assessments

May 28, 2012 | 10:59 GMT

6 mins read

Italy, Kazakhstan: Complications to an Energy Project

LIVIO ANTICOLI/AFP/Getty Images
Summary

An Italian court in Milan will begin proceedings against Italian state-run energy giant ENI on May 29 over accusations that the company's Kazakh subsidiary Agip KCO bribed Kazakh officials in order to continue operating in Kazakhstan's massive Kashagan offshore oil field. In 2007, the firm allegedly gave $20 million to Timur Kulibayev, the country's energy czar and Kazakh President Nursultan Nazarbayev's son-in-law. ENI's CEO, Paolo Scaroni, could be charged with international corruption. The court could even prohibit ENI from participating in Kashagan's development, a project in which the company is a key consortium member.

Kashagan is one of the largest oil finds in 40 years and Astana's hope for major oil industry expansion in the future, but the project has exceeded its deadline and budget limits. ENI's potential withdrawal from the project could be a blow to the already troubled project. However, the Kazakh government is already making plans to replace ENI should the Italian government force the firm to withdraw.

ENI, Italy's largest company, has long had special relationships with many former Soviet states. It was one of the first Western energy firms to operate inside the Soviet Union — specifically on Russian soil. ENI has worked inside Kazakhstan since 1992. Currently, ENI's business in Kazakhstan makes up approximately 13 percent of the company's booked reserves of oil, and Kashagan makes up half of ENI's business in Kazakhstan. ENI also works in Kazakhstan's Karachaganak oil field, which means the company is involved in two of Kazakhstan's three major energy projects.

Unlike many of the other Western majors working in Kazakhstan, ENI has a reputation of not bringing much highly technical knowledge to projects. ENI is not technically inept; rather, the projects within Kazakhstan are very technically difficult and require the highest expertise of supermajors such as Chevron, ExxonMobil, Royal Dutch/Shell and others. ENI has been able to operate in Kazakhstan because of its special relationship with the Kazakh government. Former Italian Prime Minister Silvio Berlusconi is a close friend of Nazarbayev — something that worked in ENI's favor in its efforts to remain involved in these difficult energy projects. There are also reports (such as the charges in the Milan court) of ENI bribing officials to remain part of these Kazakh projects.

Corruption charges against ENI have been pending in Italy since 2009, but Berlusconi — who is close with the company and with Scaroni — used his influence to delay any action against ENI while he was prime minister. The Milan court is known to be strict on corruption issues and is not politically aligned with Berlusconi's camp (most of the court cases against Berlusconi came from the court in Milan). With Berlusconi out of power and Italy's new prime minister, Mario Monti, more concerned with fiscal corruption and economic matters than personal relationships, ENI is left without the protection it once had.

Kashagan's Struggles

Kashagan is a national priority for Kazakhstan. The giant oil field is thought to hold an estimated 38 billion barrels. Currently, Kashagan is run by a consortium of ENI, Total, Exxon, Shell and Kazakhstan's KazMunaiGaz (each holding 16.8 percent of the project); ConocoPhillips (which holds 8.4 percent); and Inapex (holding 7.5 percent). Kazakhstan has two major oil expansion contracts planned for 2013 — one to China to add another 400,000 barrels of oil per day (bpd) to the Central Asia-China line, and another to Russia to add 1.3 million bpd to the Caspian Pipeline Consortium line. Most of this new oil is expected to come from Kashagan. 

However, Kashagan has faced numerous problems. First, it is an incredibly difficult field. It is located in the northern Caspian Sea, which is frozen over most of the year. Giant sheets of ice grow on the rigs, break off and fly through the air at approximately 100 kilometers per hour (60 miles per hour) toward other rigs. Ice sheets will also hit the rigs as they are blown through the air across the sea. Originally, Kashagan was to begin producing in 2005, but the field is now expected to produce small amounts of oil in December, with the rest of the oil coming online in December 2013, based on optimistic estimates. Furthermore, the estimated cost of the project has soared in the past seven years from $24 billion to $46 billion.

Adding to the project's problems are its transfers among various groups and consortiums. The United Kingdom's BG Group left the project in 2004, and the Kazakh government forced its way into the project in 2008. The largest shakeup was in 2009, when Astana realized that Kashagan's operator at the time, ENI, was falling behind in its duties. At first, the Kazakh government wanted ENI out of the project. Because of the company's special relationship with Astana, however, the Kazakh government came up with a new power-sharing agreement among the consortium members, now called the North Caspian Operating Co. (NCOC). ENI agreed to transfer some of its licenses to other NCOC members (specifically Shell, Exxon and Total) but remain in the project, specifically handling processing complexes. Kashagan promises a large payoff to ENI eventually, so the Italian firm wants to stay involved in the project if it can. However, Stratfor sources have said that ENI is falling behind in its new role and that other consortium members are frustrated with the firm.

An Opportunity for Change

The court case in Milan is an opportunity for change in the Kashagan project. If the Italian courts ban ENI from working in Kashagan — or any other energy project in Kazakhstan — the NCOC will have to find a replacement. It would be a relatively clean break with ENI for NCOC and Astana, since the case is an Italian matter.

The case has given the Kazakh government a chance to reassess its relationship with Italy and ENI. With Berlusconi out of power, ENI has lost its champion to the Kazakh government. Scaroni and Monti went to Kazakhstan in recent weeks to assure Nazarbayev that things will continue as before, but sources have said Scaroni does not have the personal relationship with Nazarbayev that Berlusconi did. Monti also does not yet have a relationship with the Kazakh leadership; moreover, he has not shown the inclination for personal politicking his predecessor had. And with ENI under such heavy scrutiny in Italy, the company may be prevented from any backroom dealings that could be construed as illegal, limiting ENI's efforts even more.

With the special Italian-Kazakh partnership in decline, Astana is considering putting Kashagan's needs ahead of its ties to Italy. The Kazakh government knows the field must start producing in the next year to fulfill its contracts with China and Russia. According to sources in the country, Shell has spoken with Nazarbayev about filling ENI's role in Kashagan, assuring that it could get the project running much faster and more efficiently. The proposal received backing from Nazarbayev's new special adviser, former British Prime Minister Tony Blair (who has a special relationship with Shell).

Various factors across many countries that could affect the outcome of this oil project are still unknown. In a country such as Kazakhstan, where personal relationships have superseded business sense, there could be a change as the country sees its future economy dependent on such relationships. Meanwhile, the situation does not bode well for ENI, which could be losing the protection and special benefits that have helped it run all these years.

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