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Karachaganak partners pay $1.3bn to settle oil and gas fields dispute with Kazakhstan

The agreement also adjusts the production-sharing agreement (PSA) for the Karachaganak field.
The agreement also adjusts the production-sharing agreement (PSA) for the Karachaganak field.

The Karachaganak Petroleum Operating (KPO) consortium managing one of Kazakhstan’s biggest oil and gas fields has paid $1.3bn to settle a long-running dispute with the Kazakh government over profit-sharing. The agreement paves the way for the project’s investors to push ahead with a $1bn expansion project.

The Kazakh Energy Ministry announced on December 14 that in addition to the $1.3bn cash settlement, KPO had agreed to adjust the production-sharing agreement (PSA) for the Karachaganak field. This will earn the Kazakh state an extra $600mn in oil and gas sales by 2037, assuming a $40-50 per barrel crude price.

Karachaganak is jointly operated by Royal Dutch Shell and Italy’s Eni, each with 29.25% of shares, while its other investors include Chevron, Russia’s Lukoil and Kazakh state oil company KazMunayGas (KMG). The field delivered some 412,000 barrels of oil equivalent per day (boepd) of oil and gas in the first half of the year, putting it in third place behind Tengiz and Kashagan in terms of Kazakhstan’s biggest oil and gas projects.

Transformed in 1990s

Karachaganak is also among the country's oldest projects, having started flowing hydrocarbons in the early 1980s. But it was not until international majors took on the field in the late 1990s that it was transformed into one of the country’s biggest oil and gas producers.

Despite their success, however, Karachaganak’s investors have been embroiled in several disputes with the government over the years, including one in 2012 that led to KMG obtaining its stake in the project.

The most recent dispute began in 2015, when the government sued KPO for $1.6bn, claiming it was not receiving its fair share of profits from production. The government took the case to a Stockholm international arbitration tribunal. The two sides reported in 2018 that a settlement was near, but a deal was not finalised.

The agreement this week is a “very positive step” that ensures “fiscal certainty in Karachaganak,” Shell and Chevron said in statements to Bloomberg. Kazakhstan’s energy ministry added that the partners could now push on with an expansion project.

KPO signed off on a $1.1bn de-bottlenecking project in September 2018, boosting sour gas processing by 4bn cubic metres per year and enabling the recovery of an extra 10mn tonnes of liquid hydrocarbons during the field’s remaining operational life. The consortium also approved construction of a fourth injection compressor unit in May last year.

Most of Karachaganak's gas production is pumped via a 140-km pipeline for processing in a plant in Orenburg, Russia, while the rest is used for energy at the field or pumped back into reservoirs to maintain pressure. Its oil is delivered via a 635-km pipeline that connects with the Caspian Pipeline Consortium (CPC) network, which then transports it to Russia's Black Sea coast for export to markets.