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. Last Updated: 07/27/2016

Caspian Partners Sign Pipeline Deal

Multinational investors in the long-troubled Caspian Pipeline Consortium hailed a deal Friday they said would finally unlock Kazakhstan's rich oil reserves, but only after frantic last-minute negotiations centering on the role of Russia's pipeline operator Transneft.

The agreement reached Friday evening reapportions the equity stakes in the $2 billion project linking the Tengiz oil fields to Russia's Black Sea ports among three governments and eight companies. It gives Russian and its oil majors more control along with the Western firms that have sought unsuccessfully for years to win a viable export route to capitalize on massive investments.

"We are extremely satisfied with the commercial structure that has been accomplished and we believe that it offers a realistic approach to such an important project," said Jeet Bindra, vice president for Chevron, which will hold a 15 percent stake in the venture.

But the accord earlier appeared imperiled after Transneft sought to become the party holding the Russian government's 24 percent equity stake, the single largest investor. Officials delayed the scheduled announcement and Western executives said the long-delayed project could have hit the rocks yet again.

Shortly before the 7:30 p.m. signing ceremony, the presidents of Russian shareholders LUKoil (12.5 percent) and Rosneft (7.5 percent) rushed out of the Radisson Slavjanskaya conference room where consortium members were meeting and held a private discussion by the hotel lobby bar.

After 10 to 15 minutes of heated talks they were joined by the head of Transneft for another 15-20 minutes before they all met with a Russian minister and went to the signing ceremony, with Transneft chief Valery Chernyaev looking glum.

There the minister, Valery Sirov, said he did not rule out a stake for Transneft in the future, although according to the consortium structure the pipeline monopoly would not be given a share.

Chernyaev said at the signing ceremony that "we are satisfied that negotiations have been completed and we are satisfied by their result." But his mood appeared little improved from earlier.

The Russian Fuel and Energy Ministry reportedly had lobbied heavily for Transneft to be awarded the government stake. But Western companies -- and, sources said, even LUKoil -- apparently opposed the move.

Also looking downbeat was the representative from Oman, once a one-third partner in the venture who a senior Russian adviser to the deal said had spent more than $100 million on feasibility studies. Its stake is now 7.5 percent.

Oman formed the CPC in 1992 with the Russian and Kazakh governments as the sole partners. But Chevron, the pipeline's main potential client, refused to take part unless Oman cut its stake to reflect what it said was limited investment.

The breakthrough came last spring, when Chevron, Mobil and other producers pledged to finance construction of the pipeline in return for a 50 percent stake. Russia was persuaded mainly by a 24 percent state share, plus a 20 percent block held by LUKoil and Rosneft -- jointly with Western partners -- and revenues for the pipeline's Russian operator, Transneft.

Chevron and Mobil are desperate for a route to export oil from their giant Tengizchevroil (TCO) project in landlocked Kazakhstan, because previous crude transportation problems have kept them from increasing output as planned.

Consortium members have missed two previous deadlines to re-distribute their shares partly because of debates about how to accommodate Transneft's interests. Western companies wanted Transneft to handle day-to-day transportation operations rather than strategic matters, that could have otherwise given the monopolist significant leverage over transportation tariffs.

Friday's agreement set the cost of the 1,500-kilometer pipeline at $2 billion, up from earlier estimates of $1.2-$1.5 billion. The route would go from the Tengiz oil fields in Kazakhstan north of the Caspian Sea through the Russian city of Astrakhan and on to a new port near Novorossiisk on the Black Sea.

Significantly, officials said it would veer north to avoid going through Chechnya, whose separatist ambitions would cloud Russian control.

The first phase of the pipeline construction would start in late 1997 and be completed in 1999. Russia's Deputy Fuel and Energy Minister Anton Shatalov said the first phase would be able to transport 28 million tons of oil annually to the Black Sea, and that a second phase would increase the pipeline capacity to 67 million tons a year.

Russian and Kazakh officials at the ceremony said the agreement as a breakthrough fostering cooperation between the two CIS neighbors.

"For three years we were at pains to find a common language and the project was stalled," Kazakh Fuel and Energy Minister Nurlan Balgimbayev said. "Now the most difficult part is behind us and we just have to build this pipe."

Sirov called the accord "a colossal victory."

"This world-class infrastructure development project will be a model to other foreign investors in the former Soviet Union," Richard Matzke, president of Chevron Overseas Petroleum Inc., said in a statement quoted by The Associated Press.

According to Chevron, Russia's central and regional governments will make more than $20 billion in taxes and revenue over the pipeline's 40-year life, AP reported. A substantial portion of the pipeline's capacity will be dedicated to Russian exports.

Shatalov said that to avoid financial and legal hurdles the members of the consortium decided to set up two identical separate corporate units of the CPC, one based in Russia and one in Kazakhstan. Russian contractors and suppliers will be given priority in international tenders for the construction, he said.

Besides the Russian government, LUKoil, Rosneft and Chevron, other shareholders are the Kazakh government, 19 percent; U.S. Mobil, 7.5 percent; Italy's Agip, 2 percent; British Gas, 2 percent; Kazakhstan's Munaigaz, 1.75 percent; and U.S. Oryx, 1.75 percent.

Last month Anglo-Dutch oil major Royal Dutch/Shell signed a joint venture agreement with Russian oil company Rosneft to finance its planned 7.5 percent stake in the consortium.

Vladimir Stanyev, a LUKoil vice president, was elected director general of the CPC.

A further agreement among the consortium members, formalizing and paying for the share acquisitions, is set for Feb. 6, Chevron's Bindra said.