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. Last Updated: 07/27/2016

Caspian Oil Pipeline Pact Reached

Russia, Kazakhstan and Oman reached agreement with Western investors on the division of stakes in a pipeline that would help tap the huge Tengiz oil field, but analysts, while welcoming the deal, said Monday a number of issues still need to be worked out before construction can begin on the long-delayed project.


President Boris Yeltsin and his Kazakh counterpart, Nursultan Nazarbayev, presided Saturday over the signing of a protocol with Oman and eight oil companies for the construction of a $1.5 billion pipeline that would stretch from western Kazakhstan to the Russian port of Novorossiisk.


"This is a major milestone for this important infrastructure project which will help unlock the petroleum resources of the Tengiz and the region," said Chevron overseas president Richard Matzke on Saturday, Reuters reported.


Until Saturday, Russian restrictions on pumping oil to world markets through its existing pipelines and a deadlock on constructing a new exit route had effectively blocked Kazakhstan from using foreign investment to develop the rich Tengiz field, which contains between 6 and 9 billion barrels of reserves.


This hurt Chevron, which owns a 50 percent share of the rights to Tengiz reserves and has already invested $500 million in the project, but has not been able to pump at full capacity. Russia had denied it access to its existing pipeline network, claiming its system is already full to capacity.


A project to build a new pipeline had been on the table for over three years but Oman, Russia and Kazakhstan, the original partners in the deal, failed to come up with the funding.


These three original partners have now made way for a consortium of Western and Russian oil companies to take a 50 percent stake in the deal in exchange for providing all of the financial support.


After Saturday's deal, Russia will take a 24 percent stake in the consortium, Kazakhstan gets 19 percent, and Oman agreed to cut its stake from 25 to 7 percent. The remainder will be divided between Chevron which will take 15 percent, LUKoil with 12.5 percent, Mobil and Rosneft will get 7.5 percent each, with smaller stakes held by British Gas AGIP, Oryx and Kazakh state Munaigaz.


Russia, keen to maintain its predominant political and economic position in the region, had originally been reluctant to cooperate on the project, as it had reservations about allowing Kazakhstan to compete with its own Siberian production. But President Boris Yeltsin said at the signing ceremony Saturday that Russia was persuaded to join after the Russian government and the two Russian companies, LUKoil and Rosneft received shares. "For a long time we could not come to an agreement," said Yeltsin during the signing ceremony. "Now we are satisfied with Russia's share."


Stephen O'Sullivan, an oil industry analyst at MC Securities, agreed that Russia's participation in the deal was crucial to get it moving. "This project had been stalled for a few years, but only got moving when Russia got involved," said O'Sullivan. "The rule of politics is that Russia needs to be involved because it is so big."


Industry analysts said that the deal, the first time Western oil companies have been allowed a stake in a major pipeline on Russian soil, marks an important step but it is not the last word on the long-running dispute.


O'Sullivan said that the Caspian Pipeline deal could still be affected by the results of the negotiations over rights to the $20 billion Tengiz oil field itself.


"The final outcome of Tengiz field deal has still not been completely decided," he said. "There are rumors that LUKoil is interested in receiving a share of the deal," adding that pipeline construction will only begin once the participants in the Tengiz deal are finalized.


An oil industry analyst, who asked not to be named, also cautioned that although Saturday's deal settles the issue of ownership of the pipeline consortium, it still leaves unanswered the question of who will finance the project. "That issue is just as important as determining who has what share in the project," he said.


He added that the sides have still not tackled how much the consortium will charge in tariffs for the right to transport oil through the pipeline. "Banks will not finance this project until the issue of tariffs is resolved," the analyst said.


Another significant uncertainty is that Saturday's protocol delays making major financial decisions until after the results of June's presidential election become clear.


"I don't think anybody wants to start project before they know what they are dealing with," said the oil analyst, adding that the sides may begin feasibility studies for laying the pipeline before the June elections but little else.


Observers also raised the concern that the Russian sides may not be able to come up with the cash to pay their share. "It is not so clear whether Rosneft will be able to support their financial commitment to the project," said one analyst who declined to be named. A spokesman from LUKoil said Monday however that the company would contribute about $500 million to the pipeline construction, which would most likely come from CS First Boston. The spokesman said CSFB had promised that it could raise the funds if LUKoil were to become party to the Caspian deal.





-- Sander Thoenes contributed to this report.