Exxon, Shell Said Seeking Control of $46 Billion Kashagan

Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) are seeking bigger stakes and operating control in the Kashagan oil field before starting to expand the $46 billion project, according to two people with knowledge of the matter.

Exxon and Shell have warned they may quit the project unless they gain more control in the venture and Kazakhstan’s government agrees to extend the production-sharing contract for 20 years, the people said, declining to be identified as the talks are confidential.

The Kashagan project in the Caspian Sea, touted as the world’s biggest discovery in four decades when found, is slated to reach commercial oil output no later than June 2013. The Kashagan partners, which also include Eni SpA (ENI) and Total SA (FP), want the second phase to widen the project’s profit margin after costs for the first phase ballooned from early estimates.

Exxon and Shell may seek to buy out ConocoPhillips (COP)’s 8.4 percent stake in Kashagan, the two people said. ConocoPhillips plans to sell $8 billion to $10 billion of assets by the middle of 2013 and has said Kashagan may not offer a long-term, strategic opportunity.

Leave Kashagan

Exxon and Shell will consider leaving the project if they don’t reach an agreement on prolonging the Kashagan contract and on operatorship, the two people said.

“Exxon Mobil is a long-term investor in Kazakhstan and plans to remain a major investor in the country,” Charlie Engelmann, a spokesman for the Irving, Texas-based oil company, said by e-mail, declining to comment further. Ross Whittam, a London-based spokesman for Shell, declined to comment, as did an Eni press officer who declined to be identified, citing company policy.

China National Petroleum Corp., seeking to enter Kashagan, has engaged Citic Resources Holdings Ltd. (1205) to hold talks with the partners that may want to divest, Energy Intelligence Group said, citing unidentified people. Citic would then sell the stake on to state-owned CNPC, the newsletter said.

With cost overruns and multiple delays over the past decade, the international partners agreed in 2008 to cut their stakes in Kashagan, boosting KazMunaiGaz’s interest to 16.8 percent. That is equal to the holdings of Exxon, Shell, Total and Eni. Japan’s Inpex Corp. (1605) is also a partner with 7.56 percent.

Kashagan Operator

The budget for the first phase is set to reach $46 billion by the time the first oil is exported, a person with knowledge of the matter said in January. An early cost estimate put the tab at about $24 billion. While output is scheduled to start at the end of the year, the project will reach commercial output no later than June 2013, said Lyazzat Kiinov, head of state-run KazMunaiGaz National Co., said in December, when he was deputy oil minister.

At the time, Eni ceded operatorship of Kashagan to North Caspian Operating Co., an umbrella for the partners, each of which is responsible for specific tasks while jointly making decisions on the development. NCOC put Eni in charge of delivery of Kashagan’s first phase, with Shell responsible for developing offshore facilities in the second phase, and Exxon overseeing drilling, according to venture’s website.

Kazakhstan’s biggest oilfield will produce 370,000 to 450,000 barrels of oil a day in the first phase, an amount that may double in the second phase in 2018 or 2019, the government said last year. The Oil Ministry oversees the Kashagan production-sharing agreement, which allows the investors to recoup costs before the government takes its share of oil revenue. The agreement runs to 2041, according Eni’s website.

-- With assistance by Eduard Gismatullin in London and Edward Klump in Houston. Editors: Torrey Clark, Stephen Cunningham

To contact the reporter on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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