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Eni Closes Karachaganak Deal

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A consortium of companies – comprising BG Group and Eni SpA (E - Analyst Report) − closed the agreement with Republic of Kazakhstan to divest stakes in the Karachaganak project following six months of internal rivalry.

This divestiture, signed in December last year, comes after a long two-year dispute between the international oil group and Kazakhstan over tax payment and cost recovery. Now, the completion of the agreement will allow the biggest energy producer in central Asia to take 10% of the Karachaganak oil project as well as exempt the parties from paying export duty.

Kazakhstan's shares in the project will be operated by the state oil company, KazMunaigas. The government makes $2 billion cash and $1 billion non-cash payments for the shares.

The production-sharing agreement entitles the financiers to recover their costs before the government acquires its share of the oil revenues. The deal also allows the partners to additionally produce 2 million metric tons of oil per year through the Caspian Pipeline Consortium oil pipeline over the next 26 years. The extra shipment will start at 500,000 tons and increase to 2 million tons over the next three years as the pipeline expands.

The Italian giant’s interest dropped to 29.25% in the project from the earlier 32.5%, with BG Group’s stakes slipping to 29.25% (versus 32.5% earlier). The other associates include Chevron Corp. (CVX - Analyst Report) with an 18% interest and Russia’s OAO Lukoil with a 13.5% share in the Karachaganak project.

Located in northwestern Kazakhstan near the Russian border, Karachaganak is a vast oil and gas field that has recoverable reserves of 9 billion barrels of condensate and 48 trillion cubic feet of gas. Last year, the field’s production averaged 239,000 barrels per day of liquids and 784 million cubic feet per day of natural gas. The next development phase of the project comprises the doubling of gas output to 38 billion cubic meters annually.

Based in Rome, Italy, Eni, with its consolidated subsidiaries, is engaged in oil and gas, electricity generation, petrochemicals, oilfield services and engineering industries. We believe that Eni’s outlook for the upcoming months is favorable, given its 2012–2015 strategic plans to enhance production and implement steps to control costs and recover profitability.

The company remains upbeat on its production growth target, expecting it to increase more than 3% annually in the said period from the previous 2% until 2021.

However, the positives are partially mitigated by a weak macroeconomic scenario in Italy and Europe that has affected its performances in Gas & Power, Refining & Marketing and in the petrochemical sector in first quarter 2012. As such, we foresee restricted upside potential for the stock and expect it to perform in line with the broader industry and maintain our Neutral recommendation.

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