its stake according to the Oil and Gas Minister of Kazakhstan Sauat Mynbayev.

The American company's intention to leave the shareholders of the consortium of the North Caspian Operating Company B.V. (NCOC), which develops the field, was not a surprise. Due to financial difficulties of ConocoPhillips following the global financial crisis, experts predicted the possibility of such developments last year.

Essentially, ConocoPhillips fulfils its three-year plan through which the company's assets will be sold for $15-$20 billion. Fulfilment of this plan aims to raise capital to repurchase shares for further investments in the future growth programme. Only as recently as 2010-2011, the company sold assets worth $10.7 billion.

In particular, the assets of ConocoPhillips, put up for sale included projects in Vietnam, Canada, Nigeria and Russia, where the company has been working for decades.
However, the fact of the unwillingness of the American company which continues to participate in a number of projects throughout the world in spite of all the difficulties will retain a stake in such a large project as Kashagan, which promises huge profits,, still raises questions.

Kashagan is one of the largest fields in the world discovered in the past 40 years. According to analysts, with Kashagan, Kazakhstan has the potential to join top five of largest oil companies in the world. Geological reserves are estimated at 4.8 billion tons of oil according to Kazakh geologists. According to the project operator, the total oil reserves are 38 billion barrels, or six billion tons, of which recoverable is about 10 billion barrels. Kashagan also has major natural gas reserves of more than one trillion cubic meters.

However, the Kashagan field development project at the same time is one of the most difficult. Among the main reasons that complicate the development of this field, one can recall the environmental vulnerability of the North Caspian, where the field lies, a high content of sulphur dioxide and shallow water causing difficulties with logistics.

As a result, the date launching oil production on the Kashagan field was postponed several times. Initially it was planned to start production in 2005. In addition, since the beginning of the project development, the proposed budget has grown from an initial $50-$60 billion to $130-$150 billion. In the course of all 'coordination' and 'postpones' Kazakhstan has increased its share in the project from eight to 16.8 per cent and was able to pay royalties which was not mentioned in the original agreement. The last deadline envisages starting commercial production in the period from January to June 2013.

However, given the history of the project and the desire of NCOC shareholders to increase the budget of the first phase of the project by 20 per cent ($7 billion), voiced in early 2012, but rejected by the Kazakh side, it is difficult to be sure of finality of these dates.
This means the Kashagan project, though promises huge profits in the future and only requires huge investments at present and in the near future which are very onerous for debt ridden ConocoPhillips. Therefore, the company made a difficult, but the only possible decision for itself - to give up.

At present the Kashagan project participants are Eni, Royal Dutch Shell, Exxon Mobil, Total and KazMunaiGas, which owns equal shares (16.81 per cent), as well as ConocoPhillips - 8.4 per cent and Japan's Inpex - 7.55 per cent.

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