MARKET NEWS

By Nariman Gizitdinov

(Bloomberg) -- Partners in the giant Kashagan oil field have restarted talks with the Kazakh authorities aimed at settling a potential $5 billion environmental fine, according to people familiar with the matter.

Oil majors including Eni SpA, Shell Plc, Exxon Mobil Corp. and TotalEnergies SE have drafted proposals related to allegations they stored too much sulfur at the field, the people said, asking not to be named because the talks are private. The proposal comes as Kazakhstan’s Supreme Court may issue a preliminary ruling rule on the dispute this week, the people said. 

The companies are proposing making an additional investment in social projects of $110 million over the next two years, an expense that would be recoverable from Kashagan’s revenue under the production sharing contract, the people said. They would also found a multimillion dollar social development fund, contributions to which wouldn’t be recoverable, the people said. 

The venture also proposed making additional payments related to the supply of liquefied petroleum gas to the government, the people said. That would effectively take the form of a discount from the venture on LPG sales to the state, people said.

In return, the proposal would oblige the state to withdraw sulfur-damage compensation claims in Kazakhstan and all environmental damage claims in international arbitration, the people said. The government would also need to change domestic environmental laws related to water treatment to avoid any future claims against the oil producers, who would not admit any fault in the settlement, the people said.

Kazakhstan’s Energy Ministry and the Environment Protection Ministry didn’t respond to requests for comment. Shell and Exxon referred questions to Kashagan’s operator, NCOC, which wasn’t immediately able to comment. Among other partners in the field, Inpex Corp. declined to comment, while Eni and TotalEnergies didn’t immediately respond to requests for comment. CNPC didn’t respond to a request for comment outside normal business hours. 

The $55 billion Kashagan development in the Caspian Sea has been plagued by delays and cost overruns. Kazakh authorities has being pushing for higher revenue from the country’s oil fields and sued the joint venture partners in international arbitration for more than $160 billion in damages. Most of that amount reflects lost revenue, but it also includes damages related to alleged environmental violations and deals affected by corruption.

The main international arbitration process related to the dispute is due to start next year, the people said.

The Kashagan venture has appealed to Kazakhstan’s Supreme Court, seeking to overturn an earlier appellate court decision that supported the government’s claim that too much sulfur was being stored at the facility, as well as other alleged violations related to water treatment and emissions. The operator, which has denied any wrongdoing, initially won a challenge to the environmental rulings in a lower court last year.

The settlement proposal also includes a commitment by oil companies to reduce sulfur storage at the field to 700,000 tons, which is roughly the storage limit set by the government, the people said.

--With assistance from William Mathis, Alberto Brambilla, Kevin Crowley, Francois de Beaupuy, Sing Yee Ong and Stephen Stapczynski.