Karachaganak Final Production Sharing Agreement

KPO, the consortium of companies developing the Karachaganak gaseous condensate field, has agreed to pay $1.1 billion to the Kazakh government to settle a three-year dispute over the profit-benefit agreement between shareholders and the government. However, when Shell bought BG Group in 2016, the Kazakh government was looking for a new opportunity to renegotiate the terms of the “definitive” PSA. The government was not interested in an increase in its share, but in compensation for the profits unfairly distributed between the company and the state coffers. In 2016, Energy Minister Kanat Bozumbayev told the Financial Times that the consortium had already recovered so-called “cost oil” or the initial investment and should have distributed cash “profit oil” to the state in larger shares. When KPO offered $300 million to settle the dispute, the government refused and fueled uncertainty. Kazakh authorities estimate that the amended agreement on the distribution of Astana production is expected to bring in $415 million by 2037, based on an oil price of $80 per barrel. Located in the Uralsk region of western Kaakhstan, it was discovered in 1979 by a well drilled to study a structural peak detected during a reinterpretation of 2D seismic images between 1970 and 1971. Production began in 1984 under the management of Karachaganakgazprom. Limited quantities of gas and condensate were exported to Russia via pipelines and to the Orenburg processing plants. On 3 October 2006, Kazakhstan and Russia signed an agreement to establish a joint venture based on the Orenburg gas processing plant for the processing of gas from the Karachaganak field. The work of the Karachaganak Petroleum Operating (KPO) consortium, licensed until 2037, will be governed by a production sharing agreement between Eni and our co-operator Shell. We produce liquids (condensate and oil) from the deepest parts of the field. We sell about 50 percent of the gas produced at the Orenburg power plant in Russia; the rest is injected into the upper parts of the field or used for flue gas production.

About 95 percent of the liquids produced are stabilized in the Karachaganak Process complex (PCC) and then marketed in the west by the Caspian Pipeline Consortium and the Atyrau-Samara pipeline, connected to Russian export systems. Until September 2018, when the acquisition contract expired, the rest of the liquids were sent to the Orenburg power plant without stabilization. In view of the ongoing development, the Karachaganak Process Center Debottlenecking project has been approved as part of the increase in gas processing capacity at the Karachaganak field facilities. The work is expected to be completed in 2020. Capacity will be provided in the coming years through the installation of other gas recovery facilities. Immediately after the dispute was resolved this week, KPO pledged its first investment of $US 5 billion. The government touted the deal as a victory. What is important is that by carefully crafting the agreement in favor of the Kazmunaigas government, which was the main winner of the 2009-2012 negotiations, the ministry set aside.

During the latest talks, the price of oil had fallen below $50 a barrel for months and Kazmunaigas had to sell futures and undergo a restructuring that is not yet complete. Instead of continuing to support its energy giant, Kazakhstan decided to develop a metaphorical pipeline to inject karachaganak money directly into the state coffers in Astana. The phase began with three boreholes that are part of the perm formations of the reservoir. After surface production, the gas and oil were separated before being transported to Orenburg, where processing took place. This is partly explained by the acidic nature of the gas, whose hydrogen sulphide content is between 3.5 and 5.0% and 5% carbon dioxide. Karachaganckgazprom also maintained a total gas vacuum pressure policy in order to keep the tank pressure above the dew point. . . .

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