Shell, Eni and the other partners in the giant Karachaganak gas and condensate field in Kazakhstan have paid a combined $1.305 billion to the government to settle a long-running dispute over shares in production.

"The parties put an end to the long-run dispute by signing the agreement. The essence of the disagreement was the fair sharing of production and, accordingly, the distribution of cash income between the parties," the Energy Ministry said on Monday.

The settlement amount is about $300 million above the initial claim made in 2015 by authorities that said the consortium had incorrectly interpreted the terms of the production sharing agreement and had repatriated a higher share of revenues than allowed from the country at the expense of the Kazakh state.

Shareholders and the Kazakh government have also agreed on the amended profit sharing scheme under the PSA, the ministry said.

If international oil prices stay between $40 and $50 per barrel, the government should expect an incremental payment of up to $600 million above its profit share in the PSA between 2021 and 2037.

Sour gas re-injection

Also, shareholders and authorities have rubber-stamped a $1 billion plan for the field’s operator, Karachaganak Petroleum Operating (KPO), to move into a first phase of the Karachaganak Expansion Project (KEP).

The project calls for investments into the construction of another set of powerful sour gas reinjection compressors and related supporting infrastructure.

KEP’s goal is to handle sour gas, the volume of which is rising each year as the operator tries to maintain stable output of condensate.

Condensate is exported to international markets via the Caspian Pipeline Consortium and is usually sold at a premium to European oil benchmarks, making it the core revenue generator for the development.

Marketing options for sour gas are limited, however, with most of it to be pumped back into the reservoir to maintain pressure. A portion is set for to China and Russia, and some is sold on the domestic market after being processed to remove hydrogen sulphide.

Local content

The government has mandated a minimum local content share of 45% in the procurement of goods, works and services in the first phase, and of 75% in the hiring of personnel.

This year, Kazakh authorities have pressured operators of three major foreign-led developments — Tengiz, Kashagan and Karachaganak — to take on higher commitments to use local content and services and to foster investments into local manufacturers.

From 1 January 2021, Kazakhstan will technically lose the right to insist on rising local content and services for oil and gas development contracts that were concluded before 2011, to comply with terms of its accession to the World Trade Organisation.

Apart from Shell and Eni, US supermajor Chevron, Russia’s Lukoil and state-owned KazMunaigas are stakeholders in Karachaganak.

In the first half of the year, KPO produced more than 75 million barrels of oil equivalent.

As KPO produces condensate and not oil, the operator was excluded from production cuts supported by Kazakhstan as part of the Opec+ deal to curb output in order to support global crude prices.

As of 1 July, the KPO partners had invested more than $26.6 billion into the development of the Karachaganak field.

Field Development

Eni-led partners in Kazakhstan gas and condensate development pay $1.3 billion to settle dispute