Kazakhs Said to Weigh $2 Billion Penalty on BG, Eni Project

Kazakhstan's government is considering levying a penalty on a venture led by BG Group Plc and Eni SpA that operates the nation's second-biggest producing oil and gas field as the state seeks extra revenue to bolster its finances, according to two people familiar with the plan.

The fine on the Karachaganak project could be as much as $2 billion, one of the people said. That would be roughly in line with penalties the government threatened to impose in a 2010 dispute that ended with the state taking a 10 percent stake in the project.

The Central Asia nation is studying the possibility of imposing the fine because the companies haven't fulfilled certain contractual obligations, the people said, asking not to be identified because the matter isn't public. The penalty may be a precursor to the government increasing its stake in Karachaganak, they said.

Kazakhstan, which depends on energy products for about three quarters of its exports, needs additional funds to balance its budget after the collapse in crude oil reduced state revenue and weakened the currency by about 45 percent against the dollar since the beginning of last year. The government of President Nursultan Nazarbayev has in the past forced its oil company KazMunaiGaz National Co. into projects to increase state control over operations.

Assert Control

BG Group and Eni declined to comment on the matter. Shares of both companies extended losses Tuesday, with BG declining as much as 2 percent and Eni losing 2.2 percent amid a broader selloff of European oil equities.

State-owned KazMunaiGaz referred questions to Kazakhstan's Energy Ministry, which didn't respond to an Oct. 14 request for comment, saying it was still studying the data before it could reply.

“All global international oil companies face these problems" of governments trying to assert greater control over resources, Tyler Tebbs, an analyst at London-based brokerage Olivetree Financial Ltd., said in an e-mailed note. “This is likely a ploy to get more in terms of tax, or better terms in a change of control in Karachaganak."

BG and Eni each own 29.25 percent of Karachaganak, which yields natural gas and a light oil called condensate. Chevron Corp. has 18 percent, OAO Lukoil 13.5 percent and KazMunaiGaz 10 percent.

Chevron referred questions on the project to the operators, BG Group and Eni. Lukoil didn't respond to e-mails and calls requesting comment.

Tax Dispute

In 2012, the Karachaganak partners sold some of their stake in the field to KazMunaiGaz, settling a more than two-year dispute with the government over how they paid tax and recovered costs. The government acquired the holdings for $2 billion in cash and $1 billion in non-cash payments, BG said at the time. Tax of $1 billion was also payable on the gain from the sale.

BG and Eni's interest in the project dropped from 32.5 percent following the settlement, which also exempted the Karachaganak partners from paying oil-export duty for the 26 years of their production-sharing contract that remained at the time.

Shell Deal

BG's stake in the Karachaganak field will transfer to Royal Dutch Shell Plc when the Anglo-Dutch producer completes its acquisition of the British company next year. Kazakhstan is studying whether it has the right of first refusal to buy BG's holding in the Caspian Sea field, Energy Minister Vladimir Shkolnik said last month. China National Petroleum Corp., or CNPC, said the preceding day that it would consider buying BG's share of the field if it became available.

Karachaganak is not a “core focus" of Shell's takeover of BG Group -- which also has significant oil and gas assets in Brazil and Australia -- so any dispute over the project wouldn't be a “deal breaker," said Olivetree's Tebbs.

In 2013, the Kazakh government exercised its right to step in and purchase an 8.4 percent stake in Kashagan, the country's biggest oilfield, stopping India's Oil & Natural Gas Corp.'s $5 billion bid. At the same time, the government also sold an 8.33 percent stake in the project to CNPC.

The Karachaganak field has gross reserves of more than 2.4 billion barrels of condensate and 16 trillion cubic feet of natural gas, according to BG's website. It accounts for 45 percent of the country's total gas output and 16 percent of liquids.