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. Last Updated: 07/27/2016

Kashagan Faces Russia-Style Squeeze

Kazakhstan appears to be taking a page from Russia's rulebook on energy nationalism, threatening to withdraw the license of an international consortium led by Italy's Eni as it seeks a larger slice of profits from the giant Kashagan oil field.

With oil prices about $50 higher than when Kashagan's first well was drilled in 2000, Kazakhstan is no longer happy with a contract that gives it just 10 percent of the project's revenue and an 8.33 percent stake in the field through its national oil firm, KazMunaiGaz.

As resource nationalism spreads to Central Asia, analysts said foreign-led projects across the region could expect such pressures to grow.

The Eni-led consortium appears eager to avoid the drawn-out battles that have marked foreign oil majors' efforts to maintain majority stakes in their Russian projects. Both Shell and BP lost large stakes in key projects in the country after high-profile disputes with the Natural Resources Ministry.

Talks on changing the terms of the Kashagan deal are due to start Monday, Eni CEO Paolo Scaroni told reporters in Rimini, Italy, on Friday.

"There are 60 days to find an amicable agreement," he said. The announcement came less than one week after the Kazakh Environment Ministry threatened to revoke the consortium's license over purported environmental violations.

Scaroni said the consortium was open to changing the terms of the deal.

"The conditions are right to negotiate a new contract," Scaroni said, Bloomberg reported. "The contract with Kazakhstan includes a series of parameters that will have to be adjusted."

"I'm confident it will be cleared up," he said.

Scaroni provided no further details, and a company spokeswoman declined to comment on specifics. Scaroni said he would travel to Kazakhstan sometime after Sept. 4, while Italian Prime Minister Romano Prodi is due in the country Oct. 7.

Last month, Kazakh Energy Minister Baktykozha Izmukhambetov said the government hoped to change the terms of its production-sharing agreement with the Eni-led consortium so that the state would receive 40 percent of the profits from the project.

Citing a delayed launch date and rising costs, Kazakh Prime Minister Karim Masimov said at the time that the state would "consider changes in start-up terms as changes in the contract itself."

Kashagan, with an estimated 38 billion barrels of oil, is the largest oil field to have been discovered anywhere in the last 30 years.

Located in the Kazakh sector of the Caspian Sea, the project has faced numerous delays. Its original start-up date of 2005 has been pushed back to the second half of 2010, and costs for the first phase of the project have doubled to $19 billion.

The Kazakh government says projected costs over the project's 40-year lifespan have shot up drastically, from $57 billion to $136 billion.

Rising costs will likely prevent the state from increasing KazMunaiGaz's stake in the project until after it comes on line, analysts said.

"Kashagan's production will be material to the company's growth, driving it to seek a larger direct stake in this field, if not now then in the future," said Julia Nanay, a senior director at PFC Energy, a Washington-based energy consultancy.

Project operator Eni holds an 18.52 percent stake in Kashagan, as do ExxonMobil, Shell and Total. ConocoPhillips owns 9.26 percent and Japan's Inpex has 8.33 percent.

Analysts said Kazakhstan was following a trend of resource nationalism that has spread from Venezuela to Russia and beyond, benefiting national oil companies to the detriment of international majors.

Yet Martha Brill Olcott, a Central Asia expert at the Carnegie Endowment for International Peace in Washington, said Kazakh displeasure with the foreign companies running Kashagan was merely coming to a head.

"A lot of the Kazakhs' grievances predated the current Russian cycle," she said, adding that Kazakhstan was particularly hoping to control and profit from transit of the field's oil.

"We should expect to see all the governments across Central Asia replicating what has happened in Russia," said Chris Weafer, chief strategist at UralSib. "It's only a question of speed -- not if, only when and how."

Weafer placed the recent trend in a wider context. "Oil companies have always found the oil, carried out the initial development and then fought with the relevant governments to stay in the project," he said.

Analysts warned that BP, which lost its flagship project in Russia when TNK-BP sold its majority stake in the Kovykta gas field to Gazprom, could also face trouble in another country with Caspian energy projects, Azerbaijan. BP operates Azerbaijan's largest oil field, Azeri-Chirag-Guneshli, through a 34 percent stake in the project, and the country's largest gas field, Shah Deniz, through a 25.5 percent stake.

Azeri Energy Minister Natiq Aliyev said earlier this year that the state would eventually control marketing and gas sales from the field.

Turkmenistan, which is just beginning to open its energy reserves to foreign oil firms, will likely draw favorable terms into any development contracts it awards, analysts said.