1 Oct 2018 13:47

Kazakhstan, Karachaganak operator sign agreement on terms of dispute settlement

ASTANA. Oct 1 (Interfax) - The Kazakh government and Karachaganak Petroleum Operating (KPO) Consortium have signed an agreement on the principles for settling the dispute over the calculation of earnings from oil sales, the country's Energy Ministry said.

"Today the Kazakh government represented by the Energy Ministry, Finance Ministry and authority PSA LLP as well as shareholders in the Karachaganak project represented by Eni, Shell, Chevron, Lukoil and KazMunayGas have reached an agreement on the principal understandings for the amicable settlement of the dispute over the calculation of the fairness index. The parties have signed an agreement on the principles setting out the main terms for the settlement," the Energy Ministry said in a statement.

The principles agreement stipulates the terms for the resolution of the dispute and the obligations of both parties.

The signing of the final document, the dispute settlement agreement, is planned in November, the Samruk-Kazyna sovereign wealth fund said previously.

The Energy Ministry said that Kazakhstan and KPO had a disagreement over the method for production sharing calculations. Kazakhstan filed a lawsuit at an international arbitration court to defend its rights with relation to the terms of the final production sharing agreement for the Karachaganak project.

"However, taking the many years of experience of cooperation into account, the parties found a mutually beneficial route in the process of talks to amicably resolve the dispute," the ministry said in a statement.

To set down the arrangements, the parties signed an agreement on principles, stipulating the main terms of the settlement: the consortium will pay Kazakhstan $1.1 billion in compensation; will make changes to the PSA mechanism to provide Kazakhstan with around $415 million in additional revenues from the project up to 2037 with oil prices at $80 per barrel and the consortium will provide Kazakhstan with a $1 billion long-term loan over 10 years for an infrastructure project "or will pay the equivalent value of the loan (should Kazakhstan reject the loan) in the amount of around $200 million," the ministry said.

"This means that the total cash value of the settlement is over $1.7 billion for Kazakhstan from which the government will receive around $1.3 billion in coming years," the press release said.

The Kazakh government also agreed on commitments made by KPO to implement important investment projects for the future development of Karachaganak.

"The preliminary amount of investment has been estimated at up to $5 billion with a possible additional rise in revenues for the Republic [of Kazakhstan] up to 3037 of around $23.5 billion with oil prices at $80 per barrel," the Energy Ministry said.

The parties also reached an agreement on possible shipments of crude hydrocarbons (oil and gas) on commercial terms for local refineries and to develop the gas chemical sector in West Kazakhstan Region.

"These were very complex talks with the consortium [KPO] which took about three years. Such a long timeframe is testament not only their complex content and nature but also that we prioritized, first and foremost, the economic interests of the state and accordingly, insisted on maximum benefits for the country during the talks," Energy Minister Kanat Bozumbayev was cited as saying in the statement.

"I would like to state especially that it was very important for us to settle this dispute as it was causing uncertainty for the future development of the Karachaganak project. In this regard, one of the principal elements of these agreements is the adoption of obligations by the consortium to implement important investment projects for the future development of Karachaganak in a timely manner," the Energy Minister said.

The out-of-court settlement of the dispute demonstrates Kazakhstan's commitment to the amicable resolution of disputes arising with strategic partners over contractual conditions, the ministry said.

"Today we agreed on the main settlement principles and are planning to close the deal by the end of the year, signing a final agreement on dispute settlement," the ministry said.

The Kazakh Energy Ministry reported its disagreement with the Karachaganak operator over production sharing calculations in April 2016, with Kazakhstan filing an arbitration suit to resolve the dispute at the end of 2016.

The Karachaganak dispute stems from the calculation of the "fairness index" which, according to the PSA signed in 1997, determines how much profit is received by the consortium and how much by the government of Kazakhstan. It is calibrated to enable international oil giants to get return on their investment, rather than making revenue for the government.

The Karachaganak oil and gas condensate field is one of the largest in the world. Its reserves are estimated at 1.2 billion tonnes of oil and 1.35 trillion cubic meters of gas. The Karachaganak field has been operated by a consortium of foreign company since 1997 on the basis of a 40-year production sharing agreement, comprised of Shell (29.25%) (through its 100% affiliate company BG Karachaganak Ltd), Eni (29.25%), Chevron (18%), LUKOIL (13.5%), KazMunayGas (10%).

The project is currently at the field service phase of stage 2 to maintain annual production volumes achieved in stage 2 of around 11 million tonnes of liquid hydrocarbons and 16.5017.5 billion cubic meter of gas.