India gains a foothold in Kazakhstan

By Isabel Gorst

Kazakhstan tries to balance its geopolitical interests between the east and the west when handing out oil and gas reserves. So it was high time that India, which landed a block in the Caspian Sea on Saturday, got a break in the central Asian country where US, Russian and Chinese oil firms have secured huge energy deals.

Ongc reached an agreement at the weekend to join KazMunaigas, the Kazakh state oil company in a project to explore and develop the Satpayev block in highly prospective waters of the north western Caspian Sea. The state oil company will pay an $80m signature bonus for a 25 per cent stake in Satpayev where oil reserves are estimated to amount to 250MT.

Signed during an official visit by Manmohan Singh, the Indian prime minister, to Kazakhstan, the deal aims to boost India’s energy security and fuel its rapid economic growth.

Ongc will cover all exploration costs at Satpayev, minimizing Kazmunaigas’ risk in early stages of the project that will eventually require $9bn of investment.

While some observers have accused Kazakhstan of gouging revenues from foreign oil companies, the terms at Satpayev are unlikely to be more demanding than current global norms, says Dominic Lewenz, head of oil and gas research at Visor Capital, the Kazakh investment bank. “It has become common practice around the world for foreign companies to pay exploration costs when farming into projects with state oil companies,” he says.

Amendments to Kazakh legislation in the last decade guaranteed KazMunaigas a leading role in all projects in the Kazakh Caspian Sea, one of the biggest undeveloped oil provinces in the world. KazMunaigas used a dispute with an international oil group, led by Eni, which was developing the huge Kashagan field, to double its stake in Kazakhstan’s flagship Caspian oil project in 2008, and to bolster its control of the nation’s oil industry.

India, which is heavily dependent on imported energy, has had less success than other countries in winning Kazakh oil deals. US and European majors secured rights to develop the vast Tengiz and Karachaganak fields in the 1990’s that now account for the bulk of Kazakhstan’s 80MT a year oil production. China, India’s main rival for global oil reserves, has accumulated a large portfolio of upstream assets in Kazakhstan and built pipelines to carry production to its north western border.

India has been trying to catch up at Satpayev, but the deal has taken a long time to materialize. In previous negotiations an investment company controlled by Lakshmi Mittal, the Indian-born billionaire who has huge metals interests in Kazakhstan, was to have participated in the oil project, but the company dropped out in 2009.

If it goes smoothly the Satpayev will mark a breakthrough for India which has so far little to show for the strategic partnership pact it signed with Kazakhstan in 2009. The two sides are negotiating a possible uranium supply agreement, as well as pharmaceutical and oil refining deals.