On Aug. 27 the Kazakh government temporarily suspended Italian Eni SpA's license to oversee development of its Caspian Kashagan offshore field for at least three months, citing environmental concerns. The truth, however, seems to be a more prosaic wrangle over the financial terms of the contract, signed in late 1997, when oil was less than $20 a barrel.

At stake is Western involvement in developing Kazakhstan's vast hydrocarbon reserves; with proven reserves of 35 billion barrels, Kazakhstan potentially contains the world's third-largest reserves of oil, after Saudi Arabia and Iraq. The country is also rich in natural gas reserves, with proven gas reserves of more than 2 trillion cubic meters and projected gas reserves of up to 5 trillion cu m.

Eni SpA, a subsidiary of Agip, leads a Western-based consortium developing Kashagan, which also includes Total SA, Exxon Mobil Corp., Royal Dutch Shell PLC, BP Amoco, British Gas, Phillips, Statoil and Inpex, operating the Kashagan concession under the North Caspian Sea Production Sharing Agreement. Kashagan, discovered in 2000, has been lauded as the biggest oil find in three decades, on the scale of Brent and Prudhoe Bay, and is three times larger than Kazakhstan's onshore Tengiz field. The problems in developing Kashagan are daunting, as the 2,000-square-mile block is 14,000 feet below the Caspian. While the Soviet Union knew about Caspian offshore oil reserves, given the expense and technical complexity it chose not to exploit the reserves, concentrating instead on developing western Siberia. Fifty miles off the coast, Kashagan's oil presents significant problems, as it is located at huge depths and high pressures. An added difficulty is that it is heavily contaminated with mercaptans and hydrogen sulfide, which must be extracted at enormous expense before the oil is ready for export.

Seismic surveys indicate that Kashagan has commercial reserves totaling 9 billion to 16 billion barrels of recoverable oil, at current prices worth up to $1.16 trillion. Other estimates put the amount of Kashagan's recoverable reserves at up to 25 billion barrels, which at $73 a barrel would yield a potential $1.82 trillion. On Aug. 28 in Astana, Kazakh Environmental Minister Nurlan Iskakov told a government meeting, "I would like to say that the operations at Kashagan may be stopped. We are conducting a regular audit and have every reason to believe that the operator does not follow the requirements contained in the environmental laws of Kazakhstan. We have notified the Prosecutor General's Office accordingly. Furthermore, taking into account the fact that Agip has failed to fulfill the obligations earlier assumed, we must follow the law and withdraw the permit because the company's further operations may cause an irreparable damage to the environment."

Eni SpA's efforts to develop Kashagan have been hit by both ballooning costs and developmental problems. Originally slated to begin production in 2005, Eni SpA has several times postponed Kashagan's inauguration, most recently from 2008 to 2010, even as the project's original $57 billion development cost soared to an estimated $136 billion.

Energy Minister Baktykozha Izmukhambetov, however, hinted at broader issues behind the suspension, intimating that one issue for discussions with Eni SpA may be an increase in the Kazakh profit oil share from 10 percent up to 40 percent.

Prime Minister Karim Massimov was even more blunt, warning Eni SpA that any delays in the project would be equivalent to a contract breach, with the Kazakh government responding appropriately. Massimov told reporters, "Kazakhstan has been and remains committed to inviolability of contracts, and the contract should be respected by both sides in parallel. Kashagan is the unique project not only for Kazakhstan, but for the entire world in terms of production output, anticipated results, and environment requirements. There has been no such projects developed earlier; and we need to bear this situation in mind when carrying out further work."

Stripped of its pious rhetoric, the reality is that in Kazakhstan, as in other recent oil-producing nations, the days where an energy consortium signed agreements that guaranteed a tax and royalty regime for the life of the oil or gas field are gone forever, with producing nations demanding a more equitable percentage of the profits, much to the dismay of the oil companies. While cries of anguish have been heard in corporate boardrooms about recent contract revisions from Nigeria to Sakhalin, most oil companies have grudgingly accepted the new terms, as the alternative is to be squeezed out of development projects altogether.

Eni SpA has 60 days to respond to Astana's environmental concerns with a plan to address alleged infractions or possibly lose its concession. Ironically, the northern section of the Kazakh Caspian was a nature reserve until Kazakhstan began exploring the region for hydrocarbons in the early 1990s.

Sturgeon, best known in the West for their caviar roe, have been decimated by Caspian pollution. Other victims of environmental degradation are the Caspian's freshwater seals. Some estimates put the remaining number of Caspian seals at about 100,000, the species declining to just 10 percent of its population of a century ago. Several scientific studies have attributed their decline to canine distemper virus in addition to pollution. Whatever the real reason for their decline, Caspian seals must be the most luxurious endangered species on the plant, as if Kazakh energy projections are accurate, they are worth $18.2 million apiece. If Eni SpA doesn't choose to protect the environment, then other countries committed to protecting Mother Nature are more than willing to step in -- like China.

(e-mail: [email protected])

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