Kazakhstan, Karachaganak Consortium wrap up multi-year dispute settlement

NUR-SULTAN, Kazakhstan – An agreement to resolve the dispute concerning Kazakhstan’s Karachaganak field was signed by the country’s energy and finance ministries, the authorised body – PSA LLP, as well as the shareholders of the Karachaganak project represented by Italy’s ENI, Royal Dutch Shell, US major Chevron and Russia’s LUKOIL, the press service of the Energy Ministry said on December 14.

As a result, the consortium paid Kazakhstan $1 billion 305 million.

In addition, the parties agreed on the final production sharing methodology, as a result of which Kazakhstan will receive an additional $600 million by 2037 at an oil price of $40-50 per barrel.

The parties also approved the start of the implementation of the investment project for the expansion of Karachaganak-1 (A) with the aim of further maintaining the production shelf at the field.

“Today, the parties put an end to a longstanding dispute by signing a complete agreement. The essence of the disagreement was in the fair sharing of production and, accordingly, the distribution of cash income between the parties. The republic acted in strict accordance with the terms of the signed contract and applicable law,” the government spokesman said in a statement.

“As a result of long and difficult negotiations, the parties managed to come to an amicable settlement of the dispute, which reflects Kazakhstan’s commitment to a mutually acceptable resolution of emerging disputes with investors in accordance with the provisions of the contracts,” the spokesman added.

The Karachaganak Future Expansion Project envisages the construction of a gas re-injection compressor and associated facilities with an investment of about $1 billion. This, according to the Ministry of Energy, will help maintain production at the level of 10-11 million liquid hydrocarbons per year.

“The implementation of the Future Expansion Project involves ensuring a minimum share of Kazakhstani content in the amount of 45% in the purchase of goods, works and services and 75% in the hiring of personnel. Subsequently, the parties envisaged the possibility of implementing the next stage of implementation, taking into account the technical and economic parameters of the project,” Kazakhstan’s Energy Ministry said.

The Karachaganak project is being implemented under the final production sharing agreement concluded between the government of Kazakhstan, the Alliance of Foreign Companies represented by Shell (29.25%), ENI (29.25%), Chevron (18%), LUKOIL (13.5%) and KazMunayGas (10%).

In 2015, Kazakhstan expressed its disagreement with how the consortium distributes profits and makes settlements according to the methodology. As a result of the commercial disagreements that arose, Kazakhstan applied to the international arbitration court, as required by the terms of the final production sharing agreement. While the arbitration process was underway, the government and the consortium were negotiating to find a mutually acceptable solution and resolve differences.

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