BG nears signing of Kazakh oil deal

The BG - formerly British Gas - $6bn (pounds 4.1bn) project to export oil from Kazakhstan is expected to pass a key hurdle this week when a production-sharing agreement is signed in Washington.

Kazakh President Nursultan Nazarbayev plans to sign an agreement with BG and its partners Agip of Italy and Texaco of US at the State Department on Tuesday.

The pact will allow the three to begin developing the 2 billion barrel Karachaganak field near Kazakhstan's northern border with Russia.

For BG, which has been in talks over the field since 1992, the project is a critical part of the oil exploration division's plans to reap 25 per cent annual returns while regulators governing the company's natural gas pipeline network in the UK demand price cuts.

"It is significant," said David Stedman, industry analyst with Daiwa Europe. "They've been working on this for a long time now, although it's going to be years before it's material to earnings."

BG, formed in February of this year when the old British Gas pipeline monopoly was broken up, has identified the oil exploration division as the key driver of profit growth in the years ahead. Its other main business, the Transco gas pipeline unit, agreed with regulators in October to slash prices that it charges customers by 25 per cent.

The Kazakh project, in which it holds a 32.5 per cent stake, is part of BG's plans to boost daily oil production past 400,000 barrels a day within five years from 150,000 b/d currently. BG itself refuses to put a date on when a final agreement will be signed. A spokesman for the company said only it is expected "by the end of the year".

Partners, though, say they expect the agreement next week. Robert Black, the Texaco senior vice-president in charge of the company's oil production unit worldwide, sees this project as key for his company's plans too. Texaco took a 20 per cent stake in the field in August and plans further ventures in the area.

"We view Karachaganak as an anchor to our potential size in the Caspian region," Mr Black said. "We have intentions of being a major player."

This project is just one of a handful of oil export plans being developed by Western oil companies which are also backed by the US State Department to secure oil output in the early years of the next century. Conservative estimates suggest that the region could produce 2 million barrels a day by 2005, about as much as Kuwait now pumps.

In Azerbaijan, a consortium including British Petroleum and Amoco last week began exporting first oil from an $8bn oil development in the Caspian Sea. So far, only about 8,000 barrels a day is flowing. But that is due to rise to 750,000 barrels a day by 2005.

"It's clearly a major milestone for the Caspian region," said Stephen Remp, chairman of Ramco Energy, which has a 2 per cent stake in that project.

Copyright: IOS & Bloomberg

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