BG Group (BG.) announced on Wednesday that it and the partners in the Karachaganak gas condensate field had reached an agreement with the Republic of Kazakhstan that resolves long-standing ownership and tax issues and should clear the way for future development of the field. As part of the agreement, Kazakhstan's KazMunaiGas will acquire a 10% interest in the project. Each partner will transfer 10% of its interest in the project to KMG for a total pretax consideration of $3 billion, of which $2 billion will be paid in cash. The remaining $1 billion is a noncash consideration and consists of final and irrevocable settlement of cost recovery and other claims and an allocation of an additional 2 million tonnes per annum in capacity for the Karachaganak project in the Caspian Pipeline Consortium export pipeline. The partners will be responsible for paying tax of $1 billion on the total consideration. Also, the partners will make a $1 billion loan to KMG that will be repaid over a three-year period.
As a result of the agreement, BG Group will see its interest in the project fall to 29.25% from 32.5%, but it will remain joint operator with Eni (ENI). Other partners' interest will be reduced as well: Eni 29.25% (previously 32.5%), Chevron (CVX) 18% (20%), and Lukoil (LUKOY) 13.5% (15%). An agreement was also reached on all tax affairs through the end of 2009. Karachaganak is a key asset for BG, contributing about 16% of total 2010 production (37% of total liquids, 8% of total natural gas). We view the agreement favourably, given that it not only eliminates a major roadblock that has prevented development plans from proceeding, but also should alleviate the uncertainty investors may have had about the risks of one of BG's major production assets. We expect additional updates and details on future expansion will come next year as BG presents its annual strategic update.
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